Canberra Report: Cool heads must prevail over tariffs

Donald Trump has put "free-trade" back on everyone's mind. Free trade is international trading free of tariff barriers.

A tariff is a tax on imports. It is paid by you and I every time we buy an imported good which attracts a tariff. Businesses pay too if they use an input to production which is subject to a tariff. That will be Donald Trump's first problem, the cost of producing goods in America is about to rise.

Over time tariffs became common in most countries.

They are a tax on all of us designed mainly to protect the local manufacturing sector in particular. In Australia families received help to pay the higher costs they faced - on everything from cars to shoes - by higher wages set by a national tribunal. The higher wages were affordable thanks to our great terms-oftrade and the income we received from our rural exports - back then we lived "off the sheep's back".

It was all going pretty well until the world changed and our terms-of-trade deteriorated. As a small trading nation we then realised that to remain a wealthy country we would need to be competitive and taxes on imports were only making us uncompetitive.

So we moved with the rest of the world in an attempt to ensure everyone lowered their tariff walls.

Unfortunately that push was only partly successful and remains incomplete. That's why there has been so much emphasis on so-called "freetrade agreements" between individual countries. They are a second-best result and their benefits are too often overstated. As are the things we give up.

There is an old saying - "when the US sneezes, Australia catches a cold".

It traditionally referred to the result of a down-turn in the US economy. Today it applies equally to the actions of Donald Trump. The President appears to have exempted Australia from his tariffs on steel and aluminium. The conditions attached are still unknown.

But if there is a "global trade war" - one in which countries retaliate by imposing new tariffs of their own - Australia will still suffer.

Trump's actions are a symptom of collective failure. Policy makers around the world have not been able to create the "level playing field" so many aspired to. As a result, too many feel they are on wrong side of the restructure.

It is those people Trump is hoping to appeal to.

Our position is not as strong as that of the US and an exemption from their new tariffs will not be enough to keep the cold medicine in the cupboard if cool heads don't prevail.


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