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In brief
- Recent US tariffs are expected to weaken global economic growth over the next few years.
- But Australian investment and GDP growth are expected to be higher over the coming five years under a range of EY-modelled tariff scenarios.
- The main benefits for Australia come from cheaper imports and a higher terms of trade.
- But increased global trade policy uncertainty represents a risk for Australian businesses.
Recent trade developments
The world is currently undergoing a revolutionary shift in global trade as United States (US) trade relationships are being reset amid rising geopolitical tensions. The US Administration’s minimum tariff of 10 per cent, along with higher ‘reciprocal’ and punitive tariffs on many nations, including 30 per cent on China and 50 per cent on India, have increased the average US tariff rate to around 18 per cent – the highest since the early 1930s.1
Since the US ‘Reciprocal Tariff Policy’ was announced in April, there have been significant developments. The additional US tariffs on China had earlier reached 145 per cent, with China itself applying a 125 per cent tariff increase to the US, before being lowered. The ‘Reciprocal Tariff Policy’ took effect on 7 August after a 90-day suspension, albeit with significant adjustments, and there is the potential for greater escalation of tariff barriers.
While a minimum baseline tariff has been imposed on most goods imports to the US, other sectors face much higher tariffs. The US has placed a 50 per cent tariff on copper, steel and aluminium, as well as 25 per cent tariffs for automobiles and parts across all nations. Further, the US administration recently announced a 100 per cent tariff on pharmaceuticals commencing 1 October, unless a company is building a manufacturing plant in the US.
On 28 May, the US Court of International Trade ruled that the US Government had exceeded its authority by imposing global tariffs under the International Economic Emergency Powers Act. However, the tariffs were immediately reinstated the following day, pending appeal, with the case to be heard in November by the US Supreme Court. The US Administration has used tariffs both to negotiate trade deals and as a tool to achieve other policy goals and geostrategic outcomes. It is a complex and dynamic situation, with heightened uncertainty over global trade flows likely to remain for some time.
The recent US tariffs will impact all nations, including Australia, both directly and indirectly. Global economic growth is expected to be weaker over the next few years, with the International Monetary Fund (IMF) revising down its global growth projection in July to 3.0 per cent in 2025 and 3.1 per cent in 2026, compared to 3.3 per cent for both years in its January projection.2 The forecast range has widened due to the fast-changing nature of the US government’s policy announcements.
US tariffs threaten global growth under multiple scenarios
Global trade data show that world goods trade has remained strong since the US ‘Reciprocal Tariff Policy’ was announced in April, including sectoral tariffs on steel, aluminium and automotives. However, under several scenarios, US tariffs are expected to weaken global economic growth over the next five years3.
The EYGEM model analyses tariff impacts to offer detailed forecasts of exports and consumption by sector for various scenarios.
We have modelled three scenarios which cover escalating trade tensions to highlight the potential consequences of tariff escalations, and broader implications for business, policymakers, and international markets:
- Reciprocal tariffs – existing US tariffs remain in place, but other countries don’t apply retaliatory tariffs
- Worldwide retaliation – existing US tariffs remain in place, all other countries retaliate and there is a mixed response from Chinese exporters
- China decoupling – existing US tariffs remain in place, all other countries retaliate, and Chinese exports to the US are reduced by 95 per cent and vice versa.
We estimate that the impact of the reciprocal tariffs will reduce global economic growth by 0.3 per cent by 2030. Under the more severe scenarios, global economic growth by 2030 is estimated to be 0.5 per cent lower for the worldwide retaliation scenario and 0.6 per cent lower for the China decoupling scenario.
The tariffs mostly hurt the US and the countries on which it imposes the biggest penalties
US trade data show that merchandise imports in the country have fallen from elevated levels since April and are now lower over the year. Lower growth and higher inflation are likely in the US in the near-term and this has translated to significant volatility in financial markets, including lower demand for traditional safe havens: the US Dollar (USD) and US treasuries. Meanwhile, gold, commonly used by investors as a hedge against volatility, is at a record high.
Our analysis found that under the reciprocal tariffs scenario, the recently introduced tariffs could reduce economic activity by 0.9 per cent in the US by the end of 2030. Inflation in the US would also be close to 1.0 percentage point higher by the end of this year as businesses pass on the costs of the tariffs to consumers. The impact could be even larger if other countries retaliate against the US, with economic activity reduced by 2.2 per cent under the worldwide retaliation scenario and by 2.6 per cent under the China decoupling scenario. Under each of the three scenarios modelled, the US economy is hurt the most of all countries.
We estimate that the impact of the current reciprocal tariffs in place will reduce economic activity in China by 0.5 per cent by the end of 2030. China’s economic growth is estimated to be 0.7 per cent lower for the worldwide retaliation scenario and 1.3 per cent lower for the China decoupling scenario. It is possible, of course, that the impact could be somewhat offset by stimulus measures from the Chinese government to ensure it reaches its 5 per cent growth target. So far, Chinese exports to Asia have offset the reduction in exports to the US, and China’s GDP in the first half of 2025 exceeded the official government target of 5 per cent.
