Trump tariff chaos: What boards need to do now

With geopolitical uncertainty disrupting world markets, turbulent times lie ahead for directors and boards need to be prepared. Here in this special edition of the Economic Weekly newsletter, we provide analysis from AICD Chief Economist Mark Thirlwell MAICD. Subscribe here to receive Mark's newsletter and the AICD's Dismal Science Podcast.

Key takeaways for boards

• Global policy uncertainty will persist with markets struggling to decipher what is signal and what is noise
• Boards should seek to take a long-term view and be cautious against making major decisions while policies remain fluid
• Scenario planning is key to test supply chain and broader business resilience, including in the event of a persistent US-China trade war
• Organisations should be alert to second order impacts of heightened geopolitical tensions including state-sponsored cyber threats, in particular against critical infrastructure

The chaos at the heart of the global economy continued this week, as the Trump administration abruptly backed away some from some of the more extreme measures it had announced on 2 April, or Liberation Day. Just a few hours after his so-called 'reciprocal tariffs' had gone into effect, President Trump announced that he would pause them for 90 days. This was ostensibly to allow time for negotiations with trade partners. However, in practice the move looks to be driven at least in part by the sharply negative market reaction to his 2 April announcements, which included a share market slump, growing recession fears and most recently some worrying developments in the market for US treasuries. According to the president: "They were getting yippy…They were getting a little bit yippy, a little bit afraid."

While markets have just heaved a great big sigh of relief, we should note that as well as being temporary, the roll back is also only partial. The 10 per cent baseline or near-universal tariff that the United States also introduced on 2 April remains in place. In addition, the administration said it would further increase tariffs on imports from China to an eye-watering 125 per cent, as the US-China trade war continues to ramp up, with potentially destabilising geopolitical implications.

At this point, it is worth recalling that we have seen a variant of this story before. Consider the case of US tariffs on Canada and Mexico. President Trump first announced these on 1 February this year, when the administration said it would impose 25 per cent tariffs on Mexico and Cananda, along with a lower 10 per cent tariff on Canadian energy resources. A couple of days later, on 3 February, the administration put the tariffs on hold for one month. Then on 4 March, the White House ended the 30-day pause and declared the tariffs would go into effect. However it later conceded on 6 March it would amend them to exempt imports from Mexico and Canada that satisfy United States-Mexico-Canada Agreement (USMCA) rules of origin requirements, along with announcing a reduction in the tariff on potash imports to 10 per cent. For now, the 'Liberation Day' tariff story looks to be following a similar trajectory of announcements, pauses and amendments, albeit on an even larger scale and against a backdrop of far greater financial market dislocation.

When we first assessed the implications of the initial trade policy moves of the new administration, we characterised them as a major policy uncertainty shock for the global economy. Two months on and that description remains apt, if understated. What has unfolded over intervening weeks now looks to have been a giant uncertainty shock. We have also argued that the news coming out of Washington DC is consistent with a global regime change and that it threatens the world economy with a stagflationary shock. Those key judgements continue to hold, subject to the ongoing unpredictability of US policy.

Below, we take a detailed look at recent developments and consider some of the implications.

A quick note to regular readers of the Economics weekly. This special analysis replaces this Friday's edition, and then the weekly update will be taking a break for Easter. Normal service should resume from 2 May.

And of course, on the domestic front, Australians are set to go to an election on May 3. On Thursday 8 May, please join me for a webinar for analysis of the poll and implications for boards and directors. Register here for the Post-election Economic Assessment webinar. Also in the lead-up to the poll, the AICD has published an election platform, which includes a three-point plan to revitalise innovation and productivity through better and more fit-for-purpose regulation. Download your copy here.

As we head towards May 3, it is also interesting to check the pulse of Australian business leaders and examine the results of the latest AICD Director Sentiment Index. Director sentiment has improved for the first time since 2021, lifting by 9.7 points since the last survey in 2024 but remains in negative territory at minus 23.9, weighed down by mounting global economic uncertainty and other issues. Access the findings here for the AICD Director Sentiment Index 1H 2025.

