The United States tariff program, and its expected negative implications for global economic growth, have been the dominant cause of the equity market correction experienced over recent weeks. Simplistically, the share market reaction can be explained by the fact that tariffs increase the price of goods. When the price of a good increases, there will be less of it consumed. A lower level of consumption then leads to lower production, which in turn reduces the earnings of companies involved in the production process. Lower earnings should then translate into lower share prices.
Although the use of tariffs by the new U.S. administration was well telegraphed, the magnitude and breadth of the program is greater than the share market consensus had anticipated. After various elements of the tariff regime were announced and revised sporadically over recent months, the U.S. program was further clarified on “Liberation Day” in early April, with a 10% base tariff rate being imposed on the majority of goods imported into the US (including those from Australia). Additional tariffs are being charged on specific items. Specific countries have also been targeted for higher tariffs if the U.S. administration deems those countries are themselves imposing higher tariffs on U.S. exports. Asian countries, in particular, have been singled out in the latest announcement, with a 34% “retaliatory” tariff planned to be charged on U.S. imports from China, which will bring the total tariff rate on Chinese imports to 64%.
An analysis of current trade volumes by country and type of goods suggests that the average tariff rate being applied on goods imported to the U.S. will be approximately 25%, which compares to an average of 2% prevailing at this time last year. This implies U.S. inflation will increase circa 2.5% as a direct result of the tariffs.
The direct impact of the tariffs on the Australian economy is expected to be relative minor, given the 10% rate is at the lower end of the range (in addition to the previously announced 25% tariff on aluminium and steel). The U.S. accounts for only 5% of Australia’s total exports, being well behind China (37%) and Japan (15%). However, with the economies of these major trading partners being more heavily impacted by the tariffs, overall demand for Australia’s exports is likely to be indirectly impacted.
Investment implications
Since the peak in valuations on the Australian market on 14th February 2025, the Australian ASX/S&P 200 Index has fallen 7.1% (up to the close on 3rd April 2025). At the time of writing, it would appear losses on the U.S and Japanese markets are tracking higher than that experienced in Australia. In contrast, equity markets in Europe and the U.K. have held up substantially better over this period, as has the Chinese market.
Whereas equity markets have declined, bond markets have rallied, with lower growth expectations translating into lower bond yields (and higher bond prices). Lower bond yields have also assisted some more defensive parts of the equity market. Infrastructure, for example, has been well supported and recorded small gains in valuation, with losses on the interest rate sensitive global listed property asset class being relatively minor.
The unique nature of recent events makes it difficult to assess what the exact response on financial markets should be. Clearly the tariffs are negative for company earnings overall, however these negative implications could be tempered by some or all of the following:
- The “Liberation Day” announcements do remove some of the uncertainty associated with the future roll-out of the tariff program and may be the start of a more measured policy implementation approach in the U.S.
- As per the buoyant mood on equity markets that followed the U.S. election result, there is still an expectation that the new U.S. government will introduce policies that are supportive of company earnings. Potentially, the tariff announcement may finalise the current negative news flow impacting share markets.
- There is scope within most major economies for monetary policy to continue to be eased (i.e. interest rates lowered), should economic growth decline in the months ahead. However, given the inflationary impact of tariffs in the U.S., there may be less scope for interest rates to be lowered there.
The tariff program, and the U.S. policy regime more broadly, has made investing more complex and outcomes less certain. In this environment, diversification and professional active management of portfolios is of paramount importance.
Disclaimer: This may contain general advice. It does not take account of your objectives, financial situation or needs. You should talk to a financial adviser before making a financial decision. This has been prepared by Dollar Growth Financial Advice Pty. Ltd. refer to the Financial Services Guide for details. While care has been taken in the preparation of this, no liability is accepted by Dollar Growth Financial Advice Pty. Ltd., its related entities, agents, representatives, employees for any loss arising from reliance on the information contained herein.
