This just got big. The burgeoning trade war between China and the US was mostly gesturing until now — a few tens of billions worth of tariffs being chucked round. But Donald Trump has now taken it to a new level.
Trump this week announced tariffs on $200 billion of goods and pledged a further $267 billion worth if China dared retaliate. China, of course, retaliated. Sinophobic agent of chaos “Sloppy” Steve Bannon must about now be experiencing a great feeling of warmth. Which should send a chill through us all.
It is time for Australia to figure out how it will deal with this. Australia’s economy is at risk — although there could also be surprising bonuses for some. The risk of a trade war is that it makes the global economy weaker, which could hurt ours. The Reserve Bank mentions trade war risks all the time due to their seriousness — in its most recent monetary policy meeting minutes, these risks are the first ones mentioned.
[Labor’s incoherent trade policy evident from TPP and China-US tariff war]
Global trade sustains us. It’s like we are reef fish and global trade is the ocean current that brings us fresh water and life-sustaining nutrients. We individually may feed on the reef that is the Australian economy, but ultimately the ecosystem in which we survive is much broader. KPMG modelling released to the media suggests the trade war could wipe billions off Australia’s economy. Interrupting the currents of global trade is a bad idea.
Breaking the rules
Tariff escalation drama has been a recurring and harmful part of history. To avoid the cost of these intermittent fisticuffs, the world painstakingly developed a global rules-based regime — the World Trade Organisation.
If civilisation is the progress of rules-based systems that prevent selfish and ultimately self-destructive fights, then the WTO represents the civilisation of trade. And Trump has undermined it dramatically. Trump wants to remove the trade cop in the same way the most powerful street gang would like police gone from its neighbourhood: for the most powerful actors, rules are an inhibitor, not a protector.
Does it sound dry when someone exhorts us to protect “a rules-based trading system” as Frances Adamson, the secretary of DFAT, did this week? What it means for a medium-sized country is avoiding a world dominated by a bully that takes its boot off our neck only when it suits them. That bully could be the US, but it could equally be China, on whom we depend far more.
The most powerful country in the world can always do without the rules-based regime, for a time. For the rest of us it helps.
The silver lining
While the macro-economic impact is likely to be negative, tariffs on Chinese products could make Australian exports fly off the shelves in the US. This could be a big opportunity for some Aussie businesses.
For example, on the very long list of Chinese products that will be hit by Trump’s tariffs is this: “842.19.00 Dishwashing machines other than of the household type“. An Australian company — like Rhima, which makes and sells industrial dishwashers for the hospitality and medical industries — could step in to fill the gap.
We don’t know if companies like Rhima will grab market share in the world’s biggest economy, but with such a long list of Chinese products under pressure, there is little doubt some Australian companies will make hay. (“8433.30.00 Hay making machinery other than mowers” is on the US tariff list, so Australia’s makers of hay-makers could find themselves in this category.)
Aussie manufacturers might find themselves under a different type of pressure though. If Chinese dishwashers are harder to sell in the US, they might end up here instead. Exports could be diverted to our shores and if the Chinese companies have great surplus, they could be very cheap. Could Rhima compete with a flood of cheap imports? It is hard to predict.
Whether your own risk is to the upside or the downside, it’s worth paying attention to this trade war. The tumult Trump is letting loose is severe enough to change the systems we depend on dramatically.
Australia has failed to maintain industries sufficient to support itself in times of global instability. It is not protectionist to ensure Australian manufacturing is able to survive, especially when Chinese competition is government sponsored & controlled.
China’s dictatorship has a policy of longevity & prosperity, whilst Australian governments can’t see beyond the next poll.
A move towards more nationalised essential services & industry would build resilience and create further employment. But it needs to happen now before it becomes a global trend necessitated by the collapse of globalism.
“Australia has failed to maintain industries sufficient to support itself”
No – afraid not. The first thing that I noticed on my first trip to Oz from NZ what the low price of shoes for males. Oz had a mentality of manufacturing that developed in the late 50s and muddled along for 20 odd years. What the country has failed to do is to engage with competing modern technologies. However that approach would require abandoning real-estate and developing venture capital. The joint could, as predicted by one former Asian PM, become the white trash centre of the Pacific yet!
