Tariff triumph or trouble? | Insiders On Background

Hi, it's Sam Hawley from ABC News Daily, the podcast that brings you one big story affecting your world each weekday in just 15 minutes.

The most dangerous thing you can do is start quaffing your own delicious bath water and thinking, I'm the Messiah, I can do anything.

I suspect that Anthony Albanese has been around long enough to not do that.

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Well, if the Prime Minister sits down with Donald Trump over the coming days at the G7 in Canada, there will be much to discuss.

The Pentagon review into AUKUS, announced on Thursday, has everyone scrambling to find some clarity onto what this is all about and whether it's another way for the US to force Australia to spend more on defence.

It's kind of overshadowed the other issue, though, that's been causing tension in the Australia-US relationship, and indeed an issue that's been causing tension in a lot of relationships with the US, and that, of course, is trade.

Now, Australia, in case you've forgotten, is meant to have a free trade deal with the United States, but that hasn't stopped Trump imposing tariffs on Australia, along with everyone else.

Anthony Albanese, of course, wants those tariffs to be dropped, but he's not about to bow to the President's demands on things like changing Australia's biosecurity laws, its pharmaceutical benefits scheme and so on.

So what is he going to offer?

And is the president in a mood to compromise at all?

Relatively benign inflation figures the other day in the US might have convinced him that his strategy is actually working on tariffs.

Meanwhile, Trump is also talking up a trade deal with China that was struck during the week.

What does it actually involve?

And what does it mean, importantly, for Australia?

That's what I'm keen to explore.

I'm David Spears on Ngunnawal Country at Parliament House in Canberra.

Welcome to Insiders on Background.

Well, Justin Wolfers is an Australian economist with an international reputation.

He's an author, a podcaster, and a professor of economics at the University of Michigan.

Justin, welcome.

Mate, happy to be here.

So let's start with...

There's lots to discuss in the trade space, but look, before we get to the specifics for Australia, I'm keen to get an understanding of these inflation numbers the other day.

So they were pretty tame.

2.4% annual inflation.

Pretty good number.

Same as, in fact, what we have in Australia at the moment.

Does this tell us anything about the impact of those tariffs in the United States?

It tells us the impact hasn't happened yet.

The easiest way to explain why is because a lot of the tariffs hadn't happened yet at the time that this measure was taken.

So these were the data for May.

Trump has a bit of a habit of announcing things with a flourish and

then some...

subsequently muttering the words in two weeks time.

And so actually only about half of the tariffs were on during this period.

Having said all that, it is a little surprising not to have seen a sharper price effect in the US.

So

a couple of observations about that.

The first one is someone's paying the tariff.

Like the money's coming in.

And so if it's not American consumers, and we have a pretty good guess that Chinese exporters aren't just offering a special pro-Trump sale,

that would suggest actually that it's American businesses.

So the importers.

The importers are what's soaking up that tariff.

And so you might might start to see some of that in corporate earnings over the next few weeks.

That's one part of it.

The other is sort of a subtle issue, but you've got a particularly learned audience, so I'm going to go subtle with you.

Imports are only about one-sixth of total GDP in the United States.

So if you made one sixth of stuff...

I don't know, let's say 15% more expensive, that's a reasonable average guess, right?

So what's one-sixth of 15?

That's 2.5%.

That would tell you that the average price level would rise by about 2.5%.

That's a change in the price level, right?

So that might play out as 1.25% inflation for each of the next two years.

So this is not dramatic on the one hand.

Let me come back and explain to you why it is dramatic.

So we all went through a bout of inflation after the pandemic.

In the US, inflation got as high as 9%.

What happens with a normal inflation is prices rise, but then the stuff that your bosses, that you're helping your boss make, it's price rise.

Now your boss is making a lot more money, and so what happens is there's more money to go around, so your wages catch up.

It's a little bit painful while you wait for the wage rise to catch up to the price rise, but it's not too bad.

The thing about a tariff-driven inflation is the prices rise because the boss's costs have risen.

He's got to pay the tariffs.

There's no extra money in the boss's pocket.

Your wages never catch up, ever.

So when I say your prices are going to go up 2.5%

They're going to go up and not be compensated and that's going to happen forever So now instead of talking about forever Let's just say 20 years.

What's 20 times 2.5?

It's as if we had a 50% inflation in terms of the pain on people's pocketbooks

So it can be hard to see in the month-to-month inflation data but still a really big deal for people's quality of life.

