Donald Trump tariffs: Treasury modelling shows Australia faces ‘modest’ tariff blow but more inflation pain

Modelling of the impact of Donald Trump tariffs announced by the Department of Treasury has found the impact on Australia should be “modest” and will result in a reduction in output and an increase in inflation in the short term.

According to the modellling, requested by Treasurer Jim Chalmers on Thursday, the tariff shock - including China’s retaliation - will lead to a 0.1 per cent decline in Australian GDP and a 0.2 percentage-point increase in inflation in 2025, relative to a scenario with no new tariffs.

Over the medium term, Australia’s GDP is permanently lower, Treasury said, while the inflationary impact is temporary.

Around 80 per cent of the total impact on Australian GDP is expected to stem from flow-on effects from weaker Chinese consumption, rather than direct losses from diminished exports to the US, which account for less than 5 per cent of total Australian exports.

Treasury estimates that the imposition of tariffs will reduced China’s GDP by 0.6 per cent. Treasury forecasts trade-exposed sectors such as agriculture, energy, mining and durable manufacturing will be hit hardest, while some Australian agricultural exports may benefit from displaced US trade.

The US move, announced on April 3, imposes across-the-board tariffs on imported goods, including a 10 per cent tariff on most Australian products and a 25 per cent tariff on steel, aluminium and automotive goods.

China retaliated the following day with a 34 per cent tariff on all US imports, adding to an already tense global trade environment.

The Treasury analysis estimates that the US will face a significant economic hit from its own tariff policy, with real GDP expected to be 0.8 per cent lower by 2027 compared to a scenario without new trade barriers. Inflation is projected to rise by about 1.4 percentage points initially, driven by the higher cost of imported goods.

While China’s retaliatory 34 per cent tariff on all US imports will further exacerbate the economic strain, its direct impact on the US economy is expected to be modest, given that American exports to China represent only about one per cent of US GDP.

The Treasury modelling is based on work by former Reserve Bank board member and Crawford School scholar Warwick McKibbin, which attempts to calculate the direct effect on trade, however, the steep falls in stock markets, with equities down more than 10 per cent in many countries following the announcement likely to have an amplifying impact on consumer and business sentiment.

More to come