Australia’s Economy at Risk of Disruption from Tariff War, Uncertainty in RBA Regarding Potential Price Increases

The Reserve Bank of Australia (RBA) has expressed uncertainty about how the ongoing tariff war between the United States and other countries will affect inflation in Australia due to the prevailing uncertainties.

During a recent parliamentary inquiry hearing, RBA Assistant Governor Sarah Hunter explained that while the trade war is expected to slow global growth, its impact on Australian inflation remains unclear because several economic factors are in play.

China’s Response Could Offset Damage

The Reserve Bank anticipates that the Chinese Communist Party (CCP) will counter U.S. tariffs by implementing monetary measures to bolster its economy.

“We expect that [monetary stimulus] to counterbalance the impact of tariffs. This will result in a different growth scenario in China compared to the usual course of events,” she informed the Standing Committee on Economics.

“This will lead to a weaker net export position for them. Their exports will decline.”

Given Australia’s close economic ties with China, it is anticipated that the country will bear the brunt of the tariff war.

Currency Fluctuations Could Help—Or Hurt

Additionally, the assistant governor pointed out that Australia’s floating exchange rate could potentially mitigate negative impacts.

“Our floating exchange rate acts as a substantial buffer against adverse demand shocks from international sources,” she noted.

However, she also acknowledged that the floating exchange rate may have a dual effect on domestic inflation.

“If there’s a dip in global economic activity and things start to slow down, the exchange rate typically drops, supporting our net exports,” she explained.

“This benefits our exporters and makes imports more expensive. As a result, we may import less and prefer local consumption.

“Due to these financial market effects, there’s a positive push towards inflation on the horizon.”

Nonetheless, Hunter cautioned that weakened domestic activities and the repercussions of trade dispersion resulting from a depreciated currency could cause inflation to decelerate.

“We’re uncertain about the net impact on inflation. It’s a challenging prediction,” she said.

“Australia Won’t Be Affected Like Canada”

At the same time, Hunter emphasized that Australia would not be as severely impacted by the tariff war as Canada, given Canada’s heavier reliance on the U.S. economy.

A recent analysis by Canada’s central bank—the Bank of Canada—revealed that a full-fledged trade war with the U.S. could inflict significant economic harm.

“They projected substantial negative impacts on their economy, akin to their experience during COVID,” she commented.

“We don’t perceive Australia as being as exposed. We don’t foresee a similar outcome here.

“Our trading relationship with the U.S. is not as extensive as Canada’s. Therefore, while there’s a negative impact on GDP, it’s relatively minor in our case, which is somewhat reassuring.”

The United States is Australia’s third-largest trading partner, with two-way trade totaling $98.7 billion, less than a third of China’s $325 billion in 2023.

Conversely, the United States is Canada’s largest trading partner, accounting for 75.9% of the country’s total exports in 2024.