Donald Trump’s 25 per cent tariff on steel and aluminium imports from all countries has raised serious concerns in Australia, prompting Prime Minister Anthony Albanese to quickly reach out to the US President to request an exemption.
What followed were assurances from both sides that an exemption is likely, with President Donald Trump suggesting Australia deserves it due to its aircraft purchases, citing the country’s need for planes.
“They buy a lot of airplanes. They’re rather far away and they need lots of airplanes,” Trump told the media on Tuesday morning (AEDT).
While Australia’s need for planes may not exactly be the key reason behind the US goods and services trade surplus with Australia, which, according to data, stood at US$27.1 billion in 2022 – the claim seems to be working in Australia’s favour, with Trump assuring an exemption is “under consideration”.
At the time of writing, however, Trump was yet to announce an exemption, and although Australia received one during his previous term, it took months – and several calls from then PM Malcolm Turnbull – to be implemented.
However, AMP’s Shane Oliver has suggested that even without an exemption, the overall macro impact on Australia would be minimal.
“Australia has a good case to be exempted as was the case in 2018 as we import twice as much from the US than we export to them but if Trump’s focus is on raising tax revenue and shifting production back to the US, there is a risk that the trade deficit argument may not work this time,” the chief economist said in a note on Tuesday.
“Even if Australia is not exempted, while it would be horrible for the affected industries, the overall macro impact on Australia would be trivial,” he said, adding that steel and aluminium exports to the US total some $800 million or just 0.03 per cent of Australian gross domestic product (GDP).
“Overall total Australian exports to the US are less than 1 per cent of total US goods imports and just 0.8 per cent of Australian GDP,” he said.
The main threat to Australia, according to Oliver, would be Trump’s tariffs reducing global trade, which could hurt Chinese and global GDP, ultimately dampening demand for Australian exports and impacting its GDP.
“Trump’s tariff war has potentially another six to nine months to go at least,” Oliver said.
“He is still vowing ‘reciprocal tariffs’, tariffs on the EU and tariffs on other industries like cars, pharmaceuticals and semiconductors, and he is likely to do more after 1 April once his trade reviews are complete.
“All of these could have various twists and turns, subject to deals and Trump’s whims, and as such, it feels very much like 2018, only this time, Trump is moving faster, presumably because the US economy is now stronger, his administration is better organised, he wants revenue to pay for income tax cuts and he wants any pain over by next year’s mid-term elections.”
Trump’s trade war has arguably added to the risk of recession, Oliver said. However, the economist argued that if his predictions are right and the average US tariff rate is capped below 10 per cent of US imports, then the hit to global and Australian economic growth should be contained to around 0.5 per cent.
Market volatility to persist
Ultimately, the tariffs impose a boost to US prices, disrupt supply chains and act as dampener on US and global growth.
“This will mean continuing volatility in shares,” Oliver said.
“So far, shares have been resilient – with global and Australian shares around record highs – which may embolden Trump to do even more, leading to a bigger correction,” he added.
Similarly, Mahmood Pradhan, head of global macro at the Amundi Investment Institute, expects volatility to persist with any additional news on tariffs.
“If Trump adopts a transactional approach rather than escalating into a harsh trade war, we anticipate that equity markets will remain resilient,” Pradhan said.
“Overall, the market environment is likely to remain supported by the current positive economic backdrop in the first half of the year, but uncertainty is heightened. As we move into the latter part of the year, the impact of tariffs on economic growth and inflation could prompt earnings revisions, potentially harming risk sentiment.”
Clear market winners and losers are emerging, according to Pradhan, with Trump’s tax cuts expected to benefit US small and mid-cap firms and financials, and non-US companies with US production. However, tariffs could hurt non-US producers, particularly those from countries with significant trade deficits.
According to Pradhan: “Sectors reliant on goods exports, such as autos, face greater risk, while service sectors like software, media and telecoms are expected to be more resilient.”
He predicted artificial intelligence will remain a key market theme throughout the year, highlighted by the “Project Stargate” announcement. However, China’s DeepSeek challenge to the crowded AI trade points to a shift from hyperscalers to adopters, Pradhan said, with software likely to benefit.
On Monday, Stephen Innes of SPI Asset Management warned that Trump’s latest tariffs signal an escalation of his “America First8 trade doctrine, creating a “perfect storm” of rising bond yields, a weakening macro landscape and a stampede out of tech and US equities.
Reflecting on late 2018, Innes called it a “painful lesson” when trade tensions with China and an aggressive Fed policy caused the S&P 500 to post its worst annual decline since the financial crisis, with Cboe’s three-month implied correlation index spiking to signal macro panic.
“Flash forward to today? That same correlation index is scraping record lows, meaning stocks are still trading on their own merits. Typically, that’s a sign of market health. But here’s the problem: low correlation emboldens investors to take bigger risks. If the market abruptly pivots – whether due to tariffs, inflation shocks or a geopolitical curveball – the unwinding of risk-heavy trades could be savage,” he said.
Tipping the commencement of a “volatility vortex”, he said the stakes are “nothing short of a total market regime change”.