US tariffs and the Australian economy
The US currently imposes a 10 per cent tariff on Australia, which is the lowest of all countries, and Australia has a trade deficit with the US. The direct impact of the tariffs on Australia is likely to be relatively small, given the US made up only 4.6 per cent ($24.4 billion) of Australia’s $517.0 billion total goods exports in 2024. Just under $3 billion of gold is currently exempt from the tariffs. So far there has been no discernible impact on Australian economic growth from the tariffs. Australian businesses, in the main, are wary, but mostly unaffected.
The main economic concerns lie in the indirect effects on Australia’s small open economy from weaker global economic growth (particularly Chinese growth), trade redirection, financial market volatility, and increased uncertainty.
Despite US tariff policy creating global trade uncertainty, Australian business confidence has not experienced a significant impact, with NAB’s latest business survey recording a slight increase in confidence since the tariffs were announced in April. Australia’s exports remain resilient, with the latest data on full containers from the ports showing through the year growth of around 6.5 per cent in July.4 Although forward orders had been below the long run average since 2024 and recorded a slight decline in April when the tariffs were first announced, they have since increased and in August were the highest since May 2023.
Of Australian CEO’s interviewed by EY-Parthenon in August more than half (53 per cent) have already completed localisation efforts, well ahead of the global average of 38 per cent.5 In our own conversations with clients, the range of concerns from the tariffs ranged from weaker consumer demand impacting sales to worries about heightened risk premia. And while there are ongoing areas of caution for business, it is likely that many Australian organisations will benefit from the new environment.
Tariffs impacts will differ across sectors
While most goods imports to the US have been hit with a minimum baseline tariff of 10 per cent, other sectors face much higher tariffs. The US has already put in place a 50 per cent tariff on copper, steel and aluminium, as well as 25 per cent tariffs for automobiles and parts against all nations. Further the US administration has announced a 100 per cent tariff on pharmaceuticals commencing 1 October, unless a company is building a manufacturing plant in the US. Pharmaceuticals were Australia’s third largest export to the US in 2024, accounting for $1.9 billion. The tariff impact could potentially be significant, although, some major Australian based pharmaceutical companies, which together account for a large share of pharmaceutical exports to the United States, do not expect material impacts to their businesses.6
At the same time the US administration also indicated it plans to introduce tariffs of 50 per cent on kitchen cabinets and bathroom vanities, 30 per cent on upholstered furniture and 25 per cent on heavy-duty trucks. The US administration has also flagged higher tariffs on other sectors, including semiconductors, timber, medical devices and robotics and industrial machinery. This may force Australian exporters to consider passing on the cost of the tariffs to customers, absorbing the cost, finding new markets and diversifying supply chains.
Australia has a heavy export reliance on Asia, with 34.6 per cent and 13.6 per cent of total goods exports in 2024 going to China and Japan, respectively.7 High US tariffs on many of Australia’s largest trading partners in Asia are likely to reduce economic growth and demand for some Australian exports, particularly mining commodities such as iron ore and coal.
On the other hand, some Australian export industries may benefit. For example, China’s reactive tariffs on the US may enhance Australia’s price competitiveness for beef products. Brazil had been the largest beef supplier to the US over the first half of this year, but trade has significantly decreased since the US introduced a 50 per cent tariff on Brazil. In addition, US beef is currently in short supply while US beef demand has risen, which has led to an increase in Australian cattle prices.8 China’s reactive tariffs on US energy exports also opens the door for Australian producers to replace US production.
Australia’s critical minerals sector may look more attractive to US investors who have been locked out of Chinese supply due to export restrictions. Further, countries which are closely aligned with Australia may increase investment in Australia for geostrategic reasons and confidence in the strong institutional settings which Australia boasts.
Importantly, Australia has been adept at responding to changing conditions and finding new markets. For example, in response to trade restrictions imposed by China on beef and barley in 2020, Australian businesses were able to find new markets with total exports increasing.9
Policy makers stand ready
Monetary and fiscal policy may be used to cushion the economic impact if circumstances change. If there were a sharp slowing in business investment or consumption due to hostile trading developments, especially if accompanied by a deflationary impulse, there would likely be more interest rate cuts.
Much will depend on the reaction of the Australian dollar (AUD), which has historically been a shock absorber for the Australian economy. As of 22 September, the AUD was around 5 per cent higher against the USD and the Trade Weighted Index (TWI) was around 4 per cent higher compared to levels prior to the April reciprocal tariff policy announcement. This partly reflects the unusual depreciation of the USD, with commodity prices so far withstanding downward pressure. Additionally, recently interest rates in the US have exceeded those in Australia, contributing to the AUD remaining below its long-term average. However, financial markets anticipate that US interest rates will fall below Australian levels by the middle of next year. If this pattern were to continue, it could lead to an appreciation in the AUD, making Australia’s exports less competitive. Alternatively, a USD appreciation, which is possible if US growth was to pick up, or there were fresh inflationary concerns, might contribute to an AUD depreciation, causing Australian exports to be more competitive, resulting in higher economic growth.
Australia to benefit from US tariff impacts in the medium to long term.
