Employing hard negotiation tactics means starting with extreme demands before following up with only small, slow concessions. Negotiations may have the appearance of ‘take it or leave it’ or might be designed to make the opponent flinch. This seems to be the Trump Administration’s strategy.

Today, US President Donald Trump announced reciprocal tariffs on countries based on a calculation of the tariff equivalent of existing tariffs, other taxes and non-monetary barriers that impact US exports. In what was described as ‘kind’ reciprocal tariffs, Trump announced tariffs at half the level of these calculated tariffs and other non-monetary barriers placed on US goods. A minimum base level tariff of 10 per cent was applied across the board, a level applied to Australian exports to the US. For China, the calculated ‘tariff’ on the US was 67 per cent to which the US would reciprocate with a 34 per cent tariff, but on top of the existing tariff. In the case of Europe, the applied tariff would be 20 per cent, Japan would be 24 per cent, while larger tariffs would be placed on India, Vietnam, Taiwan and South Korea. There was no extra mention of Canada and Mexico, although they have already been hit with 25 per cent tariffs.

For Australia more specifically, beef was singled out by President Trump. Australia has a ban on US beef due to biosecurity rules, while the US is currently Australia’s largest beef export market (almost 400,000 tonnes worth $3.4 billion, or around 16 per cent of exports to the US). US accounts for around 5 per cent of Australian exports. Australia will say it has got off relatively lightly compared to the rest of the world and that the direct impact of the tariffs on Australian exports is relatively small, but the potential impact on the Asian region, and global growth, will have a flow-on to Australia.

Over the past six weeks, markets have been roiled by the seemingly hard ‘negotiation tactics’ employed by the Trump administration. Early this year many in financial markets expected the demands would be softened or modified over time. However, this somewhat comfortable working assumption has been challenged by the escalation in announced tariffs which, together with the collateral damage we’ve already seen on consumer and business confidence and the disappearance of the so-called ‘Trump put’, has sent markets into a tailspin.

Only eight weeks ago, markets were concerned about the risk of ‘high for longer’ interest rates. Now markets are factoring in the probability of recession anywhere between 20% and 40%. US equities have dropped more than 10 per cent, high yield credit spreads have risen 1 per cent, markets are expecting another four rate cuts and bond yields have dropped more than 0.5 per cent.

Are markets right in pricing in an elevated recession risk?

Our own estimated probability of US recession has risen from 20 per cent to an upwardly revised 35 per cent, a level that cannot be ignored. Why have we lifted recession risk? What economists call ‘soft data’ or survey-based data such as consumer and business confidence, or activity data such as ISM’s, have all dropped sharply. As yet, the so-called ‘hard data’ such as actual consumer spending, business investment spending, car and truck sales, have not turned down, but it’s early days. Housing activity has been weak.

Elevated uncertainty impacts spending, hiring and capex plans and eventually it can lead to a reduction in actual activity.

Will there be room to negotiate these tariffs?

President Trump noted that countries will have the ability to reduce these tariffs by taking action to reduce duties and other constraints on US trade, while corporations can avoid the tariffs by relocating investment, plant and factories to the US. Trump highlighted that many companies had already announced significant investment in the US.

The night before ‘Liberation Day’, US Treasury Secretary Scott Bessent noted that the tariff levels to be announced would represent the high-water mark. He went on to say countries could then take steps to bring the tariffs down. His comments can be construed as saying that there’s still a negotiating process ahead and that the worst case of high, unilateral tariffs that cause a major slowdown in growth and lift in inflation could still be avoided.

While there’s at least some clarity on tariff levels and an incentive for higher investment in the US, the impact on confidence, prices, real household incomes and the potential for ongoing disruption to hiring and investment plans means global growth and inflation will be worse off under this new regime.

Economic Scenarios (3 April, 2025)