“tariffs are actually…an act of war to some degree.”1
— Warren Buffett
Given the unprecedented nature (in our lifetime) and complexity of recent events I went on a quest to unpack the basics of tariffs to try and keep up with global developments and their impact to our home markets Australia and Southeast Asia.
Tariffs are essentially border taxes on imports. Governments impose these to 1) raise taxation revenue 2) protect domestic businesses by making foreign goods pricier and 3) use tariffs as negotiating tools2. In theory, tariffs encourage consumers to "buy local," boosting domestic manufacturing and jobs.
The Trump administration believes tariffs are a powerful negotiating weapon and a route to economic independence. Supporters argue tariffs correct trade imbalances, punish perceived unfair practices, and rejuvenate local industries by redirecting consumption towards domestic goods.
However, history warns of significant collateral damage. Enter the infamous Smoot-Hawley Tariff Act of 19303. Designed to protect American farmers and manufacturers by raising import duties, Smoot-Hawley spectacularly backfired. Instead of bolstering the economy, it triggered a global trade war, causing international trade to collapse by 65% between 1929 and 1934.
Tariffs also inherently inject inflationary pressures into economies. Higher import costs directly translate into pricier goods for consumers, squeezing household budgets already strained by global inflation trends.
Partial list of the reciprocal tariffs with the US. Source: CNBC
On April 2, 2025, dubbed "Liberation Day" by President Donald Trump, the United States dove headlong into its largest tariff offensive. With sweeping duties averaging around 23%—up from low single-digit averages—virtually no trading partner was spared. China, predictably, was hit hardest with cumulative duties soaring over 50% when combining previous tariffs. But even staunch allies like Japan, South Korea, and European nations faced unprecedented duties ranging between 20% and 32%. Southeast Asian nations, previously seen as beneficiaries during prior tariff spats, suddenly found themselves on the receiving end, with Vietnam, Cambodia, and Thailand facing crippling tariffs around 45-50%.
China, unsurprisingly, didn’t take it quietly. Beijing swiftly retaliated with a matching 34% tariff on American imports, doubling down by restricting exports of critical rare earth minerals, vital for high-tech manufacturing, a strategic gut punch to U.S. tech sectors.
So, why is this economic showdown the most significant global shift in 80 years?
For now markets are interpreting it as an unprecedented reversal from post-World War II trade liberalization, effectively ending America's longstanding role as the global trade order’s principal architect. Second, it signals a dangerous pivot towards economic nationalism and protectionism.
The fallout is reverberating strongly across Asia-Pacific markets, including in Australia and Southeast Asia, regions heavily dependent on smooth trade flows and open markets.
Southeast Asian economies, notably Vietnam (46%), Thailand (36%) and Indonesia (32%) now face stark economic headwinds. During Trump's first trade scuffle in 2018-2019, Southeast Asia enjoyed manufacturing inflows as companies sought refuge from China-targeted tariffs. Today, they're targets themselves.
Australia, too, finds itself navigating uncertain waters. Though initially hopeful of exemption given its close alliance with the U.S., Canberra wasn't spared entirely. Australian exporters, particularly agriculture, wine, and pharmaceuticals, face a new baseline 10% tariff entering the U.S. The upshot is that our exporters may now have a large price advantage (the lowest tariff) vs our global export competitors combined with the tailwind of a weak AUD.
Australia's real worry lies in indirect impacts: diminished Asian manufacturing demand could significantly reduce Australia's raw material exports, particularly iron ore and coal. However lower demand for Chinese manufactured goods will bring down prices for Australian and Singaporean importers and consumers potentially creating deflationary impacts and increasing the potential for lower interest rates.
Strategically, Trump’s tariffs have inadvertently opened doors for China to deepen its economic and geopolitical influence in the region. By isolating itself economically, the U.S. risks inadvertently ceding regional leadership—a starkly ironic outcome given Trump's intentions.
Only time will tell whether Liberation Day was a well planned poker bluff. In the high-stakes game of global trade, history's verdict on tariffs remains clear: It's easier to unleash a trade war than to control its outcomes.
Amid historic shifts in global trade dynamics, it's crucial for investors to remain disciplined. Stick closely to your asset allocation strategy, ensure your portfolio stays diversified, and proactively identify opportunities arising from market volatility. Talk to Aura Group today to position your investments effectively and capitalize on current market conditions.
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