“It is not protectionist to ensure Australian manufacturing is able to survive,”
THAT is THE definition of protectionism ole boy(!) irrespective of the circumstances or justification. All countries have an industry that does need to be protected. Oz is a bit wary of buying gear from the Chinese on account of the perceived back doors that might be attached. That another vendor (elsewhere in the world – e.g. CISCO) might do the same thing doesn’t occur to anyone!
“China’s dictatorship has a policy of longevity & prosperity, whilst Australian governments can’t see beyond the next poll”
Agreed but globalism (or globalisation) is being sustained by Chinese coloniaism 21st century style and is NOT about to collapse.
While a full-on trade war is likely to be detrimental to the economy, it isn’t as clear cut or obvious how and why, especially if it remains mostly between China and the US.
There has to be opportunity in there somewhere, as you point out with Rhima.
Ross Gittins was the last person who wrote that the Oz economy is 80% internal – us selling stuff to us. Those figures would be old, but still. International embargoes on our coal – good. Gas supply – fantastic – our companies would have to sell us our gas at reasonable prices, possibly even less than what they ship it to Japan for. Iron Ore – well the international price would sky rocket, some good there.
In any case the profits from much of the big exporters often leave our shores as dividends to foreign owners.
The biggest problem would be if we took sides in the trade war. Provided we don’t, the effect of a trade war may be much less than we suspect.
KPMG’s study would no doubt be honest and rigorous, and tempered by a view that international trade is always good and less is always bad. I wouldn’t bank on their assessments being realised.
Who would be so stupid to “trade” a nations sovereignty for ????
There must be no trade deal that allows another nation or business to take any action on our ability to govern ourselves (can’t sue us because a law doesn’t suit them). No foreign organisation or government should have the right to bring to Australia there own workers as of right and any foreign worker MUST receive at least the same payments and rights as our own.
It’s that simple folks.
Do you think that matter is just about trade Jason? You ought to have made an effort to look behind the “window dressing” and identified the source. Why don’t we do that now and begin with the South China Sea. Trump knows that this issue is a lost cause; to “correct” it will require some muscle and it won’t be at all like taking pot shots at the Iraqis or the Afghans. Someone would walk away with more than a blood nose.
Extending the theme take a look at secured bases (by China) from the Gulf to the South China Sea. Even India has snapped out of it (by some miracle) and realises that its own navy is now no match for China’s navy. As an aside guesstimate the percentage of sailors that have type II diabetes in the USA navy and conjecture the percentage in the Chinese navy; zero in fact for the latter.
As to trade, as with most objectives the details are far form clear as articulated by President Donald. It is all very well to mention walls and immigrants and trade but there no systematic argument has been attached to any of these objectives. There is the rather waffly intention that the USA will (somehow) return to manufacturing (after about 40 years) and some actually believe it.
Nevertheless, the reality is that the productive capacity of the USA is NOT to be underestimated. In this regard their treasury bills are worth something and the latent productive capacity of the place renders the deficit an irrelevance (because the country can provide goods and services to meet the deficit). That there is considerable under-capacity in the USA is not the point. The point is that the USA could produce to maximum capacity (which is substantial) if it had to.
In fact the capacity of the place is so great that the country could be entirely self sufficient requiring no imports at all. Variations on/of Ricardo will intervene prior to such a state of affairs occurring but it won’t do to become “wooley-eyed” over silver linings and such. Therefore it is entirely appropriate to enquire as to the effects that a trade war may have upon Australia (or the Pacific in general).
The first thought that ought to occur the the government (parliamentary and bureaucracy) is that we’re price takers and, hence, not price makers. China has built a communications industry (phones, data and blade-technology computers) over the last 15-18 years while fat, dumb and happy Oz has sat on its collective arse. Thank god Ms Bishop finally acquired the wit to depart the scene. Evaluating her upon her past performance the strategic thinking required here is beyond her; usurped Australian passports were beyond her.
