Statement on Monetary Policy – May 2025Box A: How Might Tariffs Affect Australian Trade?

On balance, the effect of higher tariffs on Australian exports is expected to be relatively small and largely on prices rather than volumes. This is because Australia’s exports are dominated by resources for which Australia is a relatively low-cost producer, and because Chinese fiscal policy is expected to support commodity prices.

International developments are expected to weigh on the global prices of Australian imports. The relatively high share of Australia’s imports coming from China suggests there is scope for the price of manufactured goods imports to decline if high US tariffs on China result in trade redirection to Australia. The relatively small size of Australia’s manufacturing sector should limit the drag on domestic activity from this increased competition from imports. The small share of Australian imports coming from the United States will limit any direct exposure to higher US production costs and prices.

These judgements are uncertain; the outlook for Australian trade will ultimately depend on the level of tariffs, how trading patterns change, whether changing trade patterns induce supply disruptions, movements in the Australian dollar exchange rate, and the effect of trade policy uncertainty on global activity (see Chapter 1: In Depth – Global Economy and Financial Markets; Chapter 4: Outlook).

Slower global growth is expected to result in somewhat lower prices for Australia’s exports but to have limited impact on export volumes.

A slowing in global growth is expected to result in reduced demand for Australian exports and lower export prices, though these impacts will be mitigated by Chinese fiscal stimulus. Compared with other advanced economies, a relatively large share of Australia’s goods exports is comprised of resources and agricultural goods (Graph A.1). China is the most important destination for Australian exports, accounting for 45 per cent of resource exports and 30 per cent of total exports. While weaker global demand is expected to weigh on tradable goods prices, economic policy measures in China are expected to support demand for Australian resources. The Chinese policy measures are expected to have a significant investment component, which would support demand for steel and therefore for Australian iron ore and metallurgical coal. Indeed, iron ore prices have been relatively stable since the first US announcement of tariffs in early April, and Consensus forecasts of iron ore prices have only declined a little.

Slower global growth is expected to have a limited impact on Australia’s resource export volumes. Since Australia is a low-cost producer of some bulk commodities and agricultural products, many Australian exporters are expected to remain profitable and maintain production volumes even if prices fall somewhat. Volumes of services and other goods exports may be more affected by the decline in global growth, but these comprise a smaller share of Australia’s exports. Overall, we expect the impact of lower global growth on Australian exports to be small and to mostly affect export prices rather than export volumes.

The increase in US tariffs on Australia is expected to have only a small direct effect on Australian export demand. The share of Australia’s exports that are directly exposed to higher US tariffs is small. Total exports to the United States account for around 6 per cent of Australia’s total gross exports – a relatively small share – and only around 1½ per cent of GDP. Further, while the United States has imposed a 10 per cent tariff on most Australian goods, some goods are exempt (such as gold and selected pharmaceuticals) while others are subject to higher sectoral tariffs (such as steel and aluminium). Some product categories – such as aircraft parts and medical instruments – are more exposed to the tariffs, as a large share of these exports go to the United States (Graph A.2). Australia is expected to continue to export a range of products to the United States, including those for which it is difficult for US buyers to find suitable alternatives, and those where Australian goods face a tariff rate that is similar to (or lower than) that on the same goods from some other countries. Australian producers may also redirect some exports to alternative markets, as occurred when some Australian exports to China, including coal, fell sharply in 2020.¹

Indirect demand for Australian exports from spending in the United States is also limited. Spending in the United States also affects Australian export demand indirectly because some Australian goods are intermediate inputs in global supply chains. For example, Australia exports iron ore to China, some of which is used to make the steel components of machinery exported from China to the United States. However, Australia’s ‘value-added’ exports to the United States, which includes this indirect demand, remain below 10 per cent of total exports (a little over 2¼ per cent of GDP).

While international developments are expected to weigh on the global prices of Australian imports, there are risks on both sides.

Lower global demand is expected to weigh on global inflation of traded goods and therefore the global prices of Australian imports. Weaker global demand is expected to be the dominant effect of recent international developments for Australian import prices. However, a range of other channels could influence Australian import prices in both directions.

