Financial Planning

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Morgans Financial's Chief Economist and Director of Strategy, Michael Knox, discusses President Trump's introduction of reciprocal tariffs to address high foreign tariffs on U.S. goods. Learn how this policy aims to balance trade and reduce the U.S. budget deficit, impacting countries like China, the EU, Vietnam, and Australia. Read the transcription below:

"Back in November, we began discussing a policy document written by Peter Navarro, who had outlined what he expected the Trump administration to achieve if it were elected. One key part of this policy involved reciprocal trade, which aimed to address the issue of high tariffs charged by other countries on imports of U.S. goods. The idea was to create a structure for negotiating down these tariffs.

Navarro argued that many countries were imposing very high tariffs on U.S. imports, and the goal was to bring these rates into alignment with those that the U.S. imposes on goods from those countries. Fast forward several months. This week, President Trump issued an executive order that introduced these reciprocal tariffs. Essentially, the idea is that the U.S. will impose tariffs on other countries promted by the tariffs they charge on U.S. goods. For example, countries like Vietnam or China charge significantly higher tariffs on American goods than the U.S. charges on imports from these countries. The U.S. proposal is to raise its tariffs to match half the rates charged by these countries.

For instance, China currently imposes a 67% tariff on American goods, while the U.S. only charges about 2.5%. Under the new proposal, the U.S. would raise its tariffs on Chinese goods to 34%, which is half of the Chinese tariff. Similarly, the European Union charges about a 39% tariff on U.S. goods, and the U.S. now plans to charge 20% on imports from the EU. Vietnam, which imposes around a 90% tariff, would see U.S. tariffs rise to 46% . Taiwan, which has a tariff of 64%, would be subject to a 32% tariff.

Australia, however, fares better with only a 10% tariff on U.S. goods. Some have questioned why Australia faces this tariff despite not charging any tariffs on American imports. The reason, according to Navarro, is that Australia's Goods and Services Tax (GST) is 10%, which, while not a tariff, effectively raises the price of imported goods in the same way that tariffs do. Therefore, it is treated similarly to an import tariff.

Although this concept of reciprocal tariffs has been discussed since November, it came as a surprise to many countries when Trump made the announcement in the Rose Garden this week. For some nations, like Australia, the 10% tariff may be the best deal available. This is because the U.S. is aiming to reduce its budget deficit, which is currently running at about 6.8% of GDP. Part of this effort involves raising revenue through tariffs. The U.S. hopes to reduce its deficit to about 3% by cutting spending and increasing revenue.

Ultimately, the goal of these reciprocal tariffs is to create a bargaining process where other countries can negotiate lower tariffs. As the market adjusts to this idea, we expect the situation to stabilise. Over the coming weeks, there may be more clarity on how these tariffs will be applied and whether countries can reach agreements to reduce them to more reasonable levels. The market has already reacted dramatically to the news, but as this process unfolds, it’s likely that the global economy will adapt to the changes, and the financial system will settle down."

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In a recent radio interview, Michael Knox, Chief Economist and Director of Strategy at Morgans, shared his perspective on Australia's economic trajectory. Knox highlighted concerns about the country's increasing debt and reliance on foreign borrowing, suggesting that Australia is spending beyond its means. Read the transcript below:

Knox:‍

"Well, Australia looks like it's a country that's spending more money than it has, and it’s financing that by foreign borrowing. That's what it looks like to me. I’m looking at a wonderful document, which is the sales document that goes with the budget parties, called Building Australia’s Future.

I'm not focused on the text; I'm looking at all the appendices at the end. When I do that, I find that Australia’s debt from 2024/2025, out to 2028/2029, is expected to grow by $283 billion, from $940 billion to $1.223 trillion. Net debt is expected to grow by a little less than that, as our foreign investments are improving, which brings it to $212 billion. So, that seems to be something for future generations to deal with. The money appears to be coming from those nice people who go to Davos.

A couple of years ago, we were running a current account surplus, and we were often running a trade surplus. But now, we’re running a current account deficit. This was way back when commodity prices werethe best ever in Australian history, and that’s when Jim Chalmers made 'the biggest ever fiscal improvement' by running a balanced budget with a narrow surplus.

Now we have the dividends of this 'responsible economic management'. However, when I look at what’s happening, we’re seeing a current account balance that’s getting worse every year for the next four years. The outcome last year was a deficit of 1.3%, and by the time we get to 2025–2026, this deficit is projected to blow out to 3.75%, and by 2026–2027, it will be even worse, with a current account deficit of over 4%.

So, where is this growth coming from? It's driven by public spending, financed by all those nice people at Davos who are lending us money, increasing Australia's foreign debt."

Austin:

"My guest is Michael Knox, chief economist at Morgans. Bob Katter, a long-standing federal politician, says the 2025 budget reveals a government more focused on reactive policies than proactively addressing the needs of our nation. Is he right?"

Knox:

"Well, we've got a government here that seems to be focused entirely on the most important thing in the world for them: getting re-elected. What we’re seeing is a lot of spending in the current year, 2024–2025, with public final demand increasing by 5%, while private demand is only growing at 1%. The normal growth rate would be around 2%.

So, there’s a blowout in public spending, which, I’m sure, is carefully targeted at interest groups selected through political research. As a result, this is generating a deficit and more debt. The crucial objective here is that the government wants to get re-elected."

Austin:

"Dr. Jim Chalmers did his doctorate on Paul Keating's government 39 years ago. Paul Keating once said, "If you're not hitting 4%, you're not even trying," and he warned that, if we weren’t careful, we’d become a banana republic. Do the debt figures from the appendices of the federal budget suggest that we are acting like a 'banana republic', as Paul Keating warned nearly four decades ago?

When I look at this deterioration of the current account, from 1.3% of GDP in the year just past (2023/2024), blowing out to 4.25% for the current account deficit in 2027/2028, it seems that Paul Keating would recognise this as delightfully South American."

Austin:

"Michael Knox, thank you very much for your time."

Listen the full interview here.

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Celebrating Two Decades of Impact with the Morgans Foundation

Established in 2005, the Morgans Foundation has donated over $20 million to charities across Australia. This unwavering commitment to philanthropy has been a cornerstone of Morgans Financial Limited's mission to give back to the community.

Empowering Communities

For 20 years the Foundation has been a steadfast supporter raising funds and awareness for numerous charities.

The Foundation's support extends to a diverse range of causes, from health and education to social welfare and the arts. By partnering with local Morgans branches, the Foundation ensures that support reaches grassroots initiatives, addressing specific community needs and fostering a culture of giving among employees and clients alike.

Commitment to Rural and Regional Communities

Furthermore, Big Dry Friday our annual charity initiative has raised over $8 million in eight years and supports rural communities affected by drought pressing issues, providing much-needed relief and support to those facing challenging times. Beneficiaries include, Rural Aid, Outback Futures, Schools Plus and Royal Flying Doctor Service.

Employee Engagement

Central to the Foundation's philosophy is the active involvement of Morgans' employees. In 2024 alone, over 150 employees volunteered their time and skills, embodying the spirit of community service and enhancing the impact of the Foundation's initiatives.

Looking Ahead

As we celebrate this 20-year milestone, we remain committed in our mission to support and uplift Australian communities. With a continued focus on collaboration, responsiveness, and impactful giving, we look forward to the next chapter.​

For more information about the Morgans Foundation and our initiatives, visit Morgans Foundation.