'Liberation Day' and the return of 'Tariff Man'

Notoriously, President Trump has long been a fan of tariffs. 'I am a Tariff Man' he declared in 2018, during the first Trump administration (Trump 1.0). And in his second administration (Trump 2.0), Tariff Man has tariffed. And then tariffed again.

To date, trade policy measures introduced by Trump 2.0 include tariffs on China, Canada and Mexico; tariffs on steel and aluminium; and tariffs on automobiles and automobile parts (although the tariffs on parts have been delayed until 'not later than' 3 May 2025). There are also pending or threatened measures on imports of copper, timber and lumber, and pharmaceuticals, among others.

But the biggest measures so far arrived on 2 April as part of 'Liberation Day' when the Trump administration announced sweeping new tariffs. Using presidential authority granted under the 1977 International Emergency Economic Powers Act (IEEPA), the White House declared that 'foreign trade and economic practices have created a national emergency' and introduced two key policies.

• A near-universal base tariff in the form of a 10 per cent duty on almost all imports entering the United States. This took effect from 5 April this year.
• An 'individualized reciprocal higher tariff on the countries with which the United States has the largest trade deficits.' This - briefly - took effect on 9 April and has now been paused for 90 days.

The White House published a list of the new 'reciprocal' tariff rates on impacted economies, which ranged from a low of 11 per cent (that is, just above the 10 per cent base tariff) to a high of 50 per cent. Notable measures included a 49 per cent tariff on Cambodia, 46 per cent on Vietnam, 36 per cent on Thailand, 34 per cent on China (on top of the 20 per cent tariffs already imposed by the administration), 32 per cent tariffs on Indonesia and Taiwan, 26 per cent on India, 25 per cent on South Korea, 24 per cent on Japan and Malaysia and 20 per cent on the European Union. Australia, New Zealand, and the United Kingdom were among those economies 'only' subjected to the minimum ten per cent universal rate.

Importantly, Trump's IEEPA Order allowed the president to 'increase the tariff if trading partners retaliate or decrease the tariffs if trading partners take significant steps to remedy non-reciprocal trade arrangements and align with the United States on economic and national security matters'. When Beijing announced retaliatory measures in response to the new 34 per cent tariff levied on China, the Trump administration responded by announcing an additional 50 per cent tariff on Chinese goods. This week, the administration increased the tariffs on China yet again, this time to 125 per cent.

Note that the 2 April measures did not apply to all trade with the United States. Canada and Mexico were exempted under the USMCA arrangement (although as noted above, both countries are facing tariffs under previous Executive Orders) while countries already subject to so-called HTS Column 2 rates (Belarus, Cuba, North Korea and Russia), which captures those economies with which the United States does not have normal trade relations (NTR), were also excluded. There were also a range of product exemptions including on products subject to other actual and pending tariff measures including aluminium, steel, automobiles and automobile parts, copper, pharmaceuticals, semiconductors and lumber articles, along with some critical minerals as well as energy and energy products.

The scale of the shock

Eminent trade scholar Douglas Irwin has pointed out that one has to go back 'almost a century' to find tariff increases comparable to the measures introduced under Trump 2.0. Perhaps the most notorious of these comparisons is the 1930 Smoot-Hawley tariff. Introduced as the world economy was entering the Great Depression, it triggered a wave of international trade policy retaliation and was one important contributor to the famous downward 'Kindleberger spiral' of world trade between 1929 and 1933. While making tariff comparisons over time is difficult, according to Irwin the Trump 2.0 measures are associated with a broader product coverage and a bigger percentage point increase in the tariff rate than Smoot-Hawley.

Estimates by the Yale Budget Lab suggest that the 2 April tariff measures alone are the equivalent of a rise in the effective US tariff rate by 11.5 percentage points (Smoot-Hawley involved an increase of about 5.4 percentage points, while the McKinley tariff of 1890 - delivered by William McKinley, the original Tariff Man and 'Napoleon of Protection' and Trump's inspiration - involved a 10.6 percentage point increase). Along with other tariff increases announced by Trump 2.0, the 2 April measures (if fully implemented) would take the average effective US tariff rate up to 22.5 per cent. That would represent the highest rate since 1909, almost returning the United States to 19^th Century tariff levels.

