In this trade war, one thing is even more damaging than the tariffs
Australia risks getting caught in a double-barrelled Trump hit, as stocks and bonds are battered by uncertainty and fears of an economic slowdown.
Mar 12, 2025 – 9.29am
Australia’s failure to win exemptions from Donald Trump’s tariffs on our relatively puny steel and aluminium was overshadowed on Tuesday night by a near-perfect example of how stupid trade wars can get.
Doug Ford, the premier of the Canadian province of Ontario – and until recent months a complete unknown in global politics – retaliated against Trump’s 25 per cent steel and aluminium tariffs by announcing a 25 per cent surcharge on the substantial amount of power his province sends to the US.
Trump, showing all the patient statesmanship for which he is famous, immediately threatened to double Canada’s tariff rate to 50 per cent. At which point US Commerce Secretary Howard Lutnick appears to have stepped in and offered trade talks.
“We have both agreed, let cooler heads prevail,” says Ford, who appears to be revelling in his position as David to Trump’s Goliath.
It’s all great theatre, but it’s also incredibly stupid – on several fronts. Trump’s apparent decision that America’s closest neighbour and long-standing ally should bear the brunt of this trade war is bizarre. But the chaotic approach to trade policy is possibly more damaging than the tariffs themselves, at least for now.
Certainly, financial markets want the noise to stop. Wall Street’s benchmark S&P 500 whipsawed on Tuesday night. It was green for a little while, entered correction territory towards the middle of the day (10 per cent below its all-time peak in February), recovered again, and finally ended 0.8 per cent lower.
The lack of buying support on equity markets is completely understandable in a session such as we’ve just seen, where the trade war is playing out in real time. No investor wants to be stuck in a stock (or an index) that could be whacked by a Trump’s temper tantrum within a few days, or a few hours. Better to sit on your hands and wait for the smoke to clear.
More than this, the potential for this tariff war to hit US economic growth and asset prices is growing by the day.
On Monday night, Goldman Sachs cut its forecast for US GDP growth in 2025 from 2.4 per cent to 1.7 per cent, predicting tariffs would hit both growth and inflation. On Tuesday night, RBC Capital Markets economists Frances Donald and Michael Reid listed a series of “yellow flags” they see in the economy: consumer sentiment is now decidedly mixed, inflation expectations are rising from already worrying levels, government job cuts are showing up in the labour market, and there is growing evidence that higher interest rates are weighing on consumer debt and housing activity.
For James Aitken, this is a point that markets are missing in the drama of the recent sell-off.
“Short-term US equity oversold conditions aside, if US nominal GDP is on its way down from 5 per cent plus to about 3 per cent (or less), the market-clearing price of US equities is probably a lot lower yet – and the market-clearing price of US credit is probably a lot wider yet,” he posted on X.
“Consumption taxes, such as tariffs, either reduce real income through inflation, or reduce corporate profits via higher input costs. As Buffett said: ‘The tooth fairy doesn’t pay ’em.’”
What we need to watch for is the spillover effects from a widening and deepening trade war. For example, a recession in the US would reverberate around the world, while slower growth in China would have a much bigger impact on Australian exports.
But Angala and Timbrell point out we don’t need a full-blown trade war to take on damage – the global uncertainty we’re living with is a real risk, albeit a milder one. Falling equity markets, declining commodity prices and supply chain disruptions could threaten business confidence, push the Australian dollar and possibly halt our progress on disinflation.
At a roundtable with business leaders in Washington on Tuesday night, which was attended by JPMorgan boss Jamie Dimon and Citi chief executive Jane Fraser, Trump declared the “tariffs are having a tremendously positive impact – they will have, and they are having … the tariffs are going to be throwing off a lot of money to this country, and we’ve been ripped off for years by other countries for many, many decades”.
It’s yet another sign that the rhetoric from Trump isn’t shifting, despite the whiff of panic on the markets. And it’s the president’s apparent resolve that is a big part of the reason that former JPMorgan strategist Marko Kolanovic, who left the bank last year for essentially being too bearish, sees scope for the S&P 500 to keep dropping from its current level of 5572.
“The trend is still negative since questions around tariffs, economic growth and geopolitics are far from being resolved,” he told Bloomberg.
“If, by some miracle, there is a complete change in the administration’s approach toward trade – which I doubt – we could stabilise somewhere around 5500. But I think we could go into the low 5000s, and if there is a recession it could fall into the 4000s.”
If the S&P 500 fell to, say, 5250, that would take the drop since the index’s all-time high on February 13 to around 15 per cent.
