(15 July 2025 – Australia) With the temporary pause on proposed US tariff increases set to expire on August 1, global markets are galvanising themselves for renewed trade war hostilities and volatility.
With no playbook for what comes next, how should global economies respond?
While retaliation lowers global production and international trade even further, the harm is concentrated among countries imposing and receiving those higher tariffs according to modelling conducted by the Australian Government Productivity Commission (PC).
Trade policy uncertainty will have a destabilising impact on investment decisions, in particular “irreversible” investments such as decisions to enter new export markets or adopt new imported inputs and production technologies.
Global retaliation carries the risk of a further rise in protectionism that would create bad outcomes for Australia, leading to the knock-on “beggar-thy-neighbour” policies that exacerbated the devastating effects of the Great Depression in the 1930s.
Trump plans to apply a 30 percent tariff on European and Mexican exports from August 1. In response, the European Union (EU) has delayed retaliatory tariffs on exports from the US as officials scramble to reach a trade deal with Washington ahead of US President Donald Trump’s deadline.
Trump recently set a 40 percent tariff on US-bound transshipments through Vietnam, seeking to undermine Chinese manufacturers rerouting shipments to avoid higher duties. The US President also threatened a ten percent charge on imports from BRICS countries, leading to Brazil shifting its trade policy closer to China.
“How should Australia manage these risks? We suggest a two-pronged approach. First, we should seek to limit global uncertainty by continuing to embrace and advocate for free trade. By continuing to do this with like-minded international partners, we can reduce the risks that retaliation spirals into a broader trade war that leads to worse outcomes for Australia. Second, Australia should not retaliate” commented PC Deputy Chair, Alex Robson.
“Indeed, imposing retaliatory tariffs leads to worse economic outcomes for Australia. For example, if the US imposed a ten percent tariff on all imports and Australia retaliated alongside other countries by imposing a ten percent tariff on imports from the US, Australian GDP would be 0.14 percentage points lower than if Australia chose not to retaliate.”
“We can’t control the trade policies of other countries, but we can ensure our own approach to trade helps Australia prosper. In a world awash with uncertainty, that much is certain.”
The analysis reveals that in the long run, the direct overall impacts of US tariffs on the Australian economy are likely to be small and in fact positive, despite their negative impacts on the broader global economy.