So you reckon this this hit will still come on inflation as a result of these tariffs, and I suppose particularly on some goods more than others?

Yeah.

Look,

forecasting out of economic models is an inexact science, but what we have is a lot of case studies.

So in 2018, Trump put tariffs of about 100 bucks on American washing machines, on imported washing machines.

The price of imported washing machines went up $100.

A lot of people over here say, well, if you want to avoid it, buy American.

But guess what?

When General Electric sees sees that Samsung has jacked up the price by $100, guess what General Electric does?

Jacks up the price to $100.

They're still putting it down, are they?

There's no question

that when you raise someone's costs in an enduring way, they're going to raise their prices.

Now, notice I said something there, I said, enduring way.

The thing about these tariffs is it's really hard to know how to react when they're on on Monday and off on Tuesday.

This is the thing.

And that brings us to China, right?

I mentioned this, this deal that Trump is talking up that was struck in London.

Officials had been meeting there for a day or two.

Look, he has posted on social media, the U.S.

will provide China what we agreed to, and China will supply rare earths to the U.S.

once again.

He says the relationship is excellent.

Exclamation mark.

What do we know about this deal between the U.S.

and China?

And is it, to come to your point, a lasting deal or something that's going to keep chopping and changing every other week?

Yeah, so when a bloke who's gone through three divorces tells you a relationship is excellent, you ought to take that with a grain of salt.

Let me tell you what came out of the meeting.

So they had the meeting and then Besent and Lutnik, the chief,

the Commerce and the Treasury Secretary over here, came out and they said, we have an agreement.

The agreement is that we're both going to try and get sign-off from our bosses, Trump and she.

If we get sign-off,

that'll be that we agree that the agreement we struck four weeks ago is our agreement today.

So therefore, they have negotiated a handshake agreement to seek sign-off that a previously agreed agreement is still their agreed upon agreement.

Right, I'm trying to keep up.

So,

if you want that in English, nothing happened.

Literally nothing.

Nothing.

Right.

They had an agreement before.

They both got mad at each other.

So they had a meeting and they said, oh, we have that agreement, we're back to it.

Now, here's the funny thing, of course, so their agreement was that they agreed their old agreement is their new agreement.

But here's the funny thing about the old agreement.

You read the old agreement, it's actually two things.

It's not an agreement.

It's a pause on tariffs for 90 days, which is every time they don't know what to do, they pause tariffs for 90 days.

So that issue remains unresolved.

And the rest of it was a framework for discussions discussions in the hope that framework and those discussions would yield an agreement.

So now what we have is an agreement to agree that the old agreement is the new agreement and that old agreement was not an agreement, but a framework for discussions towards an actual agreement.

This is brilliant.

And all of this, one of those caveats, it all hinges on the leaders, Xi Jinping, Donald Trump,

who did have a conversation, but maybe they're going to have to have another one, right, to lock this in.

Do we know what, I mean, based on all of that, what does it mean for Australia?

Is it possible to say what it means for countries like Australia who are rather dependent on the US-China trade relationship?

Right, so these are the two biggest economies in the world.

In one respect, if they have a falling out, they're both going to be looking for other trading partners.

That could be an opportunity for Australia.

So that's the opportunity side.

The other is, if they have a falling out, they both tank both of their economies and there goes two of our trading partners.

That's pretty miserable.

One thing that's particularly important for Australia is

all of

three months ago, I had never used the words rare earth minerals, either in private or public.

I never much cared for minerals.

And these ones are particularly complicated because, in fact, they're not rare and they're called rare.

And now that's all we talk about.

And look, we're finding out they're used in all sorts of things, right?

Particularly when it comes to automaking, apparently, from your windscreen wipers to your seat belts.

We're all experts now.

Oh, they're terrific minerals, aren't they?

They're now some of my favourite minerals.

They're at the bottom end of the periodic table, I've learned as well.

My old high school teacher, I hope, is listening right now and feeling that all of that time we spent on science

was worth it.

Is paying off.

Well, it raises the question for Australia, like the one thing we've got.

to offer the United States appears to be access to our critical minerals or rare earths.

The problem is they cost a hell of of a lot to dig out of the ground and then process.

China's got a bit of a lock on this market.

But is that still an attractive thing to have on the table for Australia when it comes to trying to do a deal with Donald Trump?

Or what's the go now between the US and China on rare earths?