According to WTO statistics the United States 'only' accounts for around 13 per cent of world merchandise imports (or almost 16 per cent excluding intra-EU trade). But that still makes it the world's single largest goods importer, ahead of second-place China (10.6 per cent). And that importer is seeking to impose Great Depression-like levels of tariff protection.

According to separate estimates produced by the US Tax Foundation, the 2 April tariffs represent one of the largest tax increases in recent US history outside war-time adjustments, measured as the change in annual revenue as a share of GDP. The only peacetime increase to be larger was the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA).

Reciprocity? What reciprocity?

Despite its name, there is little reciprocity in the 'individualized reciprocal higher tariff' announced on 2 April. A look at calculations reported by the office of the US Trade Representative as underpinning the administration's tariff measures shows the key driver is not the level of protection imposed by each trading partner (tariff or non-tariff) but rather the size of the bilateral trade deficit that the country runs with the United States.

In essence, the way the 'reciprocal' tariffs were calculated was by taking a trading partner's merchandise (that is, goods) bilateral trade deficit with the United States, dividing that deficit by the total value of US imports from that country and then dividing the consequent ratio by two to arrive at the 'individualized reciprocal higher tariff'.

Set aside for a moment the idea that bilateral trade balances are anyway an extremely poor guide to policy. This mechanism effectively combines the effects of any tariff and non-tariff trade barriers with the underlying forces of comparative advantage (the reason that the United States runs a deficit on - say - coffee trade with Brazil or Colombia will include geographically-determined differences in climate and growing conditions, for example). Moreover, to the extent that the real target of the policy is the bilateral merchandise trade deficit, rather than the presence of policy barriers, per se, that makes it harder for the targeted country to formulate an effective policy response.

Note also that the calculations conveniently exclude services trade where the United States tends to run persistent trade surpluses.

A giant uncertainty shock

As we have noted before, the easiest way to think of current developments is to treat them as a series of trade policy shocks that combine to deliver a giant uncertainty shock. In recent weeks, specific measures of trade policy uncertainty have soared to highs that are unprecedented in the current century. Measures of broader economic policy uncertainty have meanwhile jumped to pandemic-era levels.

This uncertainty shock is in part a product of the sweeping nature of the policy experiment underway here, which involves a dramatic effort to rebalance US international trade, restructure the global trading system and unwind key aspects of globalisation. Regime change of this scale and scope was always going to trigger significant uncertainty regarding both the transition path and the ultimate destination. But at least four other features of the Trump 2.0 policy approach are further exacerbating the global uncertainty shock.

Uncertainty problem #1: The interpretation problem

One key driver of policy uncertainty is the contradictory nature of several of the administration's declared policy objectives, which makes it difficult to judge whether each measure will deliver what is required.

For example, some observers argue that the Trump 2.0 tariffs are part of the 'Art of the Deal' and therefore should be treated as a negotiating gambit. But according to the administration, tariffs are also supposed to deliver significant budget revenues. And to return US trade to balance. And to attract manufacturing jobs and investment back to the United States. Yet a tariff intended as negotiating coin cannot simultaneously serve as a stable source of fiscal revenue or as a lasting incentive to shift the patterns of trade and manufacturing investment. Likewise, the administration's quest to return the US current account to balance sits uncomfortably with its declared aim of encouraging greater foreign investment into the United States. After all, the balance of payments has to…well…balance. Changes in the current account will always be offset by change in the capital and financial account.

Uncertainty Problem #2: Chaotic implementation

A second important source of uncertainty is the way in which Trump 2.0 has implemented policy to date. As already noted, the introduction of tariffs on Canada and Mexico was far from smooth and a similar pattern is now emerging regarding at least some of the 'Liberation Day' measures. The latest pause/retreat was also messy - for a while there was uncertainty over the implications for Canadian and Mexican trade, for example. This chaotic implementation process significantly exacerbates the unpredictability associated with the introduction of new tariffs.

