Eumundi Voice Issue 113, 20 March 2025

ECONOMY

Why the fuss about tariffs?

There’s been a lot in the news about tariffs being applied by the US government on exports to the US from a number of its trading partners who have responded saying they would retaliate with new tariffs on the US. So, what does this mean for Australia?

Australia’s prosperity is built on international trade and any slowdown in global trade has a domino effect on Australia. According to Richard Holden, professor of economics at University of NSW, “Anything that reduces trade is not good news for us.”

Tariffs increase the cost of a product in the market. Importers either absorb the cost or pass it on to consumers. Prices for those products go up, leading to increased cost-of-living and pressure on inflation.

While we don’t want the US to impose tariffs on Australian exports, the bigger impact on Australia of imposing tariffs on markets is likely to come indirectly. If demand for Chinese products into the US market falls, and those products rely on inputs of raw materials from Australia, that would impact the Australian economy since we sell so much to China. In addition, Australian businesses may face increased competition for

markets as companies in other countries start shifting their products and services away from the US to our part of the world. Producers, traders and markets don’t like uncertainty as we’ve seen lately in the weaker Australian dollar. Imposing a tariff on exports from one country to another is made more complicated by the fact that products these days are rarely made in one country. Components are gathered from various sources and countries through global supply chains. Introducing higher tariffs to the mix complicates the supply chain and costs could accumulate along with the supply chain.

The iPhone is a great example. Designed in the US by Apple Inc which sources components from 43 countries and has China assemble phones before shipping them to the US for sale. It’s not clear what the impact of US tariffs more broadly might be on the cost of inputs from countries along the supply chain. What is known is that iPhones are considered an export from China to the US. A tariff on China’s exports to the US likely would result in an increase in the price of iPhones.

If trade tensions escalate, expect more volatility. Rhonda Piggott