The US president plans to impose a 25 percent tax on imported steel and 10 percent on aluminium in a move that has raised fears of a trade war.
It led to the White House's top economic advisor, Gary Cohn, to quit in protest.
Reserve Bank of Australia governor Philip Lowe described the US plan as "highly regrettable and bad policy".
"History is very clear here. Protectionism is costly. It's costly to the country that implements the protectionism, and it's costly to everyone else. It's just not the right thing to do," he told a business summit in Sydney.
"How damaging will this be remains open. If it's just confined to the current higher tariffs on steel and aluminium, then I think it's manageable for the world economy.
US President Donald J. Trump (right), with Prime Minister of Australia Malcolm Turnbull (left). Source: AAP (EPA/SHAWN THEW)
"This could turn very badly, though, if it escalates."
Canada, Germany, Britain, France and other US allies have all sounded the alarm over the potential impact of Trump's aggressive agenda on their trade relationships with the United States.
Lowe said if the move triggered retaliation and counter-retaliation, "this could turn into a very big shock for the global economy".
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"The best thing to do -- perhaps the hardest thing, but the best thing to do -- is just to sit still and do nothing, to not respond and to continue advocating for open trade."
He acknowledged this would not be easy because "there's a political imperative in some countries to respond to an unjust action".
Canberra has sought to be exempt from the hefty tariffs, citing an understanding reached with the US at G20 meetings last year.
A Chinese worker produces a steel bar at a steel plant of Dongbei Special Steel Group Co., Ltd. in Dalian city, northeast Chinas Liaoning province. Source: AAP
It has not commented on whether it would retaliate directly if the US moved forward with its plans.
Foreign Minister Julie Bishop is in New York and said Wednesday she planned to meet US counterpart Rex Tillerson to "urge the United States to not proceed down this path".
Turnbull: California would be worse off
Malcolm Turnbull insists America's most populous state will be worse off from Donald Trump's new tariffs on steel because it will be more expensive to build homes.
BlueScope ships Australian steel to the US west coast to make into roofing products because of the high cost of freight from the east coast.
The prime minister says 700 direct jobs stem from Blue Scope's operation.
"The consequence of imposing a tariff on Australian steel to the west coast would be simply... putting up the price of building in California," Mr Turnbull told the Financial Review Business Summit in Sydney on Wednesday.
"There is literally nothing to be gained in the United States ... imposing a tariff."
He used a major economic speech to point to Thursday's signing of the 11-country Trans-Pacific Partnership trade deal as an indicator the world recognises the importance of open trade.
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