How does Canberra cope in a world that threatens to spin off into competing blocs and help shape a world that preserves multilateralism, even if the United States is not a constructive part of it?

The prime minister will not be too troubled by missing his meeting with Donald Trump at the G7 in Canada. He faced a Herculean task in securing tariff relief or any kind of meaningful guarantee on AUKUS as the Pentagon’s review of the agreement begins.

In any case, Australian trade officials, alongside their Southeast Asian counterparts, are engaged on a mission of far greater urgency: to stop the Trump tariff contagion from spreading.

The first priority is a regional effort to dissuade countries from retaliating against Washington, raising tariffs on each other, or doing bilateral deals with the US that sell out the economic prospects of their neighbours and contribute to a further unravelling of the multilateral system.

How this effort plays out stands as a more critical test for this country’s future than whatever fate befalls AUKUS, and far more important than whatever percentage of GDP Australia spends on defence. A fully-fledged trade war will be disastrous for Australia.

In the great sweep of Australia’s engagement with the world over the last three-quarters of a century, it bears recalling the totemic principles that underwrite national development and prosperity: the move from the Ottawa imperial preference scheme to liberal, open markets with an enforceable system of rules, and the benefits that have accrued to Australia from the networked architecture that the multilateral trading system provides.

It’s that system which is best placed not only to avert a damaging spiral down the time tunnel of protectionism, but also to help secure a pathway to peace.

The US is again doing multilateralism serious damage and system repair looks difficult. Yet hope is far from lost. Countries still clamour to be part of the CPTPP and RCEP and 53 WTO members have found a workaround to US sabotage of its Dispute Settlement system. Washington, under Trump, appears to be truly living in the past: forgetting that it is only now 13% of global trade and that 140 countries have China as their number one trading partner.

Under a scenario where a global protectionist contagion takes over and all nations raise tariffs on each other, Australia and other countries will be severely damaged, with serious consequences for regional economic and political security.

Trump and his administration, though, pursue a policy aimed at decoupling from China and encouraging others to do the same. We can expect Washington to continue to look upon its Asian allies who trade with China with suspicion, putting pressure on them in its bilateral dealings to curtail it. Trade Minister Don Farrell is bluntly — and rightly — refuting any possibility that Australia will follow America’s bidding.

Whatever the cross currents in US-China policy, the only real coherence is their meeting point over tariffs, even if the reasons given by the Trump administration for the tariffs fluctuate with the political breeze. The US-China trade deal reached at Lancaster House in London last week amounts only to a half settlement: a guarded move from confrontation to truce but with the details still to be worked out for sign off from respective leaders.

The broader risk is that some countries will be tempted in bilateral deals with Washington to further weaken the multilateral system, especially if, as with the recent US-UK trade deal, they encourage discrimination against everybody else, but especially China.

Pressure on Southeast Asian economies is particularly intense. A preliminary study jointly carried out by the ANU’s East Asian Bureau of Economic Research and CSIS, Indonesia’s top think-tank for ASEAN policy leaders, has sketched the likely material impacts of such a scenario. Their preliminary studies estimate that the prospective US tariff regime and response by China and the EU is likely to result in a 2.3% decline in GDP across ASEAN nations.

More disturbingly, under a scenario where this becomes a global protectionist contagion, and all nations raise tariffs on each other, ASEAN GDP will take a more substantial hit, falling by as much as 11.2% of GDP (for Malaysia it would be 17% and Vietnam almost 15%). The point is that all ASEAN countries, as well as Australia and other countries, will be severely damaged, with serious consequences for regional economic and political security.

At the ASEAN summit late last month in Kuala Lumpur, its members underlined this “growing risk of global fragmentation”, adding that “ASEAN underscores the importance of predictable, transparent, inclusive, free, fair, sustainable and rules-based multilateral trading system, with the World Trade Organisation at its core.” That’s now being strongly backed by Canberra.

Moreover, an ASEAN geoeconomics task force has been established to lead this regional effort. This won’t be easy, no matter how sharply red lines are drawn. Countries like Vietnam, facing a whopping 46% tariff from Trump’s “Liberation Day” announcement, may well cave in and do a separate deal with Washington, but the wood is on in doing bilateral deals, not to compromise core multilateral principles.

Looking ahead over the next few years, this will not be the only trade dilemma facing Canberra. China still not only wants to be part of the CPTPP, it also projects itself as the defender of multilateralism and openness as America walks steadily away from the global trading system. How does Australia handle this aspect of China’s growing confidence and projection? How does Canberra cope in a world that threatens to spin off into competing blocs and help shape a world that preserves multilateralism, even if the US is not a constructive part of it?

India presents another dilemma, as it too undermines the WTO at every turn: Prime Minister Narendra Modi’s Hindu nationalist agenda dovetails with his party’s determination to protect the country’s agricultural sector and its industrial favourites from the liberalising winds of multilateral trade.

Australia’s strategic objective is to avoid the drift towards tariff contagion. That means working with regional partners, Europe and the rest of the world to limit the spread of protectionism beyond the US. Indeed, as the numbers show, with continuing multilateral liberalisation in the region and the rest of the world, the cost of Trump’s tariffs to trade and global GDP can be more than overcome.

Republished from Australian Financial Review, 18 June 2025

The views expressed in this article may or may not reflect those of Pearls and Irritations.