Because US tariffs represent a significant disruption to global trade, new supply chains will be established and trade redirection undertaken. We estimate that Australia will benefit from this process as exporters are able to increase sales to China, capturing some of the demand lost from US trade.
In addition, Australia’s US tariffs are lower than other regions, resulting in an improvement in the relative price competitiveness of some Australian goods in the US market. At the same time Australia may import commodities at better price points given lower global growth.
There is also the potential for some export goods, which would otherwise have gone to the US, to be redirected to Australia, putting downward pressure on import prices. This may increase Australia’s terms of trade. Under the scenarios reciprocal tariffs and China decoupling, EYGEM produces a modest improvement in Australia’s economic growth, relative to baseline, of 0.1 per cent and 0.6 per cent by 2030 respectively.
As trade is redirected away from the US and China to other regions, the impact of the US tariffs is expected to reduce business investment in the US and China. At the same time investment is expected to increase in Australia, reflecting Australia’s higher rates of return and more stable investment environment. We estimate investment in the US to fall by between 4.4 per cent under the reciprocal tariffs scenario and 11.2 per cent under the China decoupling scenario by 2030, relative to a baseline scenario without tariffs. While Australian investment is estimated to increase by 0.5 per cent under the reciprocal tariffs scenario, and 2.7 per cent under the China decoupling scenario by 2030. This will further stimulate spending and demand in Australia, leading to the appreciation of the Australian Dollar compared to the US. This change is expected to occur gradually over the five years to 2030. As a result, Australia would be able to import more goods at cheaper prices, possibly stimulating growth in consumption.10
Financial market volatility has eased, but further volatility is possible
Confusion over US tariff policy announcements significantly increased volatility in global financial markets, including in Australia. The ASX 200 fell by nearly 15 per cent from its peak in February to its low in April, before recovering nearly all losses as it became clearer that most countries would not retaliate against US tariffs. In April wild swings in equities as measured by the ASX 200 VIX, and bond markets pushed financial volatility to its highest level since 2020.
Such pronounced market volatility could increase risk premiums across asset classes. However, equity risk premia remains low by historical standards, but increases the risk of large adjustments or a re-pricing of assets given unexpected developments.11 Asset prices have been supported by the expected easing in interest rates in the US and elsewhere as well as the speed of uptake in artificial intelligence (AI). However, risks remain where these factors could lessen compared to expectations, potentially resulting in lower equity prices.
The interest rate environment plays a key role in impacting confidence and influencing business investment. Markets have reassessed the outlook for interest rates and are now pricing in more interest rate cuts in Australia than at the start of this year. Between 25 and 50 basis points of cuts are expected by financial markets over the next year, which at its low, would take the cash rate to 3.10 per cent by June 2026. Though, market expectations for long term interest rates have increased, reflecting rising global debt and deteriorating fiscal outlooks.12
In its August Statement on Monetary Policy, the Reserve Bank’s liaison with industry suggested that while there are concerns about the outlook, overall firms have reported that domestic conditions remain favourable. It was also noted that global developments were having minimal direct impact on investment decisions so far.
We recently conducted a survey of clients, finalised in August, to assess the impact of the US tariffs on Australian businesses. Most firms reported a moderate increase in capex investment intentions over the next 12 months compared to average levels of investment over the last five years, suggesting tariff conditions have not had a significant impact on capex intentions. At the same time, demand for goods and services was judged by most businesses surveyed to be broadly unchanged or improved compared to a year ago.
What should Australian businesses do now?
It is crucial that in the current environment Australian businesses stay up to date on the latest international trade arrangements and where possible take advantage of opportunities as they arise.
Businesses need to understand how new tariffs will be implemented. Strict US rules of origin, varied country-specific reciprocal tariff rates, and sectoral tariffs may affect the supply chains and manufactured goods of companies headquartered in Australia.
Consequently, some Australian businesses may need to reassess entire supply chains.
Free trade agreements (FTAs) have been part of Australia’s trade success and present opportunities to be less reliant on the US. Australia has 19 FTAs with 30 partner economies and negotiations with the European Union have been expediated due to the recent US tariffs.13,14 The Department of Foreign Affairs and Trade estimates that trade with these nations is 13 per cent higher on average due to these FTAs. The US trade policy changes may push some businesses to rethink their target markets and diversify their customer base to avoid the downside impacts. Cost control will be crucial. Scenario modelling, nearshoring and tech integration may help leaders control costs and meet evolving regulatory demands.15
Policy uncertainty around the recent US tariffs means a cautious exploration approach may be the sensible strategy for many businesses. Australia’s relatively low reciprocal tariff rate could create opportunities for businesses to invest and expand their workforce, providing a competitive advantage. Alternatively, the tariffs, potential tax incentives and available grants, may make it more attractive for some businesses to establish themselves in the US market.
EYGEM addresses these challenges on a scenario basis and is a key tool for businesses who are looking ahead to answer some of the most pressing questions today. We’ve been supporting clients with rapid diagnostics to see how trade impacts their business, followed by deep dives into specific products to practically examine the key issues, assess risks and develop solutions.
Businesses who respond early to these shifting dynamics will put themselves ahead of their competitors to maximise shareholder value.