Uncertainty problem #3: The credibility gap

A further problem with the Trump 2.0 approach is that the administration's trade policy commitments do not appear to be credible for its negotiating partners. Consider, for example, the USMCA negotiated under Trump 1.0. That agreement proved to be insufficient to stave off the initial threats of 25 per cent tariffs on Canada and Mexico or to protect those countries from subsequent announcements on steel, aluminium and autos. Granted, the administration did - belatedly - concede exemptions for that portion of bilateral trade conducted under MCA rules. But that concession only arrived more than a month after the initial tariff announcements. Similarly, and closer to home, Australia has its own Free Trade Agreement (FTA) with the United States in the form of the Australia United States Free Trade Agreement (AUSFTA). We also tend to sell less to the United States than it sells to us. And we have a close security relationship including a commitment to spend billions of dollars on US military kit. None of which has been enough to shield us from either the 10 per cent universal tariff or specific measures such as those on aluminium and steel. Even if a foreign government can reach a deal with the Trump administration to stave off current tariff threats, there is no guarantee that any such agreement will prove durable.

Uncertainty problem #4: How the rest of the world responds

A final important source of uncertainty relates to the future response of the countries targeted by US tariff measures. While there are a range of policy options available, in practice their choices largely boil down to three: Appeasement, Retaliation and Diversification, with countries able to select one or more of these options and to do so over different time horizons.

Option one involves taking the Trump tariffs as an exogenous shock and choosing not to respond. This would be the economic purist's response, best captured by Joan Robinson's 1937 observation that it makes little sense to respond to tariffs with more tariffs since 'It would be just as sensible to drop rocks into our harbours because other nations have rocky coasts.' (Although note that when read in context, Robinson was more ambiguous about the case for free trade than this standalone quote suggests.) To date, this has been the approach followed by Australia and the United Kingdom, among others.

Option two is to retaliate. As the Robinson quote above implies, this would seem to violate the logic of free trade. But that argument misses two important forces. First, there may be domestic political pressures that push governments into responding, aside from the economic logic. And second, there are game-theoretic arguments that suggest responding to tariffs could make sense under some circumstances as part of a bargaining strategy in the context of a repeated game. To date, Beijing has chosen to adopt such a retaliatory approach, as have (to a lesser extent so far) Canada and the EU.

Option three is to look to diversify trade away from the United States and towards other trading partners, where the viability of this strategy depends on the nature of the products in question and the scale of the market demand the exporter is seeking to replace.

There are important unknowns around which countries will choose which options and when, for how long they will sustain those choices, and how they will seek to operationalise them. For example, take the case of retaliation. As well as engaging in tit-for-tat tariffs (which - as we have seen with the US-China interaction in the past few days - risks generating its own escalatory logic) countries could seek to retaliate using alternative means. The latter could include limiting or taxing access to key exports (think of China's restrictions on rare earth exports for example), or using taxes and other measures to targeting US services trade or US foreign investment, or even the deployment of financial measures (such as Beijing choosing the nuclear option of upsetting the 'financial balance of terror' and dumping its holdings of US debt).

The implications of the giant uncertainty shock

The combined impact of this giant uncertainty shock plus the trade policy measures that triggered it has already had at least seven important implications.

Implication #1: Market Fragility and the United States' 'Liz Truss Moment'

Most obviously, Trump 2.0 has roiled financial markets. Until recently, share markets had taken the biggest hit, with dramatic falls in market valuations wiping out trillions of dollars of stock market wealth. Initially, however, the US administration seemed willing to ride out this market pain. What may have triggered this week's abrupt volte face was the sign that the disruption was spreading into the foreign exchange and government bond markets. Falls in the US dollar signalled that policy uncertainty was starting to take a toll on the greenback's traditional status as a haven during global 'risk off' shocks. And a sell-off in US Treasuries spooked investors by raising a similar concern around the safe-haven status of US government debt and causing market analysts to zoom in on the potential risks around so-called basis trades.

The greenback's status as the global reserve currency and US Treasuries' status as the global safe asset of choice were supposed to protect the United States from staging its own version of the UK's 'Liz Truss moment'. But over the past few days, that judgement had started to fray, and it may well have been this concern that prompted the administration's latest retreat (or at least pause).

