Article by John Kehoe, courtesy of Australian Financial Review.
When US Commerce Secretary Howard Lutnick spoke at the Australian embassy in Washington three weeks ago, business executives attending were stunned by his breathtaking remarks on the Trump administration’s global trade revolution.
In a fireside chat, ambassador and former prime minister Kevin Rudd interviewed Lutnick in the presence of Macquarie Group chief executive Shemara Wikramanayake and about seven superannuation fund senior representatives, including former Labor federal treasurer Wayne Swan. Dozens of other Australian expats from the business and diplomatic community were present at the invitation-only dinner.
There is no official transcript of the private discussion with the New York billionaire who has been friends with Trump for 30 years. But several people in attendance described the talk as striking, extraordinary, blunt, bolshie, animated and like nothing else they’d heard from a public official.
The shocked Australians were in no doubt Team Trump was embarking on a fundamental reshaping of global commerce and that there was almost no chance of exemptions from his tariff war. Two weeks later, Trump and Lutnick imposed 25 per cent tariffs on steel and aluminium, including imports from Australia.
But much more sweeping actions are due on April 2 with plans for broad-ranging reciprocal tariffs on all sorts of goods around the world. China is a prime target and there could be big implications for Australia.
Lutnick’s closed-door address revealed protectionist tariffs are in the DNA of the Trump team. They are not just a rhetorical leverage tool in trade negotiations with other countries.
Lutnick said the Make America Great Again mission seeks to emulate the pre-1900s era of president William McKinley when the US was the richest nation on earth. America raised large chunks of revenue from tariffs and virtually nothing from income tax, except briefly during the Civil War and the 1890s.
“Some Australian mining companies have offtake agreements with China for critical minerals. This would not please the Trump administration.”
The modern vision is to recreate the “external revenue service” via tariffs and charging wealthy foreigners $US5 million for “gold card” visas to live in the US, reducing dependence on the income-tax collecting Internal Revenue Service.
Lutnick spoke about building a tariff wall. Allies and friends – such as Australia – could choose to be inside or outside the wall.
The former financier appears to distinguish between being on the right or wrong side of America. His Wall Street firm, Cantor Fitzgerald, lost 658 of its employees including his younger brother in the World Trade Centre attack on September 11, 2001 by al-Qaeda terrorists. Lutnick was taking his son to his first day of kindergarten, which ultimately saved his life.
At the embassy, Lutnick talked up Trump’s “America first” agenda. Tariffs against trade partners would reverse the de-industrialisation of America and bring back manufacturing for the middle class. The Trump regime argues free trade has been good for Wall Street, but not Main Street.
Pointedly, the US wants to unwind the so-called China shock. China entered the World Trade Organisation in 2001 and wiped out millions of American manufacturing jobs with its cheap labour and huge economies of scale to produce goods.
Lutnick said much of Trump’s trade strategy was aimed at Beijing. So far, this includes a doubling of tariffs to 20 per cent, but this is only an opening shot in a trade war that could go much further unless Trump and Xi Jinping cut a deal.
The US wants to revamp supply chains, suppress China’s technology prowess, take on Beijing’s market distortions and confront intellectual property abuses.
Lutnick was not explicit in saying that Australia selling 40 per cent of its exports to China was bad. Yet, if there is an escalation in a US-China trade war, Lutnick suggested that Trump expects allies to back America.
“He made it clear you’re either in the tent with the US or outside of it,” one person said.
A benign interpretation is that this may involve, for example, giving the US priority access to Australia’s critical minerals such as lithium, cobalt, nickel, graphite and rare earths.
Australia is rich in these minerals, some of which are crucial for building sensitive defence technologies and products vital for the energy transition such as wind turbines, batteries and electric vehicles.
Some Australian mining companies have agreed to partner with the US on these nascent critical mineral projects. Several US private equity funds are in discussions about making investments, according to a market participant.
Yet, the Albanese government’s offer to give the US streamlined access to critical minerals as a trade-off for exemptions from steel and aluminium tariffs fell flat with Lutnick. The US response in trade discussions with Rudd was Australia had already agreed to do that with the Biden administration, and it wasn’t anything materially new.
Some Australian mining companies have offtake agreements with China for critical minerals. This would not please the Trump administration.
The US leaning on Australia to temper its economic relations with China would not be new, as former treasurer Joe Hockey recounts in his memoir.
“At one point in 2015, when things had begun to heat up between the United States and China, president Obama flat out asked prime minister Abbott to stop selling iron ore to China,” Hockey writes.
“Both the prime minister and I were astounded.
“That’s ridiculous, I protested furiously … Those exports were critical, both for the economy and for the federal and the West Australian budgets.
“We weren’t going to trash our economy for president Obama – or any other president, for that matter.”
This occurred when Obama was pressuring Australia not to sign up as a founding member of the Beijing-inspired Asian Infrastructure Investment Bank to finance projects in the region. Hockey believed more infrastructure in the region would be good for Australian iron ore exports that help build roads, bridges and buildings.
Iron ore is Australia’s No.1 export. In recent years, China has bought about 80 per cent of the more than $100 billion in annual iron ore sales, plus huge amounts of coal, gas, agricultural goods, tourism and higher education exports.
China has made Australia an incredibly wealthy nation over the past quarter of a century.
Similar to Obama, Trump could threaten this.
It is not surprising then that some of the wealthiest Australians who have become rich doing business with China, including iron ore magnate Gina Rinehart, have been trying to find ways to show how they are investing in America and Trump personally.
Rinehart has been spending time at Trump’s Mar-a-Lago resort in Florida, including on election victory night last November.
Geopolitical and defence analysts have raised the prospect of Australia coming under pressure from the US in the future to cut iron ore sales to China in the event of a conflict over Taiwan. BHP president for Australia Geraldine Slattery was asked about such a hypothetical scenario in a conversation at The Australian Financial Review Business Summit this month.
“Do you think about that? Or model that in any of your scenario planning?” Financial Review editor-at-large Michael Stutchbury asked Slattery.
Slattery responded that market access was a top-of-mind-risk for BHP, particularly when global trade rules are changing.
She said that commodities could often be diverted to other markets, as they were during sanctions imposed on Russia during the Ukraine war and when China in 2020 stopped buying Australian coal.
But because China is such a large buyer of iron ore, purchasing four in every five tonnes from Australia, Slattery suggested diverting iron ore to other markets would be much harder.
“Now, of course, iron ore going into China, could that all be diverted?
“You know, that clearly poses a challenge.”
Whether it’s iron ore or other trade areas, Australia must be on alert for Trump’s next trade shock.