US recession risk at 50 per cent, says geopolitical strategist
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While Trump plays with tariffs, Chalmers must find a way to do what Keating did in the 1980s
In the early 1980s, Australia had as big a trade deficit as the United States has now — around 3 to 4 per cent of GDP. But the two solutions to the same problem could not be more different. In the 1980s, then treasurer Paul Keating tore down Australia's imposing tariff wall, but in 2025, US President Donald Trump is doing the opposite — raising tariffs back to levels last seen in 1930. In 1986, I was editor of the Australian Financial Review. On Wednesday, May 14, I got into work at about 10am to find that the Australian dollar was crashing. By the end of the day, it had fallen 3 US cents, one of the biggest one-day falls in history, kicking off a three-month devaluation totalling 21 per cent to less than 60 US cents. It started when Keating was interviewed by John Laws on 2GB that morning and said the collapse in our terms of trade meant that Australia was in danger of becoming a banana republic. (We later learned that he had been standing in the noisy kitchen of a function centre near Melbourne, having just given a breakfast speech, and that what he said was not premeditated.) With economics editor Michael Stutchbury, I sprang into action and marshalled the troops. We got a recording of the interview, transcribed it, and prepared a big front page for the following day. Here's the nub of what Keating told Laws: "It's the price of our commodities — they are as bad in real terms since the Depression … it means an internal adjustment. And if we don't make it this time, we never will make it. If this government cannot get the adjustment, get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for. We will end up being a third-rate economy … a banana republic." Trump's language on April 2 this year was also theatrical and urgent, but he was not foreshadowing an internal adjustment, far from it. "For decades, our country has been looted, pillaged, and plundered by nations near and far, both friend and foe alike," he said. In the executive order he signed that day, Trump declared a "national emergency" that was America's "large and persistent annual US goods trade deficits". That declaration gave him the ability to usurp Congress's constitutional power to impose tariffs. Four months of bruising, chaotic negotiations later, America's average tariff rate has increased from 2.5 per cent to 19 per cent, the same level as that which catastrophically worsened the Great Depression and, as it happens, was the average of most Australian tariffs in 1986. Keating started cutting them in an economic statement to parliament in May 1988. Anything above 15 per cent was cut to 15 per cent, which included the 79 per cent tariff on motor vehicles and 146 per cent on textiles, clothing and footwear, and anything between 10 and 15 per cent was cut to 5 per cent. I asked Keating last week why he decided to do that, and also why he waited two years. His answer to the first question was simple enough: "We had tried the closed way for 70 years and it failed us. We had to open up the economy and become competitive. Also, tariffs are just a tax on working people." Keating told Kerry O'Brien in the interviews for the book Keating, after O'Brien recalled that Bob Hawke had called the interview with Laws a disaster: "That's a post-event re-evaluation. It turned out not to be a disaster but a turning point in the Australian reconstruction to deal with (the) big secular decline in the terms of trade that had begun in the 1960s." As for why he waited two years to start cutting tariffs, Keating told me: "We had to cut government spending first. Australia's government sector was the biggest in the OECD, and the first step had to be getting that down. "We cut government spending from 29.4 per cent of GDP in 1986 to 22.4 per cent in 1989, down seven percentage points, and back to what it was before Whitlam." I asked him whether he had any regrets — after all, the tariff cuts that began in 1988 ended up destroying Australian manufacturing. He replied: "Yes, but Australia's living standards rose. Wages increased and so did profits." Now, Australia's living standards are declining despite higher terms of trade because of weak productivity growth. America's problem in 2025 is similar but different. Productivity is fine, and the trade deficit is the same, but it wasn't caused by a collapse in the terms of trade like Australia in the 80s — America's have fallen just 3.5 per cent in two years. It was caused by the strong US dollar, which was the result of it being the world's reserve currency, and which exacerbated the decline in its comparative advantage, especially versus China. It's obvious that tariffs will not rebuild America's comparative advantage, quite the opposite, but