Tariff turmoil
‘Reciprocal’ tariffs have raised the average effective US import tariff rate to its highest level in more than a century.
On 2 April, the United States levied import tariffs on all its trading partners. President Donald Trump announced a baseline tariff of 10% on the import of goods from a number of countries, including Australia. These tariffs went into effect on 5 April. Much higher tariffs of varying degrees were imposed on a significantly longer list of countries and are due to take effect on 9 April.
Reciprocal tariffs have raised the average effective US import tariff rate to its highest level in more than a century (see Chart 1). Tariffs announced on 2 April have a cumulative effect — they do not override previously announced tariffs; they add to them. Previously announced US import tariffs include tariffs on goods from Canada and Mexico (with some exemptions still in place), tariffs on all goods from China, tariffs on the import of steel and aluminium from all countries, and tariffs on all foreign-made automobiles. Importantly, tariffs imposed in 2018 on certain goods from China also remain in place. This implies that most goods that the US imports from China will face a 54% tariff from 9 April, but some goods will be subject to a 79% tariff.
Chart 1: Average effective US import tariff rate
In the aftermath of the tariff announcements, equity markets across the global economy have turned down savagely (see Chart 2). Nowhere was this more apparent than in the US economy. The S&P 500 index fell 4.8% on 3 April, and a further 6% on 4 April, wiping out $5.4 trillion in market value. Elsewhere, markets fell, but by a smaller margin. In Europe, the STOXX 600 closed the week 7.5% below its 2 April level. In the United Kingdom, the FTSE 100 was down 6.5%. In Japan, the NIKKEI 225 was down 5.4%. In Australia, the ASX 200 closed the week more than 3.0% below its 2 April level. On 7 April the Australian market slumped by a further 4.2%.
The precipitous falls in equity indices indicate a significant deterioration in global investor confidence. Australia’s superannuation funds, which invest heavily in global equity markets, have been hit hard. It is estimated that Australian superannuation funds have lost $90 billion since the start of 2025.
Chart 2: Equity indices in the US, Europe, UK, Japan, and Australia
Markets remain on tenterhooks, not least because retaliation to US tariffs could be on the cards. On Friday, 4 April, China announced a retaliatory tariff of 34% on all goods imported from the US, matching US reciprocal tariffs on Chinese goods announced two days earlier and adding to its previously announced tariffs on imports from the US. This roiled global markets further. Other economies, including the EU, have indicated the possibility of retaliatory tariffs on US imports in coming days. If retaliation gathers momentum, tensions could ratchet higher, and a full-blown trade war could ensue.
Financial and currency markets have reacted so bleakly because the impact of US tariffs (and other tariffs in retaliation) is expected to have a very large and negative economic impact. Modelling by The Budget Lab at Yale, a non-partisan research centre, indicates that the 2 April tariffs alone may subtract 0.5 percentage points from US real GDP growth in 2025 and a further 0.1 percentage points in 2026. However, when all US tariffs and retaliation from trading partners is considered, the impact is larger — US real GDP growth may be 0.9 percentage points lower in 2025. There has also been conjecture of much worse outcomes (including a US recession) from many analysts.
For Australia, the direct impact of US tariffs however may not be large. Only 4% of Australia’s total goods exports go to the US. Far less than 20% for the EU and 80% for each of Canada and Mexico.
However, the indirect impact on Australia’s economy could be significant. Demand from China, Australia’s largest export market, remains a key determinant. In 2023, Australia sent almost 40% of its goods exports, dominated by resources and energy products, to China. As tariffs mount and draw retaliation, China’s economy could slow further, resulting in a significant moderation in demand for Australia’s exports, and/or a large decline in global commodity prices. It could also lead to stranded exports locked out of the US market being redirected to markets such as Australia at lower prices, allowing Australia to import deflation.
The elevated possibility of a global economic slowdown, and perhaps the increased likelihood of a deflationary impulse from the redirecting of trade, has led to expectations of a rate cut when the RBA meets in May (see Chart 3). At the end of last week, the probability of the RBA cutting the cash rate by 50 basis points to 3.60% was as high as 70%. Investors now expect the RBA to reduce the cash rate by a further 100 basis points this calendar year. The negative wealth effect from falling equity markets across the global economy is another factor that is likely to boost expectations of interest rate relief in Australia. Earlier today, Treasurer Jim Chalmers reiterated market expectations of interest rate cuts but also mentioned that Australia is uniquely placed to deal with a global fallout.
Chart 3: Market expectations of forward RBA cash rate
However, rate cut expectations could be tempered to some degree by the sharp drop in the Australian dollar, reacting to concern of a significant global slowdown. At market close, the Australian dollar was trading at 60 US cents, its lowest level in almost five years. Additionally, modelling by Treasury released today indicates that relative to a baseline scenario without tariffs, Australia’s real GDP could be just 0.1% lower in 2025, but inflation could be 0.2% higher.
This newsletter was distributed on 7 April 2025. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Lester Gunnion, Manager at Deloitte Access Economics
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