To type more would take the matter in another direction – no less deserved – but away from the subject of the title but I will leave the interested reader with this thought (that I have defended elsewhere) – Gonsky : its a (an expletive) mirage for the quick-fixers.
Today I learned that there has never been a real ‘civilization’. Thanks, economists! Always on hand to mystify anything.
Depending upon what is intended by the word “real” that is probably true.
As to economics the subject is about what is produced and the distribution of what an economy produces. Despite what one reads in chapter 1 of a 1st year text the subject could not be more political – and hence the “mystery” Draco. Yep : its deep.
Odd that there is no mention of how a disruption of the China/US exchange system – stuff for US$ – would affect our exports to China. (Our exports to the US are barely discernible.)
If China needs to make fewer toys for its biggest market then it will need less iron & coking coal from us.
Recall that the only, the SOLE, reason we survived the GFC unscathed is because of those big holes in our landscape.
BTW Kyle, the T-Bonds that China holds – and, inexplicably, keeps buying – currently in excess of $2T, would cause a financial tsunami were they to be dumped on the market.
The Drumpfster crowed 6 months back “Trade wars are easy to win” which is only true if one lives on Planet Zog, as does he, apparently.
“Odd that there is no mention of how a disruption of the China/US exchange system – stuff for US$ – would affect our exports to China”
Actually, de facto, there is AR – but I would not be so unreasonable to expect a writer for Schwartz Media to be able to express it. What has occurred (if anyone has been watching) is that the RMB has devalued about 5% (or a tad more) since this idiocy began. THAT in itself provides Chinese manufacturing with a distinct advantage! Keep in mind that the PRC is hell-bend on becoming the manufacturing hub of he world – from everything from toys to CDs for Deutsche Grammophon.
Thus exports to China from Oz (e.g. iron ore) are going to be more expensive for the Chinese manufacturers but China has accepted that state of affairs. The PRC is in the race for the long term and thus exports from Oz can be considered stable – but thank god (for the country that) Bishop departed the scene. From the Asian perspective (not exclusively the PRC perspective) she was becoming somewhat scary; a case of far too many feet.
“If China needs to make fewer toys”
China will not be making fewer toys. Africa, as a whole, hasn’t been tapped. Sri Lanker, for example, is sown-up tighter than any sack – and that only since the end of the Tamil War. Quite an achievement. Pity that Oz didn’t get any of the action.
“Recall that the only, the SOLE, reason we survived the GFC unscathed is because of those big holes in our landscape.”
Not strictly ‘sole’. The Keynesian oiling had a lot do do with it. The never-ending boom did not commence until late 2011 and had a peak of mid 2013. Then China chatted with the opposition in Latin America and the rest is history. Some silly buggers really did think (and not a few political hopefuls in Perth) that the price would hang at US$100/t forever.
“the T-Bonds that China holds – and, inexplicably, keeps buying – currently in excess of $2T,”
I don’t intend to be picky but its not ‘inexplicable’ at all – with all due respect. I’ve been working with these guys for a while now and their thinking is VERY long term in everything. Xi gives frequent speeches to intermediate and high school students. The years that he mentions, as a habit, are 2030, 2035, 2040, 2050 .. etc. All one will hear in Australia is 2019 and that won’t be for another three months.
Bonds are a store of value AND a weapon. China knows that whatever the state of the deficit China will be (if push comes to shove) paid out in goods and services qua Versailles.
“would cause a financial tsunami were they to be dumped on the market.”
And SOME! Ditto for the dollars. It would make early 20s Germany look like a Quaker’s picnic.
“Trade wars are easy to win”
Yeah – well he could loose his arse here if he doen’t look out – for all the industrial muscle that the USA has. For his own sake I hope that he peddles that crap for his voters and that he doesn’t believe it himself.
Anyway, AR, is all crap! Self preservation will intervene in the nick of time. Yeah, there will be a lot of spewing and pissing but the world economic and political order is going to change whatever Trump thinks. Obama had this moment of clarity in Oz in 2014. A rational person would try to work with it but there are not a lot of rational people to hand. The remainder are just going to have to be dragged to the trough by circumstances.