Economic Shock Eases As Trump Retreats On Highest Tariffs

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To find out, we reran our global economic model with the US tariff schedule as it stood on July 28, again allowing trading partners to retaliate proportionally (excluding Australia, Japan and South Korea, which have ruled out retaliation ). This table compares the April projections with the updated results.

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Damage to the US economy is less severe, but still substantial. In 2025, the falls in real (inflation-adjusted) consumption narrow from a decline of 2.4% to 1.6%; real gross domestic product (GDP) from a fall of 2.6% to 1.7%; and real investment from a slide of 6.6% to 5.1%.

For the US, lower tariffs on the EU, UK, Japan, Vietnam and especially China, mean less disruption to short-run employment and long-run capital markets, lower efficiency losses in product markets, and less punishing retaliation from abroad.

The jump in tariffs on all imported US goods will cost American consumers.

Beijing also benefits from Washington's climbdown. Short-run losses in Chinese real consumption shrink from 0.4% to 0.1% in 2025, and the GDP loss all but disappears. Cutting the US tariff on Chinese goods to 34%, and the corresponding pullback in China's retaliatory duties, explains most of the improvement.

Australia remains a beneficiary, but to a lesser degree. In April, we projected short-run gains of 0.6% in consumption and 0.4% in GDP. These are now more modest, with a gain of 0.3% and 0.2% respectively. Two forces lie behind the downgrade:

1. Australia's relative tariff treatment has narrowed. In April, Australia faced a 10% base tariff while many of our trade competitors in the US market confronted much higher“reciprocal” rates. Many of those have now been cut, eroding the relative price advantage of Australian products in the US market.

2. The global investment diversion is smaller. When investment contracts in the US and in regions relatively hard-hit by US tariffs and retaliatory action, some investment is reallocated to more lightly hit economies.

Because the projected fall in investment in the US and other regions is now milder, the corresponding investment inflow to Australia weakens, with our forecast boost to Australian investment dropping from 2.9% to 2.1% in the short-run.

What should Canberra do?

For the moment, the tariff outcomes still tilt slightly in Australia's favour. That hardly argues for rushing into concessions in a bilateral“deal of the week” with Washington, let alone making unilateral concessions outside of any bargaining framework. This is especially true when US policy continues to appear reactive, volatile and unreliable.