Global share markets have been turned on their head over the last two weeks with announcements from the US of tariffs on every country (including uninhabited islands).
Australia seems to have gotten off fairly lightly, with a tariff of ‘only’ 10%, which is the lowest rate any country received.
That’s led many economists and forecasters to predict that the direct impacts on Australia will be limited. After all, we don’t actually export that much to the US – they make up only 5% of our overall export of goods.
However, that doesn’t mean we’re out of the woods yet.
The tariff we should really be watching is not the one put on Australia – it’s the one put on China.
What are tariffs?
A tariff is basically a tax that a country applies to imported goods.
They’re often applied to specific goods, but in this case Trump’s proposed tariffs apply to all goods imported from each targeted country.
Generally, a country will impose tariffs when it’s trying to protect local industry. If you produce a certain product, but another country can produce and supply the same product to you more cheaply, you might impose a tariff to give your domestic producers a cost advantage.
The thinking goes that it’s good for jobs, and keeps products that are important to you produced locally.
So, the 10% tariffs applied to Australian goods will mean that US importers now pay 10% more for Australian products. In other words, they’re being incentivised to buy local.
Why do tariffs on China matter?
The reason I’d be watching China, and not Australia, is that Australia doesn’t export that much to the US.
Our main export to the US is beef, and there may be pain for that sector specifically, but it’s not going to ruin the Australian economy.
However, Trump has gone after China much harder than he has Australia.
While Trump has paused tariffs at 10% for all other countries, the US and China have been trading blows.
Trump first put a 10% tariff in place for Chinese goods in early February, before increasing it to 20% a few days later. On April 2nd that was increased to 54%.
China hit back with an 84% tariff, and on April 10th Trump raised the rate to 125%. He then clarified this morning that it’s actually 145%.
The reason we should care about this in Australia is that we export a lot of our goods to China. Nearly 37% last year, in fact.
So, while we might have dodged a bullet on direct tariffs, we’re definitely exposed to an economic downturn in China.
If this toddler tantrum (sorry, I mean serious trade negotiation) turns into a full blown trade war and neither backs down, both the US and Chinese economies could be hit hard.
Australia could be the innocent bystander in the wrong place at the wrong time.
Should that change my investment strategy?
Owen, and many other smart investors, have been taking advantage of the lower prices and buying shares this week.
The volatility has presented some opportunities to buy great companies at better prices than we could a month ago.
Those great companies will remain great companies, no matter what happens with tariffs. That’s why I’m still comfortable investing for the long term right now.
However, we’re not out of the woods yet. If you’re buying shares today thinking that the pain is over because of a temporary tariff relief, you might be jumping the gun.
I’d also be wary of companies heavily exposed to China’s economy, like Fortescue Ltd (ASX: FMG) or a2 Milk Company Ltd (ASX: A2M).
Bottom line – I’m buying shares this week too, but I wouldn’t be doing it with money I need back in the next year or two. There’s still a lot to play out and no one can predict what’s coming next.