that's not really why Trump is doing it. Trump's using tariffs for two purposes: first to raise revenue while cutting taxes on the rich, because, as Keating says, they are a tax on working people, and second as a non-military assertion of geopolitical power. The reason Trump likes taxing via tariffs is that he can say, and does say, that other countries are paying them. The revenue is now up to $US30 billion a month, and America's working people are starting to realise that they're the ones paying that, which should eventually rebound on the president. But for the moment, he can say, as he did on Saturday, "hundreds of Billions of Dollars are pouring into our Country's coffers" — as if it's coming from somewhere else. The use of tariffs to assert power and/or punish other countries and companies, rather than protect domestic industries, is shown by Brazil's 50 per cent tariff, imposed because former president Jair Bolsonaro is being prosecuted for trying to overturn the election, an activity Trump is in favour of, and India's 50 per cent tariff as punishment for importing Russian oil against sanctions. Also, the CEO of one of the world's biggest companies, Tim Cook of Apple, showed up at the Oval Office last week, lavishing praise and carrying a gift for Trump of a piece of iPhone glass set in a big lump of 24-carat gold, to get Apple's tariff of 100 per cent removed. It worked. He also promised to invest another $US100 billion in US manufacturing, mainly by having the iPhone glass made by Corning at its plant in Kentucky. But that plant is fully automated — the glass is untouched by humans. That's why there's no longer much point in using tariffs these days to try to rebuild a manufacturing industry: the jobs go to robots, not humans. Or rather, the point is not jobs, but profits. That's why the stock market is back at record highs, having fully recovered from the initial tariff meltdown on April 2: tech companies are going to make a ton of money, or at least investors think they will. Economist Nouriel Roubini wrote last week: "The US happens to be at the centre of some of the most important technological innovations in human history. These will deliver a large positive aggregate supply shock that will increase growth and reduce inflation over time. This effect should be an order of magnitude larger than the damage [of tariffs]." So, the US economy is engaged in two historic revolutions at once: dramatically raising import taxes and remaking the global trading system, and at the same time leading a technology revolution — artificial intelligence — that McKinsey & Co says is part of a seismic shift reshaping the world's economy that will have 3,000 times the impact of Britain's Industrial Revolution in the 18th and 19th centuries. And while all this is going on, Australia's current treasurer, Jim Chalmers, will next week conduct a reform roundtable, where 25 or so chosen people will be tasked with finding more tax revenue without the government being voted out, and finding a way to repeat what Keating did in the 1980s and 90s and lift productivity. Good luck with that. Alan Kohler is a finance presenter and columnist on ABC News, and he also writes for Intelligent Investor.
ABC News
4 days ago
- ABC News
Donald Trump leveraging peacekeeping in tariff 'deals' across Asia
Just days after imposing a 25 per cent tariff on Indian goods, United States President Donald Trump has increased it by another 25 per cent. The 50 per cent tariff is set to take effect in three weeks, and comes as Mr Trump pushes for a peace deal between Russia and Ukraine. He has accused India of profiting from Russian oil and ignoring civilian deaths in Ukraine. The announcement of further tariffs on India was the latest indication that Mr Trump has leveraged peacekeeping in trade deals. "Trump is frustrated with Putin for not ending the war in Ukraine. Now India is facing this backlash," Saira Bano, assistant professor of politics at Thompson Rivers University in Canada, told the ABC. In response, India has said it will take all necessary steps to protect its national interests. India's Foreign Ministry has said the country was being unfairly singled out over its purchase of Russian oil. Hussain Nadim, international relations lecturer at George Washington University, said India's high tariffs were the "result of India running a multi-alignment foreign policy at the global stage, benefiting both from the US and Russia." He said not only Russian oil deals, but India's reluctance to buy American defence equipment was part of the reason why India faces higher tariffs compared to peers in the region. "The Trump administration wants India to align with Western interests on core geopolitical issues," Dr Nadim said. But some analysts warn this tactic may have the opposite effect. "It seems that this is going to push India towards Russia and China," Dr Bano said. In