WEEKLY E-MAIL

10 February 2025

DONALD TRUMP’S NEW TARIFFS ON MAJOR TRADING PARTNERS

By Karen Maher

Just two weeks into his new term as the President of the United States, Donald Trump has imposed tariffs on imports from Canada, Mexico, and China.

What are the tariffs, and how will they work?

Tariffs are taxes placed on imported goods and services, increasing their cost for domestic buyers. They are designed to reduce competition from foreign markets and encourage domestic manufacturing by making locally produced goods relatively more affordable. However, importers – typically U.S. businesses – pay the tariffs, and these costs are often passed on to consumers in the form of higher prices.

For example, a U.S. retailer like Walmart would pay tariffs directly to the U.S. Treasury when importing foreign goods. To offset the added expense, businesses may increase prices, making the affected products more expensive for consumers. Tariffs can also impact foreign economies by making it harder for exporters to sell their products in the U.S., potentially forcing them to lower prices and reduce profit margins.

What has been announced so far?

Under the new policy, imports from Mexico and Canada will be subject to a 25% tariff, while goods from China will face an additional 10% tax. President Trump has cited national security concerns, particularly regarding drug trafficking (from Mexico and Canada), as the primary motivation behind these measures.

Following the announcement, Mexican President Claudia Sheinbaum expressed opposition and initially imposed counter-tariffs. However, after a discussion with President Trump, both leaders agreed to pause the implementation of the tariffs for 30 days. In response, Sheinbaum ordered the deployment of 10,000 soldiers to the U.S.-Mexico border to help curb illegal migration and drug trafficking.

Similarly, Canadian Prime Minister Justin Trudeau initially responded with retaliatory tariffs. However, after a phone call with Trump, both leaders agreed to a temporary 30-day pause. Trudeau committed to a $US1.3 billion border security plan, including enhanced surveillance technology, additional personnel, and aerial patrols to combat organised crime and drug smuggling.

All three leaders will use the 30-day pause period to attempt to finalise an economic deal.

Meanwhile, China has strongly opposed the new tariffs, with its Ministry of Commerce filing a complaint with the World Trade Organisation (WTO). Beijing has labeled the tariffs unfair and retaliated by imposing 10% tariffs on select U.S. imports, including oil, agricultural equipment, and large-displacement vehicles.

Although tariffs have not targeted the European Union yet, President Trump has warned that imports of key goods such as computer chips, steel, oil, natural gas, pharmaceuticals, and copper could face similar measures in the future, potentially escalating trade tensions between the U.S. and Europe.

How will Australia be affected?

From a trade perspective, Australia is unlikely to face direct tariffs from the U.S. due to the trade dynamics between the two countries. The U.S. maintains a trade surplus with Australia, meaning it exports more to Australia than it imports. The Australia-United States Free Trade Agreement (AUSFTA), in place since 2005, has facilitated trade growth, with over 97% of Australia’s non-agricultural exports to the U.S. now duty-free.

From a share market perspective, the Australian financial market reacted swiftly to the developments, with the ASX200 experiencing a $50 billion drop on the first trading day after the tariffs were announced. However, markets have recovered quickly since then.

It appears that volatility in equity markets will likely persist while these new tariffs are being imposed. This will also weaken the Australian dollar, impacting imports and travellers while benefiting exporters.

Karen Maher
Associate

If you have any questions or comments, please email me at karen@gfmwealth.com.au

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