Can he rely on a credible supply of this stuff from China or does he need other options like Australia?

It's made Australia

pretty important to the US.

So, look, here's the old, it used to be three months ago we knew nothing about them because every time you wanted to order some from China, they just send them.

And that's how it went.

The Chinese now understand just how much leverage this has given them.

And so while Trump is

trumpeting that he now has access to rare earth minerals, the Chinese have actually said,

you're not allowed to buy more than a six-month supply at a time.

So they're going to provide it, but maintain that leverage, which is at any point in time, I can shut down vast tracts of your economy in six months' time.

Maintaining enormous leverage.

The US, of course, is incredibly uncomfortable about China having that leverage.

And so if there is a good friend in the southern hemisphere who would be willing to provide them and provide greater security and

so on, that would make Australia strategically quite important.

So, I mean, this brings us to what the two leaders, that is Anthony Albanese and Donald Trump, might be able to work out when it comes to trade.

I mean, what they're telling us here in Canberra government officials is, look, don't expect a breakthrough.

This will probably be more of a get-to-know-you meeting

if indeed they do get together at the G7 in Canada.

But should they talk, no doubt trade will be high on the agenda.

We know Anthony Albanese doesn't want to budge on some of the things Trump's demanding, be it biosecurity laws, the pharmaceutical benefits scheme.

But would that critical minerals idea be enough, do you reckon, to, I'm asking you here to get in Donald Trump's head, which I know is not easy to do, but would that sway him to drop some of those tariffs he's imposed on Australia?

Look, I don't do Trumpology because that's the domain of a psychologist and perhaps a psychiatrist, not an economist.

But I do have some thoughts here.

The first is actually a question for you because I've not been able to get the answer.

So what's come out of the White House is Peter Navarro, the trade advisor, has said we're going to do 90 deals in 90 days.

And depending on how you count, they're either at zero or one after

62 days maybe.

And depending on who you ask, the deals either have to be done or not.

Anyway, Besent has been, the Treasury Secretary has been saying, actually, we really care about our 18 biggest trading partners.

And those are who we're working with.

Last time I looked up the tables, Australia was somewhere between 17th and 19th.

And everyone who's out of the 18, they're not going to negotiate, they're going to send them a letter because apparently this is how you negotiate when you're the White House.

For those of you who are in relationships at home, don't try this.

Good advice.

So I'm actually, do you know, David?

Well, I'm unsure whether we're in the 18.

I don't know if we're in the 18.

I do know that there's not a clamour on the Australian side to bend over backwards here because this is a difficult thing for government to say out loud to steel makers, aluminium makers and so on.

Now they are obviously individually feeling the pain of this, but this is not hurting the Australian economy in a big way.

In fact, things like our beef exports have risen.

They've certainly risen to China in a big way since all of these tariffs began, but they've risen globally.

So we're in a pretty

okay spot at the moment.

And as you point out, there are swings and roundabouts here.

We can benefit.

If things things go sour between China and the US.

We can sell more stuff to China.

So there's not a desperation here in Canberra to get a deal done at all costs.

But I don't know if we've had a letter or a deal, not to my knowledge.

Okay, so let me unpack some of this.

So first of all, one of my favorite stories out of all of this, and it gives you a sense of what this,

the effects on Australia aren't obvious.

I just love the story, is there's an American barbecue place in China.

There's a chain.

Apparently they love to go and pretend that they're American and eat barbecue, which their word barbecue means something different than our word barbecue.

Theirs is terrible and ours is wonderful.

But

it is marketed as a Texas barbecue place, used to import its beef from the United States and post all of the tariffs, started importing its beef from Australia.

So hang on, the Texas barbecue chain in China is now

owned by the Chinese.

Aussie beef.

Yeah.

And then slathering it in sticky

liquids, which is what the Americans like to do.

And so that's the sense in which when

the U.S.

isolates itself, it's opening new markets for Australia.

That's the optimistic side for Australia if that story gets played over and over.

The pessimistic one is these economies tank.

Anyway, I just love to get that story out because I think it tells there's a lot of economics in there.

Let's come back to

what,

how important is it for ALBO to move forward on anything with the Americans?

So first thing is we do have a free trade agreement.

Like, it's literally there.

It's called the US-Australia Free Trade Agreement.

And you would think

that it involves things like the US and Australia and trade being free.

And it essentially is, like all free trade agreements, all free trade agreements have a little asterisk.

