Statement on Monetary Policy – August 2025Box A: How are Global Trading Patterns Adjusting to Changes in Trade Policy, and What Does It Mean for Australia?

Global trade patterns tend to adjust in a way that reduces the impact of trade barriers on economic activity and inflation.

The introduction of trade barriers can affect supply chains and global trade flows, as households and businesses in affected economies adjust to the changes in competitiveness. Some changes in trade flows may happen relatively quickly in response to tariff changes – for example, as importers switch to new suppliers for highly substitutable goods. Other aspects of the adjustment – for example, changes in the location of production for less substitutable goods – are likely to occur more gradually, if tariffs are sustained. Over time, these changes, along with adjustments in exchange rates, will tend to reduce the impact of higher trade barriers on overall economic activity and inflation.

This Box focuses on the initial adjustment in trade flows in response to recent trade policy developments, and how the global prices of Australia’s goods imports might be affected. These changes in trade flows can come about in a number of ways. When a country raises its tariffs on some trading partners, that can encourage importers to source their goods from other countries (‘trade diversion’), or it may prompt a switch to domestically produced goods where possible (‘import substitution’). Alternatively, some goods may be imported via an intermediate country to avoid trade barriers (‘transshipment’) – though, subject to country-specific customs laws, it may not be possible to legally circumvent higher tariffs in this way. Exporters elsewhere that face lower demand due to the higher tariffs may also look for new markets in which to sell their products.

Adjustments in trade flows are likely to reduce the extent to which tariffs weigh on economic activity in the country imposing the tariff, while supporting export volumes and prices in other economies. Demand in the tariffing country will tend to shift towards trading partners less affected by any tariff increases, reducing the extent to which higher tariffs raise domestic prices (and reduce domestic purchasing power), compared with a situation in which there was no adjustment in trade flows. That in turn helps maintain demand for exports in other economies, and mitigates the impact of tariff increases on overall global demand and hence global prices (which is expected to be mildly disinflationary).¹

Global trade has historically adjusted in this way following the introduction of trade barriers – for example, following the United Kingdom’s departure from the European Union in 2016, and the tariffs imposed by the US administration in 2018–2019, particularly on China.² During the 2018–2019 episode, the decline in US imports from China was offset by an increase in US imports from other countries such as Vietnam, Taiwan and Mexico. China’s total export volumes were also little changed over the period, suggesting that Chinese producers were able to find new markets.

There are signs that global trade patterns are adjusting in response to tariff policy changes.

Bilateral trade data provide an early indication of how global trade flows are adjusting to recent US tariff changes. This Box focuses on the United States and China because increases in US tariffs on China have been among the largest so far, China is Australia’s largest trading partner, and together these two economies accounted for more than one-fifth of global trade flows in 2024.

Chinese exports to the United States have declined but exports to other advanced economies and east Asia have increased, leaving total exports little changed (Graph A.1).

Similarly, after a surge in the March quarter in anticipation of higher tariffs, total US imports are little changed from 2024 levels despite a sharp fall in imports from China (Graph A.2). The share of US imports from China has declined and the share of imports from other economies – particularly Vietnam, Malaysia, Indonesia and Mexico – has increased. Changes in import shares from China in these economies can indicate whether the adjustment in US trade flows reflects trade diversion or transshipment; if transshipment was occurring on a large scale, we would expect to see an increase in the share of imports from China in these economies. So far this hasn’t been observed, suggesting that the adjustment in trade flows in the United States is largely due to trade diversion. For example, the share of Vietnam’s imports from China is broadly unchanged this year, while Vietnam’s share of US imports has increased.

It will be important to monitor bilateral trade data closely over the months ahead to assess the persistence of these changes in global trade patterns in response to tariffs, particularly because the earlier frontloading of imports into the United States, and other temporary factors, add uncertainty to their interpretation.

There has been little evidence of global supply chain disruptions as trade flows have adjusted. Changing shipping patterns have led to ports in Vietnam recording high levels of both congestion and container ship departures in June. However, the risk of broader supply chain disruptions has so far not materialised, with indicators of global supply chain pressure little changed (Graph A.3).

Around half of China’s exports to the United States prior to tariff changes may be redirected relatively easily to other markets, with global demand and prices for those products likely to be little changed.

The scope for redirection of Chinese exports to markets outside of the United States is likely to vary across individual products. One way to assess the possibility for trade redirection across products is to look at the extent to which the United States and China rely on each other as purchaser and supplier of a given good. This is shown in Graph A.4, which is divided into four quadrants. The lower left quadrant shows products for which US imports from China comprise a low share of overall US imports of that good type, as well as being a low share of Chinese total exports of that good. This implies that the United States has other import options and China has other export options for these goods – making these goods readily substitutable across countries. The upper right quadrant shows the opposite, where US importers and Chinese exporters don’t have other options, making them mutually dependent. The upper left quadrant shows goods where the United States has other import options, but Chinese exporters do not, while the lower right quadrant shows goods where the US mainly imports from China while China exports to many countries.

