This morning, I was asked to discuss Sarah Hunter’s presentation from yesterday. Sarah, the Assistant Governor and Chief Economist at the Reserve Bank of Australia (RBA), delivered a detailed and competent discussion on the conventional view of tariffs’ impact on the international economy. She highlighted that tariffs typically increase inflation and reduce economic output, a perspective echoed by the OECD in a similar presentation overnight. Sarah’s analysis focused on the potential shocks tariffs could cause, particularly their effects on GDP and inflation.
Drawing on my experience as an Australian trade commissioner and my work in Australian embassies, I found her presentation particularly interesting. My background allowed me to bring specialist knowledge to the conversation, which I believe gave me an edge. Notably, I observed that the RBA seems to lack analysts closely tracking individual policymakers in the Trump administration, such as Scott Bessent, whose views on tariffs and competition differ from the general assumptions. The conventional view assumes a world of perfectly competitive countries adhering to international trade rules and unlikely to engage in conflict—a scenario that doesn’t align with the current global trade environment, especially between China and the United States.
China, operating as a Marxist-Leninist economy, aims to dominate global markets by building monopolies in areas like rare earths, nickel, copper, and other base metals. It maintains a managed exchange rate, despite promises to the International Monetary Fund for a freely floating currency. If China allowed its currency, the RMB, to float, it would likely appreciate significantly, increasing imports and reducing its trade surplus. This would create a more balanced international trade environment, potentially reducing the need for other countries to impose tariffs. However, major institutions like the OECD and RBA seem to misjudge the nature of this trade shock, relying on outdated assumptions about global trade dynamics.
The international community also appears to overlook specific U.S. policy intentions, such as those articulated by figures like Peter Navarro and Scott Bessent. The U.S. aims to use tariffs selectively to bolster industries like pharmaceuticals, precision manufacturing, and motor vehicles. This misunderstanding leads public institutions to perceive unspecified risks, as reflected in Sarah’s otherwise able presentation. Because the RBA and similar institutions view the world as fraught with undefined risks, they are inclined to keep interest rates low, responding to perceived threats rather than an equilibrium model.
Interestingly, data from the U.S. economy contradicts the expected negative impacts of tariffs. The Chicago Fed National Activity Indicator, a reliable gauge of economic growth since the 2008 financial crisis, shows U.S. growth above the long-term trend for the first four months of this year. This suggests resilience despite tariff-related shocks. Ideally, growth will slow later this year, prompting the Federal Reserve to cut rates, facilitating a soft landing and a decline in the U.S. dollar to boost global commodity prices. However, this nuanced outlook wasn’t evident in yesterday’s presentation.
Moreover, the anticipated rise in U.S. inflation due to tariffs isn’t materialising. Scott Bessent recently noted that U.S. CPI inflation is lower than expected, with core inflation shown as the (16% trimmed mean) at 3% for the past two months . Core inflation excluding food and energy CPI is only at 2.8%. This suggests that Chinese suppliers are absorbing tariff costs to maintain market share, rather than passing them on as higher prices. Recent Chinese data supports this, showing a slight decline in manufacturing confidence and coal consumption, indicating reduced factory output and electricity use. This points to a modest slowdown in China’s economy. So far the expected negative effects on U.S. prices and output are not occurring.
In summary, the fears expressed by institutions like the RBA and OECD about the Trump administration’s trade policies appear overstated. The U.S. economy is not experiencing the predicted declines in output or increases in inflation. While these effects may emerge later, the current data suggests that the risks are not as severe as anticipated, highlighting a disconnect between theoretical models and real-world outcomes.
