By Dr Rand Low, Associate Professor of Quantitative Finance
Associate Professor of Quantitative Finance Dr Rand Low unpacks the resurgence of tariffs, the dynamics of free trade and globalisation, and what it means for Australia’s economy, people, and future prosperity.
If we were to select a word for 2025, it might just be ‘tariffs’. This year we’ve witnessed a dramatic shift in global economic policy, bringing tariffs and protectionism back to the fore. To explore the impact, we need to understand what tariffs are, how they differ from free trade, and the implications for the global economy.
What are tariffs?
Tariffs are a border tax to make imported goods more expensive to sell. Historically, governments and politicians have encouraged the use of tariffs to protect local businesses and the domestic economy. Tariffs make it more expensive for foreign businesses to compete with local ones — however, they also make products more expensive for local consumers and reduce competition, which can make businesses less efficient. Since World War Two ended, the use of tariffs has reduced, with free trade and globalisation heavily encouraged — until now.
How do tariffs impact free trade?
Free trade encourages competition from overseas companies, making products cheaper for domestic consumers, and meaning different countries can specialise in what they do best.
For Australia, that’s exporting minerals and ore to countries such as Japan and China. These nations then convert our raw materials and resources into products like cars and household appliances that are imported back into Australia.
Not everyone loves free trade, however. Some countries retain barriers to trade to protect certain industries like telecommunications and agriculture because of dangers posed by another country controlling these industries. For example, the Japanese government has tariffs on several agricultural products, including rice, to protect key food sources in the event of a conflict or major disaster overseas.
Some governments also have barriers to protect nascent industries in their countries. Consider Samsung and LG — the South Korean government protected its infant companies with tariffs for 50 years, resulting in those firms going on to become world-class competitors.
Broadly, however, most countries have dropped tariffs and embraced globalisation, allowing their economies to be open and interlinked.
What do economists say about free trade and globalisation?
Before 1945, the world suffered from major conflict. While there are many theories on why wars occur, the prevalent one by economists is that wars often occur when there is a lack of something, and a want for more of it. When trade is restricted, a country can find it is unable to access essentials for its people — and feels it must fight for what is needed.
Most economists, including myself, would argue globalisation and free trade has resulted in countries realising how dependent we are on each other, and that when we work together peacefully, the entire population is happier, healthier, and more prosperous.
What are the downsides to free trade and globalisation?
Since the rise of globalisation and free trade, global poverty has significantly reduced. Between 1990 and 2012, the percentage of people living in extreme poverty dropped from 40 per cent to 15 per cent, largely due to industrialisation and access to global markets. Countries with cheap labour became manufacturing hubs, while other nations exported education and technology, lifting millions out of poverty. It also increased the number of billionaires...
While global poverty reduced, the changes came at a cost to many workers in developed countries. As manufacturing jobs moved overseas, less educated workers in Western countries, who once relied on these jobs, faced unemployment and declining job prospects. This led to increased domestic inequality, particularly in regions like the United States (US)’ Rust Belt, where cities that were once thriving industrial centres experienced economic decline.
The growing divide between the wealthy and the working class has fuelled resentment and political polarisation, paving the way for leaders who promise to restore lost jobs and economic security.
Enter, tariffs.
Will tariffs lead to a global trade war?
We haven’t witnessed a global war in many years, but the imposition of tariffs can lead to what we call a global trade war. This strikes fear and uncertainty in people and global financial markets — just as we saw in April, when the US introduced tariffs.
The 1930s Great Depression was initially triggered by the struggle of American farmers and manufacturers. To help them, the US government quadrupled tariffs on almost 900 imported items. While the tariffs were successful, and US imports of foreign goods dropped by almost 70 per cent, other countries retaliated with their own tariffs and American exports plunged by 60 per cent.
Global trade ground to a halt and, by 1934, the US gross domestic product (GDP) had halved, world trade shrunk by 66 per cent, and millions were unemployed.
Why does Donald Trump want tariffs?
From my personal experience, Mr Trump has learnt a thing or two since his first stint as President. When I was working on Wall Street in New York City, Mr Trump called for sanctions on Russia due to the Crimean war. In contrast to tariffs, sanctions are much broader and mean US firms aren’t allowed to own any assets directly or indirectly in a country that has been sanctioned. When Mr Trump sanctioned Russia in 2019, there were repercussions for many financial firms and pension funds holding Russian assets, like government bonds and shares in companies, or with subsidiaries selling products or services in Russia.
Mr Trump wants to bring jobs back to the US. It was one of his electoral promises — and he gained strong support from the population for that promise. By forcing tariffs on the rest of the world, he is looking to negotiate an outcome where global companies are forced to research, develop and manufacture goods in the US to access the richest and most powerful democratic capital market in the world.
Some astute businesspeople saw it coming. While I was on the Intrepid Aircraft Carrier in 2017 with Mr Trump and then Australian Prime Minister, Malcolm Turnbull, I witnessed one of Australia’s richest businesspeople, the Chairman of Visy, Anthony Pratt, publicly pledge to significantly invest in the US over the next decade.
President Donald Trump at the Intrepid Aircraft Carrrier in 2017. Photo: Dr Rand Low
President Donald Trump at the Intrepid Aircraft Carrrier in 2017. Photo: Dr Rand Low
What do the US tariffs mean for Australia?
Technically, Australia doesn’t export much to the US. Our major export partners are China (33 per cent), Japan (12 per cent), South Korea (6 per cent), US (6 per cent), and India (5 per cent). Australia’s largest exports to the US are beef and wine, however, our major exports globally are iron ore, coal and copper to countries like China, Japan, South Korea, and India.
So, the direct impact of Trump’s tariffs on us is relatively small. However, it is the indirect effects which may be significant. Australian superannuation is largely invested in US equities, so many Australian retirees and their nest eggs are at risk.
And, if China goes into recession, Australian exports and the economy are likely to be heavily impacted by Trump’s tariffs.
How can I protect myself from the impact of the tariffs?
My advice for retirees is to shift their asset allocation in their superannuation towards fixed income or government treasury bills, which are less likely to be impacted by the tariffs.
I would advise younger investors not to worry. It is fine to continue allowing your investments to be in US Exchange Traded Funds (ETFs) if that’s where they already are.
We’re looking at another four years of potential tariffs, and then things could change when another President is in power.
Published on Wednesday, 2 July, 2025.
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