We estimate that around half of Chinese exports to the United States could relatively easily be redirected to other markets, because the United States is not a dominant source of demand for those products and China is not a dominant supplier. This includes products such as computer parts and modems. Downward pressure on Chinese export prices for these goods from lower US demand is likely to be limited, since this demand can be replaced by demand from other markets, while US demand is simultaneously higher for these goods sourced from other markets.

Most of the other products that China exports to the United States could be classified as belonging to the ‘high China market power’ quadrant (Graph A.4) – that is, the United States is largely reliant on imports from China for these products, while China is less reliant on the United States as a source of demand for these goods. For these products, it is likely that Chinese exporters could find alternative markets, since the United States accounts for less than half of demand for China’s exports. However, because the United States relies on China as the major supplier, it is possible that importers will need to continue to purchase these products despite higher tariffs, or that some products in this category will end up exempt from tariffs because they are deemed critical or essential (e.g. smartphones and computers, which fall under this category, have already been exempt from US tariffs).

Overall, this framework is consistent with there being considerable scope for global trade patterns to adjust to higher US tariffs on Chinese exports, as has been observed so far, helping to limit the negative impact on Chinese activity. That suggests Chinese and global trade will continue to be resilient to the large increase in US tariff rate differentials between China and the rest of the world.

The effect of trade redirection and shifting global supply chains on the global prices of Australian imports is likely to be limited, though prices for some products could decline.

US exporters may eventually pass on increased costs due to tariffs on imported intermediate inputs to global customers, but the effects on Australia are expected to be limited. The increased costs of intermediate inputs as a share of overall costs is likely to be modest for most US exporters. Further, US imports only account for around 10 per cent of Australia’s merchandise imports.

Chinese export prices have increased slightly since the start of the year (in both CNY and USD terms). That is consistent with trade redirection having ensured that there has been little reduction in total demand for Chinese exports so far, despite higher tariffs on Chinese exports to the United States. It is also consistent with the analysis above that, for many products, Chinese exports can be redirected relatively easily, without requiring significant declines in prices. Australian imports from China have risen sharply, but this has been partially offset by decreases in imports from other countries. Overall, Chinese export prices have been resilient. Some firms in the RBA’s liaison program have reported isolated instances of discounting of imported products due to trade redirection, but in general businesses view the impact of tariffs and adjusting trade flows on imported prices as uncertain. Firms continue to note recent movements in the exchange rate as a much more important factor in imported costs.

In aggregate, our assessment is that the effect of trade redirection from China on Australia’s import prices is likely to be limited. We use the simplified framework above (Graph A.4), which divides products traded between China and the United States into four categories based on their scope for trade redirection, to illustrate the possible effect of trade redirection on prices for Australian imports based on the (value) share of each of these categories in Australia’s imports. Higher tariffs are expected to be mildly disinflationary for the Australian economy, primarily due to weaker global demand, so trade redirection that supports global demand in the face of tariffs should lead to a smaller disinflationary impact on Australian import prices. Indeed, Australia’s imports are most exposed to products considered ‘easy to redirect’, where total demand and prices are expected to be little changed as trade flows adjust to tariffs (Graph A.5).

Some Australian imports could, however, experience some downward price pressure as global trade flows adjust to tariffs. Downward price pressures are likely to be largest for products where the United States has higher market power (top left quadrant of Graph A.4), because they will be most affected by the decline in US demand and least likely to benefit from tariff exemptions. The share of Australia’s imports of these goods, which could experience the most acute price declines, was less than 1 per cent of total goods imports in 2023 (Graph A.5). These goods also have a small weight in Australia’s Consumer Price Index.

Some downward price pressure is possible for goods in the remaining two quadrants of Graph A.4, but price declines particularly in the ‘high China market power quadrant’ are likely to be small because US demand has a smaller effect on the global price and US reliance on Chinese suppliers means that tariff exemptions are more likely. In total, around 7 per cent of Australia’s imports are in categories that are more likely to experience some price declines due to trade diversion, but in most cases these price declines are likely to be small.

Endnotes

The ultimate impact of changing trade patterns on global prices depends on the substitutability of goods across exporters and the extent to which the tariffing country turns to domestically produced goods. In cases where goods are less substitutable across markets, or the tariffing country turns to domestically produced goods rather than sourcing imports from a new market, changes in trade patterns could exert additional downward pressure on global export prices for those products. 1

See Wang M and SA Hannan (2023), ‘Trade Diversion Effects from Global Tensions – Higher Than We Think’, IMF Working Paper No 2023/234; Gutiérrez E, A Lacuesta and C Martín-Machuca (2024), ‘Brexit: Trade Diversion due to Trade Policy Uncertainty’, Oxford Bulletin of Economics and Statistics, 86, pp 1058–1088. 2