Implication #2: A 'stagflationary' shock for the world economy

The macroeconomic consequences of recent developments have been to simultaneously drive down growth expectations (markets have been assigning a rising probability to the likelihood of a US recession) while also driving up inflation expectations. In other words, they have delivered a stagflationary shock to the US and global economies.

Early signs of this shock were visible in the latest March 2025 OECD forecasts for the world economy (which predated liberation day) which downgraded the global growth outlook while upgrading inflation prospects. Since then, the likely impact of US policy measures on both activity and prices has increased markedly in line with the greater size and scope of the proposed tariff measures.

Implication #3: Accelerated decoupling and challenges to the 'China + 1' model

Absent a new grand bargain between Washington and Beijing, the dramatic increase in trade tariffs between the United States and China is set to accelerate the decoupling of the two economies. US tariffs on Chinese imports have now risen to 125 per cent while Beijing has responded with tariffs of its own, which currently stand at 84 per cent.

The intensifying trade war will further raise the geopolitical temperature between Washington and Beijing with potentially destabilising consequences for geopolitical stability. Markets might be celebrating the Trump climbdown right now, but that geopolitical picture should be injecting a significant note of caution into their calculations.

In addition, the latest trade policy measures may also serve to undermine some of the logic of the 'China+1' style models adopted by international businesses, at least in terms of maintaining access to the US market. Key winners under that model had included Vietnam (given a 46 per cent 'reciprocal' tariff), Thailand (36 per cent), India (26 per cent) and Malaysia (24 per cent) all of which are now subject to hefty tariff rates of their own, albeit that those rates are now on pause.

Implication #4: Complicating the geoeconomic fragmentation story

Prior to the advent of Trump 2.0, the big globalisation story was the growing risk of geoeconomic fragmentation in the form of policy-driven efforts to unwind international economic integration, typically motivated by security or related geopolitical concerns. This trend has manifested in growing trade policy interventions that have been increasingly correlated with geopolitical and geoeconomic competition. For example, trade policy interventions for 'aligned' economies have risen more than five-fold since 2015 compared to a more modest (if still significant) doubling for non-aligned nations.

Likewise, in recent years trade growth between geopolitically aligned country blocs has behaved differently to (in particular, grown more slowly than) trade growth within those blocs.

The policies implemented on 'Liberation Day' have now complicated this story. True, in a continuation of past trends, China has remained the most prominent target of US policy interventions. But Trump 2.0 trade policies have also targeted US allies. Indeed, one could make a plausible case that it is allies and those countries with trade and security relationships most tightly integrated with the United States that are now among those most exposed to the shifts in US trade policy.

Implication #5 Global (trade) regime change

The 'Liberation Day' policy measures have inflicted further severe damage on the WTO-led international trading order. As we have noted before, Trump 1.0 had already undermined the role of the WTO by blocking new appointments to the WTO's appeals court and thereby rendering the dispute settlements system dysfunctional. Trump 2.0 has taken things much further: after declaring that the United States would pause its funding for the WTO, the 'reciprocal' tariff measures announced last week delivered a body blow to the 'most-favoured nation' (MFN) principle that has been foundational for the world trading system since the WTO's predecessor, the GATT, was established in 1948.

That MFN principle says any trade advantage granted by a WTO member to any single trading partner must be extended immediately and unconditionally to all other WTO members. Sure, sceptics will correctly point out that in recent years the proliferation of Preferential Trade Agreements (PTAs) in the form of FTAs and Regional Trade Agreements (RTAs) has already been undermining the MFN principle. Still, until now the damage has been limited. According to one recent estimate, as of 2022, roughly 83 per cent of global trade still took place under MFN terms, with 51 per cent of global trade MFN-duty free and 32 per cent subject to positive MFN duties. It is this global trading order that the current US administration is trying to tear down.

