Trump's Policy Uncertainty Could Be A Bigger Threat To Australia Than Tariffs, Experts Warn

Despite the easing trade tensions between the United States and China offering a welcome boost to Australia's economy, the unpredictability of President Donald Trump's policy shifts may pose an even greater source of market uncertainty than the tariffs themselves, experts have warned.

After previously vowing to "tariff the hell" out of China, Trump adopted a markedly softer stance earlier this week.

"We're not looking to hurt China," he said, describing the latest agreement as a "total reset" in bilateral trade relations, The Guardian reported.

Following negotiations in Switzerland over the weekend, the U.S. agreed to reduce tariffs on Chinese imports from 145% to 30% for a period of 90 days. In a reciprocal move, China cut its tariffs on most American imports from 125% to 10%.

Additionally, China pledged to dismantle non-tariff retaliatory measures imposed since April's so-called "liberation day." It includes easing export controls on rare earth elements -- materials critical to global manufacturing and technology sectors.

Australian markets reacted cautiously on Monday, with the benchmark S&P/ASX 200 index lifting modestly before giving up some gains on Tuesday to close just 0.4% higher at 8,269 points.

Expert warn long-term uncertainty

Despite the progress, analysts caution that the fundamental unpredictability of U.S. trade policy under Trump remains unresolved. Hayley Channer, a director at the University of Sydney's U.S. Studies Centre, noted that Trump appeared to be "fundamentally overestimating the U.S.'s ability to unilaterally change trade relations across the board."

According to Channer, while Australian businesses, which is China-reliant, could manage around fixed import taxes, the deeper concern is the persistent uncertainty about Trump's next move.

"That uncertainty is worse than the 10% tariff," Channer emphasized.

Jenny Gordon, an honorary professor at the Australian National University, echoed similar concerns. She pointed to examples from the U.K. and China to argue that global powers are not approaching Washington as supplicants.

"Certainly countries are not coming on bended knees," Gordon said.

ANZ's chief economist Richard Yetsenga welcomed the fact that the threat of a full-blown trade embargo between the world's two largest economies had been avoided. However, he warned that Trump's standard 10% tariff now appears to be a permanent fixture, which according to him was "more disruptive than destructive."

"And it still leaves Australia facing a global economy that is less open and less multilateral. The assumption would be 10% tariffs on Australia, with the hope of something better on steel and aluminium," Yetsenga said.

Implications for Australian interest rates

In a sign that the trade deal is seen as broadly positive for Australia, financial markets have scaled back expectations for interest rate cuts by the Reserve Bank of Australia this year. Markets are now pricing in three cuts, down from an earlier forecast of four.

Most economists expect the RBA to reduce the cash rate from 4.1% to 3.85% at its upcoming meeting next Tuesday.