Australia Gains Economically from Trump's Tariff Redirective Action
Australia is currently experiencing its highest level of economic uncertainty since the COVID-19 pandemic, according to a commission report. This uncertainty is largely due to the impact of US tariffs and the associated trade tensions.
The Australian Government's Future Made in Australia (FMIA) Act, which commenced in 2024, has provided grants and support to the mining and resource industry. However, the mining sector, heavily reliant on Chinese demand and global commodity prices, may face significant risks if US tariffs reduce China's industrial output and commodity demand.
For the period of 2023 to 2024, mining remained the top destination sector for foreign direct investment (FDI) inbound to Australia, equivalent to 15 percent of gross domestic product (GDP). The United States remains the largest source of FDI, with its FDI equivalent to 24.8 percent of GDP.
The US tariffs have put downward pressure on Australian GDP, primarily through a "negative external demand effect" where tariffs reduce demand from major trading partners, leading to an estimated 1% lower GDP level and higher unemployment, alongside tighter financial conditions and lower household wealth.
Australia's open market stance and lack of retaliation increase its vulnerability, but monetary and fiscal policies aim to alleviate these impacts. Direct industry assistance specifics are not deeply detailed, but the focus is on monetary easing and fiscal support to soften tariff impacts and support domestic demand.
The mining sector, given its reliance on Chinese demand, is particularly impacted by tariff-induced slowdowns in China and global demand shifts. The Critical Minerals Production Tax Incentive, passed in February 2022, provides a refundable tax credit on 10% of eligible costs associated with the production of critical minerals and rare earths.
Expressions of interest for the FMIA initiative are open until March 30, 2026. The commission suggests that abolishing tariffs will maximise benefits to Australian production and warns against retaliatory trade measures due to potential costs.
In addition, Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO) has opened a new graphite research and development (R&D) program to assist small-to-medium-sized enterprises. The commission also recommends the abolition of 457 tariffs in 2025 and the removal of 300 nuisance tariffs.
The commission estimates that the tariff regime imposed compliance costs of between AU$1.3 billion and AU$4 billion in 2023-2024 while collecting AU$2 billion in revenue. Mining is among the "favoured" industries, with research and development measures being the main type of budgetary assistance for the sector.
The Productivity Commission in Australia's latest Trade and Assistance Review warns against retaliatory trade measures due to potential costs. Deputy Chair Alex Robson of the Productivity Commission has cautioned that escalation could lead to a broader trade war with serious consequences. Minister for Trade and Tourism Don Farrell has invited US Commerce Secretary Howard Lutnick to Australia for continued discussions regarding tariffs on Australian products.
[1] Australian Productivity Commission, Trade and Assistance Review 2022, p. 30. [2] Australian Treasury, Economic Outlook and Fiscal Strategy 2023-24, p. 12. [3] Reserve Bank of Australia, Statement on Monetary Policy, May 2023. [4] Australian Bureau of Statistics, Foreign Direct Investment, Australia, cat. no. 5367.0, May 2023.
The Australian Government has initiated the Critical Minerals Production Tax Incentive to encourage investment in the production of critical minerals and rare earths, which are crucial for various industries, including resource investing. Despite this, the ongoing tariffs and trade tensions, primarily from the US, continue to create uncertainties in the sports, mining, and other sectors that rely on global demand, leading to potential risks for Australia's economy.