Implication #6: Rethinking supply chains and a new kind of globalisation

The erosion of MFN, the introduction of high and broad tariff rates and the shift to a model of bilateral trade negotiations characterised by the exercise of significant power imbalances all look incompatible not just with the previous era of hyper-globalisation, but also with many of the institutions, frameworks and ways of doing business that this era gave us. In the emerging new trading order, for example, the complex, globe-spanning supply chains built to maximise the gains from cross-country variations in comparative advantage look much less viable. So, too, do the kinds of business models built to exploit them. And as already noted, recent policy moves mean that even the more recent models of friendshoring, ally-shoring and regionalisation that businesses have adopted to manage geoeconomic fragmentation sit uncomfortably with some of the objectives that the current US administration is now pursuing.

Implication #7: Worry about what comes next

Trump 2.0 has already made significant efforts to challenge the global trade order and - via its early interventions in the Ukraine-Russia conflict - the global security order. We also know that the administration is similarly unhappy with key aspects of the current global financial order, including the role of the US dollar. In that context, recent months have brought speculation about efforts to change the latter too - perhaps via some kind of Mar-a-Lago Accord.

Given the disruptive nature of the interventions in the global trading system, parallel moves to remake the global financial system should be expected to be at least as disruptive, and at least as risky. It is possible that the disturbances in global financial markets over the past week have undermined the attractiveness of pursuing this option for Trump 2.0. But it would be premature to rule it out just yet.

What does this mean for Australia?

Prior to the current global economic and financial disruptions trigged by the trump tariff measures, the Australian economy looked on track to achieve a soft landing this year. Inflation had fallen, the economy had exited its per capita recession, the RBA had delivered a first interest rate cut, and the labour market had remained relatively robust. According to the AICD's own Director Sentiment Index (DSI), the share of directors thinking that an Australian recession was likely over the year ahead had fallen to about one in four, down from closer to one in two in the previous DSI.

Inevitably, the economic and financial market turbulence generated by Trump 2.0 have tested that confidence. Indeed, even before 'Liberation Day', the DSI was reporting that directors had pushed global economic uncertainty up to the top economic challenge facing Australian businesses; likewise, the share of directors citing global protectionism as a top economic challenge was more than five times higher than in the previous survey; and roughly nine of out ten respondents reckoned that evolving global trade tensions would threaten both the Australian and global economic outlooks.

While it is premature to declare that a soft landing is no longer likely, the risks to that outcome have increased. But by how much? The conventional wisdom on the direct impact of US trade policy on the Australian economic outlook is that it will be limited, given that the US is the destination for a relatively small share of Australian goods exports (less than five per cent in 2023-24). Instead, the focus has been on the indirect implications via any hit to growth in China, which remains by far our most important export market (accounting for almost 37 per cent of goods exports in 2023-24). Treasury, for example, has estimated (see box 2.1) that the indirect effects of US tariffs on the Australian economy are likely to be four times larger than the direct ones. In this context, much will depend on how Beijing deploys its own domestic firepower to maintain activity in the face of the adverse trade shock.

Another potential source of reassurance is that past experience with international crises (COVID-19, the global financial crisis, and the Asian financial crisis) suggests that Australian policymakers typically do a decent job of managing external shocks, assisted in their task by the operation of the Australian dollar as an important shock absorber.

Further, both the fiscal and monetary authorities have room to provide offsetting stimulus if required. At 4.1 per cent, the RBA's cash rate target remains above neutral and well-above the zero lower bound while - despite some medium-term concerns around the fiscal trajectory - Australia's public sector debt burden is modest compared to many of its peers (see our pe-budget analysis). At the time of writing, financial markets were pricing in multiple RBA rate cuts over the year ahead, with one indicator placing a 77 per cent probability on a rate cut at the upcoming 20 May Monetary Policy Board meeting.

In the longer term, Trump 2.0's ambitions to remake the global trading order will present Australian policymakers with additional challenges. As a clear winner from the existing international economic arrangements, it is unlikely that any successor regime will be quite as advantageous for Australia. That prospect of a less congenial external environment represents an important future growth headwind, enhancing the case for addressing Australia's current productivity problems and making the case for overcoming the obstacles to reform and securing new growth drivers even more pressing.

An important complication here is Australia's precarious position in the context of geoeconomic fragmentation, where our export reliance on China means that a significant share of our exports is exposed both to geopolitical risk and to elevated levels of market and product concentration.

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