the face of uncertainty from Mr Trump's policies, she expected states would adapt and "increase cooperation with each other, rather than relying on the United States." Meanwhile, with Thailand, Cambodia and Pakistan receiving reduced rates in Donald Trump's latest tariff negotiations, it appears there was a pattern of "good deals" among those who promote his image as a "peacemaker". Following April's Pahalgam attack, which saw 26 people killed in Indian-administered Kashmir, a military escalation broke out between Pakistan and India. A ceasefire was agreed to after four days of fighting. India has repeatedly denied American involvement in the ceasefire. Despite this, Mr Trump has said multiple times that he brokered peace between the nuclear-armed neighbours. "Pakistan's military regime recognises that the best way to appease President Trump is by giving him what he wants," Dr Nadim said. In June, Pakistan said it would nominate the US president for the Nobel Peace Prize for his role in brokering peace with India. "Much of this stems from the Pakistani regime's belief that they can play on Trump's narcissism to curry itself favours. And so far, the strategy is working," Dr Nadim said. Pakistan initially faced tariffs of 29 per cent. Ahead of the August 1 deadline, the two countries landed a deal that dropped Pakistan's tariff rate to 19 per cent and increased US investment in the country. As ceasefire talks were held in Malaysia between Cambodia and Thailand, after the worst fighting between the rival nations in a decade, two tables of diplomats sat in the wings: China and the US. "Trump's tariff threats likely added indirect pressure on both Cambodia and Thailand to de-escalate quickly," Joanne Lin, senior fellow at the ISEAS Yusof Ishak Institute, told the ABC. A widening border war risked having a severe economic impact. According to Thitinan Pongsudhirak, professor of political science and international relations at Chulalongkorn University, Mr Trump's reciprocal tariffs were "the last push" that secured a ceasefire. Washington had initially threatened tariffs of 36 per cent on Thailand and 49 per cent on Cambodia. Following the ceasefire agreement, both countries saw their "reciprocal tariffs" reduced to 19 per cent. Indo-Pacific security analyst Hunter Marston said both sides welcomed an active role by the United States, to keep Washington engaged in the region "to balance Beijing's dominant influence." However, Cambodia went one step further. Like Pakistan, following a ceasefire agreement, it vowed to nominate Donald Trump for the Nobel Peace Prize. According to Professor Pongsudhirak, the move shows Cambodia "knows the game, and is playing the game well." The nomination could also suggest a way of downplaying relationships with another great power: China. "By publicly elevating Trump's role in the ceasefire, Cambodia is using the opportunity to recalibrate its image … after years of being viewed as overly aligned with China," Ms Lin said. "It's probably less about Trump's actual involvement and more about Cambodia's effort to show it has options beyond Beijing." Nearby, Myanmar and Laos face some of the world's highest tariffs at 40 per cent. Since 2021, Myanmar has been embroiled in a civil war following a military coup that ousted a democratically elected government. While members of ASEAN have repeatedly pushed for peace, US intervention has been largely absent. "For those of us from Myanmar who have long been treated as collateral in great-power games, this strategy is all too familiar. Trump's 'peacemaking' is no more than coercive diplomacy disguised as statesmanship," said Burmese observer and PhD candidate, Phyo Win Latt. Local media have reported that Myanmar's military government was pleased to receive Mr Trump's tariff letter. Htwe Htwe Thein, an expert on Myanmar and associate professor in International Business at Curtin University, said: "The Myanmar military is an international outcast. Nobody has given them a seat in high-level government-to-government communications. Even a letter saying 'you have a tariff' has delighted them [the junta]." As Mr Trump promises peace across the globe, a lack of engagement from the US inside Myanmar is puzzling to Dr Thein. "It makes sense for Trump to take interest, even if it's motivated by trade leverage, or rare earths and geopolitical competition." Dr Thein said many of Myanmar's pro-democracy groups control land containing rare earths currently being sold to China. However, the strategy behind the Trump administration was a short-term approach, according to other experts. "Much of the government is being run on a day-to-day basis from one crisis to the next," Dr Nadim said. "With that operating mindset, President Trump is functioning at a very base level, securing deals as they come and using all leverage America has to get the best deals, be it in Asia or elsewhere."
