Any US tariff increases won’t delay RBA easing

Trump, tariffs and the RBA

There has been some commentary that a Trump 2.0 could delay any RBA easing because of its potential inflationary impact.

I struggle with the notion that Trump’s tariffs will have any meaningful effect on Australian inflation and by extension the RBA policy rate.

Trumps policies are inflationary for the US. But they will have a barely perceptible impact on inflation in Australia. That is the case even if China and others retaliate.

The more important impact is on Australian economic activity which would unambiguously suffer and that would be disinflationary.

US tariffs on imports from China, Mexico or the EU will not change the price of goods we import from those nations and nor will they alter in any significant way the price of goods the US exports to Australia (Australian import prices). It will of course have an impact on US inflation.

Similarly, were China and others to retaliate it would not change the price of goods we import from the US or the price of exports from those countries to Australia (again, Australian import prices).

The exception might be where US tariffs apply to US imports from China and elsewhere that are inputs into the production process of US and other exports to Australia (and vice versa). My conjecture is that is trivial (in terms of the effects on Australian import prices) in the scheme of things.

The only way in which there is a significant price impact in Australia will be if we “shoot ourselves in the foot” by engaging in retaliatory tariffs.

I think the RBA Governor was correct when she discounted the impact of tariffs on the stance of monetary policy in Australia.

I acknowledge there may be some effect via the exchange rate (i.e lower AUD leading to modestly higher import prices) but:

1. I’m yet to be convinced that the USD appreciates significantly. It is hard to see any sustained appreciation in the event of a less independent Fed (lower policy rates) combined with a yawning budget deficit that needs to be funded (higher medium to longer term bond yields). In other words, the curve steepens.  The deficit funding requirements probably mean that over time US bond yields need to rise just to stop the USD from depreciating. Added to that I’m not sure the Chinese will be buying US Treasuries in a “trade war” scenario (the Chinese will be diversifying their FX reserves away from the USD and buying less US treasuries as a consequence). This chips away at the USD “exorbitant privilege”.
2. But more importantly, rather than inflation being the more significant effect locally, it will be on activity growth and employment. These effects will be disinflationary – potentially in a non-trivial way. Other things equal that argues for lower policy rates sooner in Australia (admittedly these are “slow-burn things”) rather than higher. Global trade wars are an internecine by nature. Global growth will suffer in a global trade war and given our leverage to the freer international trade, the Australian economy will suffer a hit to growth (bigger than most) and an attendant disinflationary impetus.