Business News Analysis: China-US Trade War, Australia’s Inflation
Business News Analysis: China-US Trade War, Australia’s Inflation
Writer: Klinsmann Lee
May, 2025
China and the U.S. agreed to reduce tariffs for 90 days in the global trade war. [1]
Background:
Both countries agreed to reduce “reciprocal tariffs” on each other by 115%, with total U.S. Tariffs on Chinese exports at 30% and total Chinese Tariffs on U.S. exports at 10%.
This breakthrough comes after a negotiation between both countries in Geneva.
The higher U.S. rate is because of the 20% tariff applied in response to the flow of Fentanyl at the start of 2025.
On 2nd April 2025, Donald Trump announced a “reciprocal tariff” strategy against all other nations, causing global financial and economic turmoil.
On 9th April 2025, Donald Trump announced a 90-day pause for most countries except China, which had retaliated earlier. This has led to further escalation of tariffs with U.S. tariffs on Chinese goods of 145% and a reciprocal rate of 125% in China.
Klinsmann’s Analysis:
The bond market saved the day!
After the announcement of the U.S. tariffs against all nations, the global financial market panicked, and stocks fell.
In a normal situation, investors will rush to put money into less risky assets such as U.S. Treasury bonds. However, this was different this time, with panic also spreading to the bond market.
When investors sell treasury bonds, this increases the yield on the bond (investors now demand a higher yield to buy the bond).
Bond price and bond yield are inversely related.
This is very problematic given that the U.S. runs large fiscal deficits and funds its spending by issuing treasury bonds.
A high bond yield means higher interest payments for the government.
As of 21st May 2025, the U.S. National Debt is $36.21 trillion. [2]
“We are all screwed, we are all saved” ~ A friend of Klinsmann.
The influx of Chinese Goods has helped Australia tame Inflation. [3] [4]
Background:
Australia's economy relies heavily on imports as the country manufactures very few finished products domestically.
In 2024, China is Australia’s biggest trading partner and imported more than AUD $110 billion of goods.
Chinese e-commerce platforms in Australia include Alibaba’s Taobao, JD.com, Temu and Shein.
Inflation has dropped from a high of 7.8% in late 2022 to 2.4% in the first quarter of 2025.
With inflation (headline consumer price inflation) coming down to the desired target of 2%-3%, the Australian Federal Reserve has lowered interest rates to 3.85% from a peak of 4.35% in 2024.
Klinsmann’s Analysis:
As Australia’s economy is heavily dependent on imports, it is unsurprising that there are fewer concerns regarding the floods of Chinese goods than other manufacturing-dependent countries.
However, this creates a challenge for domestic retailers (acting as the middleman) such as Kmart and Kogan, who are mostly unable to compete with Chinese online e-commerce platforms where goods are likely to ship directly from suppliers themselves.
The influx of Chinese goods will help tame inflation for Australia, which is important as the cost of living has been high in Australia since COVID.
Globalisation is also one of the reasons why inflation has been persistently low across countries as countries export goods and services that have their competitive advantages while import goods and services cheaper from overseas.
With the inflation rate coming down both in Australia and worldwide (excluding the U.S. due to the trade war), I believe the interest rate will likely be trending downward.
When inflation goes up, it likely signals that the economy is overheating, and the Australian Federal Reserve will raise interest rates to “slow” and “reduce” this overheating.
At the same time, the high interest rate will give more room for the Federal Reserve to implement expansionary monetary policy if there is a shock to the economy.
In summary, I think the current interest rate is “in a good position” to protect the economy.
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