LPW Lowdown: What Will Trump’s Second Term Mean For Australia?

While President-elect Donald Trump will not be sworn into office until January 20, financial markets have moved quickly to forecast what his second term will entail. Trump’s capricious approach means what he says, and what he does, can and often are very different. Here we attempt to read the tea leaves and discern what the second Trump presidency means for Australia.  

Tariffs

Trump has made tariffs a defining feature of both his first and second term economic agenda. His protectionist approach aims to extract greater revenue from trade partners in addition to protecting national industry and jobs. Conveniently, it’s also used a bargaining chip achieve his foreign and domestic policy aims.

Source: Wall Street Journal

In his first term duties were primarily focused on Chinese imports, where the effective tariff rate increased from 3% to 11% per data from Trade Partnership Worldwide.  

In his second term, Trump is expected to target several more nations. Previously he has warned of a blanket tariff of 10-20% on all imports, irrespective of source country, and 60-100% tariff on Chinese imports. More recently the increase has been limited to 10% across all Chinese imports. Trump has also declared a flat 25% tariff on all Mexican and Canadian imports will be one the “first executive orders”, in part to encourage stricter border enforcement.  

The commonality among these three nations is that all meaningful trade partners and all have trade surpluses with the United States. Australia however has a small trade deficit and represents a slither of total US trade. We are also the United States closest ally in the Pacific region with common military and foreign policy objectives. As a result, Australia would likely be exempt or face relatively smaller tariffs. Depending on the magnitude and breadth of tariffs, Australia could be a net beneficiary as our exports become relatively cheaper.

Of greater concern is what happens to China. Domestic economic conditions remain weak, and the prospect of further tariffs will only hinder its recovery. Nearly 30% of domestic exports are to China, whereas just less than 5% are shipped to the US. Meaningful tariffs against China – Australia’s largest trading partner, would undoubtedly dent demand for mining and agricultural exports.

Energy

Trump’s “drill baby drill” mantra heralds a return to a fossil-fuel energy sources at the expense of green alternatives. This will benefit Australian developers and producers, with greater access to public demand and faster federal permit approvals.  

Australia should also benefit from Trump’s anti-China rhetoric and the push to reshore critical supply chains such as critical minerals. Conversely renewables, and more broadly the environment, will take a back seat during Trump’s second term.

As for the Inflation Reduction Act (IRA), where several Australian companies have received funding, Trump has deemed it a “green scam” and said it would be repealed. We remain doubtful given 85% of IRA funding is committed to Republican states. Instead, he will likely make peripheral changes, such as removing tax credits for electric vehicles and opt for easier policy wins such as exiting the Paris climate accord (for the second time).

Tax Policy

While tax cuts have been foreshadowed under the second Trump administration, the finer details are yet to be announced.

Trump flagged cutting the corporate tax rate from 21% to 20%, with a potential 15% tax for domestically produced goods and services. He has also earmarked an extension of the expiring individual tax cuts legislated in his first term, increasing child tax credits and reinstating unlimited deduction for state and local taxes.  

The individual cuts rates likely won’t have a material impact on Australia. But Trump’s desire to cut red tape and encourage domestic investment will encourage large and multinational Australian firms to reconsider where they invest their capital. Should it move the dial on business investment, Australia will need to consider its own package of incentives to retain and attract new corporate investment and expenditure.

Cover Image Source: CNN/Peter Kramer/NBC/Getty Image