And the asterisk is, look, there's some politically sensitive stuff in my country.

You know, and so in Australia, that might might be a beef farmer's.

And the Americans say there's some politically sensitive stuff in my country.

And so they say it's actually a mostly free trade agreement.

They each sort of let each other off the hook on the politically difficult stuff so that they can actually sign something.

So it's hard to see what more of an offer they want.

Now, I have seen stuff out of the U.S.

trade representative.

They bitch and moan about beef.

The idea that Australia wants to import American beef when we already grow more beef than we eat.

I think we export something like 70%.

Yeah, 70% of beef in Australia is exported.

So

we don't need more beef.

Look, they're always niche products, I suppose.

But the issue's also been around the traceability because of, you know, beef slaughtered in the US comes from Mexico and Canada and so on.

So there's that issue.

Yeah, no, so I have to keep telling the Americans, in fact, we'll allow your beef in

if you follow our rules so that we know it's yours.

And they're like, no, no, no, that's not right.

And I'm like, we don't want your beef anyway.

Like, the idea that President Trump is going to sell beef to Australians, what's he going to do next?

Wheat?

Acubras?

You know, like, what the...

So let me come back.

So

the implicit threat hanging over the head of all of this is that if we don't do a deal, then we'll go back to the reciprocal tariffs.

Well, Australia already buys more stuff from America than America buys.

from us.

So under the reciprocal tariffs, we're actually the lowest tariff country in the world.

So we don't stand to lose much.

At the moment, it looks like they're really not going to bend on the 10%,

right?

So the Brits got 10% tariff.

Everyone's got the 10% tariff.

They're not going to bend on that.

If they didn't bend for Starma, they're not going to bend for Albo.

He did give Starma a bit of a break on the steel and aluminium ones, though, didn't he?

Oh, no, no, no, no.

No, no, no, no, no, no, no.

So that is the second part of the story that I really want to tell.

Okay, so but let's just stick with this for a moment, which is the worst threat is that we're going to make Australia the lowest tariffed country in the world.

You can see how this is not going to light a fire under our under Albo's bum,

you know, because in fact, a 10% global tariff could be really good for Australia.

How so?

Like the 10% tariff makes it sound like they're going to buy less from us, but actually Americans are going to buy fewer imports overall, but they'll buy more from Australia and less from Europe, for instance.

And so it may actually turn out to be a positive for Australia.

So

I think failing to get a deal done is bad news for some countries if Trump follows through on his threats, big questions about whether he does, and not really bad news for Australia.

So I wouldn't be in a hurry to get on a plane.

So hang on.

I reckon this is the headline from our chat.

You're saying it's probably better for Australia to have no deal, to stick with the status quo.

I mean, if you can get a better deal, you take a better deal.

So

trying to do economics late at night while standing up, don't take me too seriously, David.

But come back to the UK.

Explain to me the UK, right?

Because we've got this political argument here in the US.

Yeah, so this is really important.

Where the opposition here is saying, you know, oh, Starmer's got a discount on the steel and aluminium tariffs.

Australia should get the same.

What has happened there?

Okay, great.

So first of all, I want to put Australia in its place.

Because I remember during the election campaign, Peter Dutton was coming at Balboa saying, I would have got a better deal out of Trump.

And I was sitting over here saying, every Fortune 500 CEO is lined up on mass ave trying to get into the White House.

They can't get in quick enough.

There's no way the Australian ambassador is jumping the line ahead of

the CEO of the major auto companies.

And in fact, the election comes and goes, and I don't know how much coverage this got back home, but Trump was asked about the fact that he played a pivotal role in the Australian election.

He said, I don't know who Peter Dutton is.

Yes, we do.

Just sort of rubbed a bit of salt in the wound.

Yeah, so let's come back.

So there is exactly one case study that we can learn from here, because there's been one deal.

And the one deal was with the British, the United Kingdom, I've been told.

So what happened there?

So first of all, there'd been ongoing trade talks between Britain and the US for either months or years, depending on who you talk to.

It was crystal clear

that

when they announced the deal, it wasn't ready.

In fact, it was so clear that at the press conference announcing it, Kier Starmer was asked, did you expect to be here announcing a deal today?

And he said, No, I was settling down to watch the Arsenal football match.

So, what I infer from that is that the American political situation got to the point where the press is saying, Where's the deals?

Where's the deals?

