Productivity Commission warns Australia not to retaliate on Donald Trump tariffs

Australia’s economic activity could actually grow in the face of Donald Trump’s tariff regime.

But the Productivity Commission, which advises the Government on economics, has warned Australia not to retaliate against the US trade taxes fearing it could escalate into a far more damaging global trade war.

The commission has also found that uncertainty arising from the US President’s agenda is a major threat to economic growth.

The annual review of trade and industry assistance comes as Anthony Albanese prepares to visit China for talks, expected to also include a meeting with President Xi Jinping.

The 90-day pause on Mr Trump’s “Liberation Day” tariffs ends on Thursday (Australian time), although he may extend it further having failed to strike the promised “90 deals in 90 days”.

The US has slapped a 10 per cent tariff on imports from all countries, but once the pause ends this will lift to a “reciprocal” level for those nations Mr Trump deems to be dealing unfairly with America.

Australia is not expecting to be hit with a higher level.

The Productivity Commission says the direct economic impacts of the tariffs are likely to be minor compared with the costs associated with growing economic uncertainty.

“Uncertainty is a handbrake on investment — when businesses are uncertain about the future, they are less likely to invest,” deputy chair Alex Robson said.

The commission’s modelling suggests the effect of the tariffs could increase Australia’s GDP by 0.37 per cent.

Treasury modelling done in the wake of Mr Trump’s “Liberation Day” tariffs showed the economy shrinking slightly, not growing.

The difference comes down to Treasury examining a broader impact, including the effect on the US dollar.

But Dr Robson said it was important Australia not hit back and should instead go further on opening up trade.

“Retaliatory escalation could spiral into a broader trade war, which would bring serious consequences for Australia and the world,” he said.

“Australia can promote long-term economic stability by continuing to talk the talk — and walk the walk — on free and open trade.”

The commission’s report recommends another round of scrapping “nuisance” tariffs, which it says collect $2 billion but cost up to $4 billion.