[Analytics] Trump’s weird tariff move has just shown why Australia is vulnerable

The Tariff Man has struck again, this time blindsiding and unnerving allies and markets with “Trumped-up” accusations of currency manipulation. In yet another of his market-shaking tweets on Monday, Donald Trump announced he would “restore” tariffs on Brazilian and Argentinian steel and aluminium exports to the US. Stephen Bartholomeusz specially for The Sydney Morning Herald.

“Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers. Therefore, effective immediately, I will restore the tariffs on all steel and aluminium that is shipped into the US from those countries,” he tweeted.

In fact neither Brazil nor Argentina have been subjected to the tariffs that Trump imposed, on “national security” grounds, on a range of countries including close allies such as Canada, in March last year. Instead they agreed to quotas that limited their exports to the US.

It is equally the case that neither of the two biggest economies in South America has been manipulating their exchange rates to gain a competitive advantage.

If anything they have tried, albeit unsuccessfully, to support the values of the Brazilian real and Argentinian peso. The value of the real has fallen almost 10 per cent against the US dollar this year, while the peso has collapsed, plunging nearly 40 per cent.

Argentina has almost exhausted its foreign exchange reserves selling US dollars to try to defend the peso.

Neither country has been accused of currency manipulation in the bi-annual US Treasury reports on the economic and foreign exchange policies of America’s major trading partners.

In reality, the currencies of both countries reflect the dismal state of their economies. Argentina is experiencing another of its periodic economic crises while Brazil’s free-floating real has sunk because its economy is on the brink of recession.

None of the facts appear to bother Trump – he has consistently accused China of manipulating its currency to gain a competitive advantage for its exports even as all the evidence has suggested that it has done precisely the opposite.

Nor does it bother Trump that he’s being hypocritical.

In a continuation of the tweet announcing the new tariffs he said the US Federal Reserve should also take action to devalue the dollar: “So that countries, of which there are many, no longer take advantage of our strong dollar by further devaluing their currencies. This makes it very hard for our manufacturers & farmers to fairly export their goods. Lower rates & Loosen – Fed!”

The US dollar, as most people other than Trump seem to appreciate, is strong because its economy is in relatively better shape than most of its major trading partners’ economies.

It should also be noted that the Fed has actually cut US rates three times this year and that Brazil’s 10-year bond rate of 6.9 per cent sits about five percentage points higher than the US rate. The one-year Brazilian yield is 4.6 per cent; Treasury bills yield 1.6 per cent.

Trump’s cynical willingness to use baseless charges of currency manipulation against America’s trading partners sent a shiver through markets, with the US stock market falling almost 1 per cent.

Investors thought the administration was on the verge of ending the trade war with China with a “phase one” deal thought to be close to completion and that the prospects of new fronts opening were receding as next year’s elections draw closer.

The tweeting of the opening of a new and completely unexpected front in the trade wars therefore unsettled investors.

Commerce secretary Wilbur Ross added to the markets’ concerns by saying that Brazil isn’t the only country where there are currency “issues”. That comment and Trump’s South American tariffs ought to unsettle all America’s allies, including Australia. The administration can’t be trusted.

The decision to impose the tariffs has nothing to do with currency manipulation. It’s actually related to the trade war with China.

In response to Trump’s tariffs on China’s exports to the US, China imposed its own tariffs on US goods and products and switched its purchases of soybeans, pork and other agricultural products to alternative suppliers. Brazil’s share of China’s soybean imports has soared while Argentina made its first shipment of chilled pork to China last month.

Both Brazil and Argentina have also been discussing more comprehensive trade relationships with China.

The South Americans’ gains are coming at the expense of US farmers, the hardest hit sector from the Trump trade war with China. US manufacturing has also been impacted, with data released on Monday showing factory activity is continuing to decline.

Farmers and manufacturing workers in the rust belt states are critical to Trump’s re-election prospects next year.

Despite the overwhelming evidence to the contrary, Trump seems to still believe that imposing tariffs on America’s major trading partners can benefit the US.

He also believes, regardless of the evidence, that everyone else is manipulating their currencies because that is what he’d do if he were them – and would like to do himself if only the Fed would co-operate.

Australia – alongside Argentina and Brazil – was exempted from the original US tariffs on steel and aluminium after intense lobbying by former prime minister Malcolm Turnbull and former foreign minister Julie Bishop.

It is obvious now, if it weren’t previously, that the special status Australia enjoys as a long-standing and always supportive ally of the US is fragile and vulnerable to a late-night tweet.

Trump has just demonstrated, if a demonstration were needed, that he can’t be trusted to keep the commitments the US has made on trade. For the moment Australian steel and aluminium exports remain exempt from his tariffs but that could change with a tweet.

Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.