The impact of changing trading patterns on the global price of Australian imports is ambiguous, but on balance is expected to reduce them because China accounts for a large share of imports. On top of weaker global demand for tradeable goods, very high US tariffs on China could push Chinese suppliers to redirect goods to other countries, including Australia. This could increase the supply of goods from China and reduce the price that Australians pay for Chinese goods. However, US consumers will likely substitute towards imports from other countries, supporting the relative price of goods from the rest of the world. The impacts of these changing trading patterns on Australian import prices (over and above weaker aggregate demand for tradeable goods) are ambiguous and depend on a number of factors, including the composition of Australia’s imports. On balance, because Australia has a higher share of Chinese products in most parts of its import basket compared with other economies, the redirection of tariff-affected exports is likely to place additional downward pressure on Australian import prices, especially in the short term while global trade flows adjust (Graph A.3).

Lower priced goods from China are unlikely to displace much Australian production, but they could benefit industries reliant on imported inputs. The United States has applied the largest tariff increase to China, so Chinese exporters may look to redirect goods to new markets or lower prices in existing markets. There is not much overlap between the tradable goods Australia produces (largely resources and agricultural goods) and those that Australia imports from China (largely manufactured goods), suggesting limited scope for lower priced imports from China to out-compete domestic production. However, there are some industries where there remains some overlap and where Australian producers could be worse off. In addition, lower goods prices relative to services could weigh on the demand for domestically produced services at the margin. On the other hand, industries that have a large share of imported inputs from China (such as clothing retailers) would benefit from lower input costs (see Box C: Insights from Liaison for more information about how Australian firms are considering global developments).

There are also several factors that could put upwards pressure on world export prices. In the short term, the reorientation of supply chains could be costly and create disruptions that put upwards pressure on prices that flow through to Australia. It is also possible that multinational corporations whose margins are compressed in markets where tariffs have been raised might seek to raise margins elsewhere, putting upwards pressure on prices in other markets such as Australia.

Higher inflation in the United States is unlikely to have a material direct impact on Australian import prices. US tariffs are likely to be inflationary for the United States in the short run (see Chapter 1: In Depth – Global Economy and Financial Markets), which could boost the prices of their goods and services exports. The effect of this on Australia is likely to be small given some Australian firms would seek alternative suppliers if prices from the United States rose materially, and imports from the United States account for only around 2½ per cent of Australian spending. However, in product categories that are highly dependent on imports from the United States, it may be more difficult to find substitutes. For example, one-third of Australia’s value-added imports of professional and technical services come from the United States (Graph A.4). At an industry level, services (such as professional services) are more exposed to imports from the United States than goods industries (such as mining and agriculture).²

Developments in the Australian dollar exchange rate will continue to be a key determinant of economic outcomes here.

While we expect global goods price inflation to be lower based on recent international developments, Australia’s export competitiveness and domestic inflation will also be affected by movements in the Australian dollar exchange rate. The exchange rate against the US dollar is particularly important over short horizons because most of Australia’s exports and around half of imports are invoiced in US dollars. Typically, the Australian dollar depreciates in response to a downgrade in global growth or increased global risk aversion, playing an important role as a ‘shock absorber’. The direct effect of a lower exchange rate is an increase in the price of goods and services produced overseas, relative to the price of goods and services produced in Australia. This lowers demand for imports and increases demand for domestically produced goods, increasing Australian economic activity.³ However, since the announcement of tariffs in early April, the Australian dollar has been little changed in trade-weighted terms amid broad-based US-dollar weakness (see Chapter 2: Australian Financial Conditions). The response of the exchange rate to future international developments, including whether the US dollar continues to depreciate during periods of heightened risk aversion, will be a key determinant of the outlook for Australian GDP and inflation (see Chapter 4: Outlook).

Endnotes

As discussed in Hauser A (2024), ‘The Ghost of Christmas Yet to Come’, Speech at the Australian Business Economists’ Annual Dinner, Sydney, 11 December. 1

See Westpac (2025), ‘Australian Industry Bulletin – Tariff Test: How Exposed Are Industries?’, 1 May. 2

See RBA (undated), ‘Exchange Rates and the Australian Economy’, Explainer. 3