Predicting the exact effects of tariffs on financial markets is no easy feat. Even top economists struggle to forecast their long-term consequences. With that in mind, let’s explore how tariffs work and how they might influence markets in Australia and abroad.

A quick note: we're not here to make any kind of commentary on tariffs and their political implications. Instead, our focus is on understanding how tariffs might affect the share market to help you make more informed investing decisions.

What are tariffs, and how do they work?

A tariff is essentially a tax that a government places on imported goods. The idea is to make foreign products more expensive, encouraging consumers to buy local alternatives. Governments introduce tariffs for several reasons, including:

• Protecting local industries from overseas competition
• Retaliating against perceived unfair trade practices
• Raising revenue for the government

Tariffs come in different forms, such as specific tariffs (a fixed charge per unit of goods) or ad valorem tariffs (a percentage of the product’s value). Regardless of the structure, they often lead to price hikes, supply chain adjustments, and economic shifts that ripple through financial markets.

How could US tariffs affect the Australian economy?

Recently, tariff announcements from the United States have dominated headlines. Even if tariffs don’t end up being directly imposed on Australian goods, they can still influence our economy in several ways. Some key factors to consider include:

1. Global trade disruptions – If the US places tariffs on a key trading partner like China, it can slow economic activity. This slowdown may reduce demand for Australian exports such as iron ore, coal, and agricultural products.
2. Supply chain changes – Many Australian businesses are linked to global supply chains. If tariffs make certain imports more expensive, local companies may face higher production costs, impacting profit margins and potentially leading to inflation .
3. Currency fluctuations – Tariffs can cause volatility in foreign exchange markets. If they lead to global economic uncertainty, investors may flock to the US dollar as a safe haven, potentially weakening the Australian dollar. While a weaker AUD can benefit exporters, it also makes imports more expensive for Australian consumers and businesses.
4. Business and consumer confidence – Trade tensions can create uncertainty, leading businesses to delay investment decisions and consumers to hold back on spending. This can have flow-on effects on company earnings and, consequently, share prices.

How could tariffs impact the Australian share market?

Because the Australian share market is heavily tied to the global economy, tariffs can have an indirect but noticeable effect. Here are some key ways they might influence our market:

1. Sector-specific effects – Some industries are more vulnerable than others:
   • Mining and resources – Giants like BHP and Rio Tinto rely on strong demand from overseas, particularly China. If tariffs slow global growth, demand for resources may fall, leading to declining commodity prices. Lower prices can reduce revenues and profits for Australian mining companies , ultimately putting downward pressure on their share prices.
   • Agriculture – If global food markets are disrupted, Australian farmers and agribusinesses could face lower demand and fluctuating prices. This could reduce export earnings and profitability for agricultural firms, potentially causing share prices in this sector to decline.
   • Retail and consumer goods – If tariffs make imported products more expensive, retailers may need to raise prices, which could impact sales and profit margins. Reduced consumer spending due to higher prices can hurt retail companies' earnings, leading to weaker investor confidence and falling share prices.
2. Investor sentiment and market volatility – The uncertainty surrounding tariffs can lead to increased share market volatility . If investors fear a worsening trade war, they may pull back from equities, causing short-term price swings.
3. Interest rates and economic policy – If tariffs slow economic growth, central banks like the Reserve Bank of Australia may respond by cutting interest rates to stimulate the economy. Lower interest rates can potentially make shares more attractive compared to other investment options like bonds or savings accounts.

What about US-based indexes like the S&P 500?

Since many tariff policies originate in the US, the American share market is often at the centre of tariff-related uncertainty. The S&P 500 , which tracks the performance of 500 major US companies, can be affected in several ways:

1. Impact on multinational corporations – Many large companies, such as Apple and Boeing, depend on global supply chains. Higher tariffs can potentially increase costs, reduce profits, and force price changes.
2. Consumer and business confidence – Tariffs can sometimes impact overall economic confidence, affecting both consumer spending and corporate investment. If businesses delay expansion or hiring due to trade uncertainty, share prices can suffer.
3. Sector performance – Just like in Australia, certain industries in the US are more exposed to tariff risks. Manufacturing and tech firms often take the hardest hit, while domestic-focused businesses, like utilities or some retailers, may be less affected.
4. Market volatility – The S&P 500 tends to react sharply to news about trade policy, with tariff escalations or resolutions often triggering major price swings in either direction.

Are there any positives to introducing tariffs?

While tariffs often lead to increased costs and market uncertainty, they can also have some potential benefits:

• Protection of domestic industries – By making foreign goods more expensive, tariffs can theoretically give local businesses a competitive advantage, helping them grow and retain jobs.
• Encouragement of local investment – Higher costs on imports may potentially drive businesses to invest in local manufacturing and production, fostering economic development.
• Government revenue generation – Tariffs can serve as a source of government revenue, which may be reinvested into infrastructure, public services, or other economic initiatives.
• Bargaining tool in trade negotiations – Governments sometimes use tariffs as leverage in trade negotiations, pushing for more favourable agreements with other nations.

However, while these benefits exist, they must be weighed against the broader economic impacts, particularly on consumers and businesses that rely on global trade.

What other factors should we consider about tariffs?

One of the most important things to remember about tariffs is that their effects can vary significantly depending on the context. Here are a few key takeaways:

• Markets adapt – While tariffs can cause disruption, businesses often find ways to adjust, such as shifting supply chains or passing costs on to consumers.
• Retaliatory measures matter – Trade partners frequently respond to tariffs with their own countermeasures, adding further complexity to the situation.
• Economic forecasting is difficult – Even expert economists struggle to predict the long-term consequences of tariffs. While some impacts may be obvious in the short term, others unfold more gradually.

Like many aspects of investing, trying to predict how tariffs will influence the share market is incredibly challenging. Rather than attempting to forecast market movements based on trade policy, investors may be better off focusing on long-term fundamentals and diversification.

In summary

Tariffs have been a major talking point in recent months, raising questions about their economic impact. While their direct effects are most visible in certain industries and global trade flows, their overall influence on the share market is much harder to predict.

Both Australian and US markets may experience sector-specific disruptions, currency fluctuations, and increased volatility, but markets also have a strong track record of adapting to changing conditions.

For investors, the key takeaway is that while tariffs can influence share prices, they are just one of many factors at play. Staying informed, maintaining a diversified portfolio , and focusing on long-term investing principles can help navigate the uncertainty tariffs may bring.

Happy investing!