President Donald Trump is going scorched earth on trade policy, emulating the famous Oprah Winfrey meme: "You get a tariff, you get a tariff, everyone gets a tariff!" From 25% levies on all incoming steel and aluminum to universal import duties on North American neighbors, nobody is spared from the new administration’s tariffs. But while nations are engaging in tit-for-tat retaliation like kids on a playground, a couple of countries, including Australia, are opting for a more balanced approach.
Be Like Australia
Australian Prime Minister Anthony Albanese declared he would not order retaliatory tariffs on the United States. He believes that Trump’s tariffs and the decision to remove all exemptions and exceptions are unjustified. Despite his condemnation of the White House’s actions, Albanese thinks adopting a "Made in Australia" approach a la Canada or Europe would impose self-harm on the domestic economy.
“It has been foreshadowed that no country regardless of its relationship with the United States has been granted an exemption. Such a decision by the Trump administration is entirely unjustified,” Albanese said at a press conference last week. "Tariffs and escalating trade tensions are a form of economic self-harm and a recipe for slower growth and higher inflation. They are paid by the consumers. This is why Australia will not be imposing reciprocal tariffs on the United States."
Importers pay tariffs rather than foreign governments. So, if the Australian government imposed retaliatory levies, domestic companies and consumers would bear the higher costs.
Meanwhile, one reason behind the Trump administration’s overhaul of US trade policy is America’s ballooning trade deficit, which equals approximately $1 trillion. Based on this logic, the Aussies would be similarly justified in implementing a response because the United States maintained an $18 billion trade surplus with Australia in 2024. Of course, as Rob Smith, the managing partner of Chartwell Capital Advisors, writes in RealClear Politics, trade deficits "are meaningless."
Other countries are mirroring Australia’s strategy of turning the other cheek. British Prime Minister Keir Starmer confirmed his Labour government would not pull the trigger on tit-for-tat tariffs. His reasons differ from his Australian counterparts, mainly that the UK is pursuing a post-Brexit trade agreement with the United States. Additionally, he is working toward a peace deal in Ukraine and does not want to perturb Trump.
So, is the Australian approach the correct strategy in a trade war with the United States?
The Economics of Sitting Still
Economic literature concludes that tariffs are protectionist and harmful to the economy, adding to cost pressures while reducing global capital flows. This was a position held by Treasury Secretary Scott Bessent a year before going public in his support of the 47th president. Modern economists will debate the merits of these teachings. However, understanding the adverse effects of tariffs is integral to determining how to respond to levies, whether large or small, and how direct or targeted they may be.
Remember, tariffs, no matter how benevolent their promotion, are not installed in isolation. To paraphrase the eminent economist Ludwig von Mises: Tariffs beget tariffs. Trading partners exacerbate the situation by doubling down on the very actions they oppose.
Since Trump returned to the Oval Office, Canadian officials have been chugging Double-Double coffees from Tim Hortons and eating late-night poutines, attempting to avert trade disputes. After former Prime Minister Justin Trudeau and his cabinet failed to accomplish anything except crying in front of the world stage, Ottawa chose the easy route by installing counter-tariffs on steel and aluminum, orange juice, ketchup, peanut butter, and a range of other US goods. Of course, the better option for the Great White North would be to start approving pipelines, opening mines and refineries, expanding liquefied natural gas (LNG) exports to foreign markets, and cutting tariffs.
Protectionist Europe joined the countermeasures by targeting US metals, bourbon, peanut butter, jeans, motorcycles, and other agricultural and consumer goods. What could have been an alternative strategy for Europe? A more libertarian, small-government approach would have sufficed: cut or remove value-added taxes (VATs) and decrease import duty levels – the White House’s two grievances.
Canadian and European leaders say their retaliatory efforts will have maximum impact on the United States. This is befuddling since their economies have been hanging on by the skin of their teeth, avoiding technical recessions by a couple of percentage points. Despite America’s plethora of challenges, the rest of the world is anemic and, as a result, unable to weather a trade storm.
Still, when trade strife ensues, akin to what happened in the 1930s with the Smoot-Hawley Tariff Act, the global economy suffers immensely, from a decline in foreign investments to decreases in export opportunities. The consensus among economists was that this created the Great Depression. Will an all-out trade war echo the past? History may not repeat itself, but it does rhyme.
Reciprocity
Commerce Secretary Howard Lutnick has purported that the term “reciprocity” is Trump’s second-favorite word behind “tariffs.” This is the administration’s chief goal: leveling the playing field. Will this objective, set to go into effect on April 2, be realized? Past trade disputes indicate that tariffs mostly go up rather than down. It is a lose-lose proposition, so why bother playing the game other than to feign strength in front of the cameras? The one positive outcome of this affair could be the demise of the World Trade Organization, a superfluous entity that has rarely achieved anything good for the global economy.
Whether it's Trump, Vice President JD Vance, or Bessent, the argument is that the American Dream is not contingent on buying cheap stuff from foreign markets. However, strong purchasing power is what makes the American Dream possible, particularly in an environment of incompetent governance. Economist Adam Smith wrote in The Wealth of Nations: “In every country, it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.” If the Europeans or Canadians want to harm their people by taxing them to subsidize industries, should American businesses that depend on these products and consumers gripe?
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