And the Trump White House said, Well, we've been talking to these guys, they're British, let's just tell them it's done.

So, they fronted the press and they said, We're done.

And Trump sold it as the greatest deal ever done.

Starmer was a little more honest,

but

what's important here is to describe the deal.

There's a 10% tariff on every country around the world.

The Americans walked in and said, you're a country.

It's 10%.

That's it.

Not what I call a negotiation.

But so write that in 48-point font.

And what I want you to do is put a six-point font asterisk next to it.

And that asterisk says,

Separate from that, which is the whole game, we're going to strike a deal where we each provide a couple of of carve-outs for each other.

And those carve-outs are going to allow Trump to front the press and tell the Americans he got a deal, and it's going to allow Starmer to front the press and say he got the British a deal.

And basically, it's the two bastards colluding to delude their own populations.

So the carve-outs are tiny, like truly tiny.

Yeah, so there was something on steel.

There was something on the Americans were going to buy, no, the Brits were going to buy a bunch of Boeing parts, but they were already going to buy them anyway.

And because, of course, tariffs have such a regressive effect, the one other important part of the deal was a lower tariff on British-made cars,

which of course is important because the cars we import from Britain are Rolls-Royce's, Bentleys, Aston Martins, Land Rovers, and the Mini.

So

truly welfare for the...

the millionaires.

But these are like really small side deals that aren't worth anything.

So what do you learn from that?

Albo could go and get that form of deal, which would be 10% with an asterisk.

The asterisk is small enough.

It's not clear it's worth paying a business class flight to get it.

Now, probably is, right?

But I wouldn't bring the staff with me.

Yeah.

Like, you know, just, you know, why not just Zoom?

Well,

you don't need to have a fancy dinner.

Maybe the local Chinese and just, you know, come with a couple of talking points.

Maybe some Texan barbecue with Aussie beef is all they need to do.

Look, I just want to finally get a sense from you of how the tariff issue is currently playing out in the U.S.

We began by talking about those inflation numbers, and no doubt Trump supporters are saying, C, told you so, there's no inflationary impact.

But what are the American people, based on what you're seeing and hearing, how are they feeling?

I know there's a lot going on there in LA and what's happening in the Middle East.

A lot of things occupying everyone's headspace.

But what's the current mood on the tariffs?

Yeah.

So first of all, just...

Yeah, there's a lot going on over here.

It's crazy.

Okay.

The mood on tariffs.

Trump has lost the war of ideas.

Totally lost.

It's clear that he's lost among professional economists.

There's not another economist alive who would endorse what he's doing.

And he's lost.

But if you look at polling.

On the tariff issue.

Yes.

Among other issues.

So polling basically shows that two to one, the the broader American public is anti-tariff.

Wow.

And their confidence in Trump's stewardship of the economy is well and truly underwater.

It's quite impressive to be losing the war of ideas over tariffs because tariffs, the idea, we will tariff the Chinese and get them, sounds so superficially attractive.

And it had historically polled very well.

But he's not done the work.

It's an argument.

You've got to have the argument.

You've got to try and win the argument.

And then the other thing is he's made it too easy, which is, look, I'll tell you as an economist, there are genuine, profound arguments to be had about the occasional strategic, pointed, surgical use of tariffs.

I'm mostly against them, but I'm willing to entertain serious people who can disagree.

Across the board, chaotic, on one day, off the next, tariffs.

There is not an economist alive who says that's a good idea.

And that argument is winning the day among the American people, and they understand that this is not in their best interests.

No, and look, if you're right about the inflationary impact is only going to get worse from here, you wouldn't expect

that sentiment is going to move

in a different direction anytime soon.

Look, we've got to wrap it up, Justin Wolfwas.

It's been terrific to talk to you.

Thank you for sharing your insights on all that's been going on on the trade front.

Good to chat.

Great pleasure, mate.

And if you have any thoughts on this podcast or any ideas to send us, please do so.

Insiders at abc.net.au.

We'll have more on all of this on Sunday morning.

The Foreign Minister Penny Wong will be joining me.

We'll be talking trade.

We'll be talking AUKUS and so many things going on in the world right now.

So hopefully see you then 9 a.m.

ABC TV.

Bye for now.

You're making us all feel very excited about being here.

Hi, it's PK here, host of the new politics podcast, Politics Now.

I'll be joined by the ABC's sharpest political minds to break down the biggest stories of the day.

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