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Is the US/China trade war good for Australian business?

By: Alan Hartstein - IndustrySearch Contributing Editor (Have your say below)
11 October, 2018

The escalating trade war between the United States and China, the world’s two largest economies, is already having an impact on smaller economies all over the world.

What initially started out as a glorified slanging match between US President Donald Trump and his Chinese counterpart Xi Jinping about America’s multibillion-dollar trade deficit and its difficulty in competing with cheap imported Chinese goods has steadily grown into what many now view as an economic crisis of global proportions.

The US Government initially announced $US270 billion worth of tariffs or taxes on Chinese imported goods and has since added another $US200 billion worth of products to that list, meaning it now has tariffs on nearly half of all Chinese imports into the US.

The Chinese have since retaliated with their own tariffs, along with supposed currency manipulations designed to make their goods even cheaper, something Beijing denies responsibility for. This has in turn led to a further rise in tensions, with the US now threatening to extend the tariffs to cover almost all of the goods imported from China.

So what does this mean for Australia, and is there any upside?

Australia's economy has remained robust for a long time now, even in times of global financial turmoil, thanks largely to the benefits of free trade and investment, and strong bilateral and multilateral agreements with our biggest trading partners such as China, Japan and Korea.

Being caught in the crossfire between our number one ally and largest trading partner on the surface at least looks like a lose/lose situation, especially if other countries join in a trade war to protect their domestic industries.

KPMG Australia chief economist Brendan Rynne said Australia could lose up to 2.5 per cent of GDP annually if the current situation continues, as rising import costs in China means less money for consumption, resulting in a slowing of the flow of trade, a shrinkage of our economy and resulting job losses. 

Of course there’s a whole range of other factors such as currency valuations and exchange rates, government bonds and share market performance that come into play, but, to cut a long story short, trade wars don’t usually have happy endings for economic minnows caught in the middle.

In this case, US tariffs could lead to a shrinkage in the money circulating in the Chinese economy, and that means less for the Chinese to spend on Australian holidays or education courses for their children.

UBS Chief Economist George Tharenou says the best thing from an Australian perspective is that we have not experienced much in the way of negative growth yet, and that the fall in the Australian dollar has been good for the local economy as it makes our exports more competitive.

“Our major export earners like iron ore are relatively insulated from the trade war. However, an ongoing conflict will leave us exposed to a shrinking global economy,” Tharenou adds.

Regarding sectors of the economy that could gain in the long term, Tharenou believes it’s far too early to tell who, if anyone, will benefit. “It takes a long time for companies to redirect their focus from one major market to another, so those ramifications have a long way to play out.”

AMP Capital Head of Investment Strategy and Chief Economist Shane Oliver said there was no obvious way in which Australia as a whole, or even specific sectors, would benefit from the current trade war and that sourcing other markets for our commodities would be highly problematic.

“If China buys less of our commodities to make products to sell to the US that’s a problem for us,” he says. The one upside, he adds, is that Australia’s economy remains in relatively good shape in these uncertain economic times and a sizeable loss in the mid-term elections due in November for the Trump Administration may lead to a more conciliatory approach regarding trade and deficits.

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Anton Carpenter | Thursday, October 11, 2018, 2:59 AM
What if China starts buying things from us that they would have bought from the US? Surely that would be a good thing. I'm just not sure what else China would buy from us besides stuff that comes out of the ground and baby food.
Geoff Thomas | Thursday, October 11, 2018, 3:11 AM
Basically, America, as a country with huge areas of agriculture and huge mining resources, is a competitor to Australia, - every time America could sell some agricultural or mining product cheaper than Australia, they did, and OZ economy declined accordingly. Sure, we bought technological materials from them, although some very shonky, like the Hawkesbury River bridge to Brooklyn north of Sydney, and the current fashion of not honouring warranty nor giving post sales advice, the which I have suffered, - based on their logo, User Beware. Thing is, many economies around the world are making goods superior to US goods, (with occasional exceptions) and developing huge alternatives to the US, some exceeding the US, so lets just let Trump and China sort it out, stop grievously distorting our Balance of Payments by buying inappropriate weaponry (designed for some sort of plan) and instead developing our own defence oriented Miiitary, - the which would stimulate our own economy rather then the predatory American economy. Let's face it, a country attacking Australia has a problem with long supply lines, America would have the same problem l supporting us. and probably wouldn't bother. How about we focus on China, try to ameliorate their more grandiose empire plans, they never worked in the past, establish a meaningful dialogue, include the rest of Asia - that is our future, take it from there? Best Regards, Geoff Thomas, Malanda, Australia, 4885
Chuck Solide | Thursday, October 11, 2018, 3:40 AM
Without being a "Party Pooper" or a complete cynic, I see nothing to get excited about. Whatever happens between the U.S. and China, we need to realise that Australia is producing less and less of its own commodities and is fast approaching the point whereby China could simply "hold us to ransom" ! Given that we are now relying on other countries to supply the majority of our clothes, our appliances, all manner of "consumer durables", building materials and a hell of a lot of foodstuffs, anyone who says Australia is still "the Clever Country" is either a Liar or a Fool. (or a Politician, in which case they're both !) As has been pointed out by people far smarter than myself, Australias major export is empty shipping containers. As we shut down more and more of our manufacturing facilities, we lose not only the ability to produce the "commodity", whatever it may be, but we also lose the people with the "skill-sets" to perform particular tasks. Donald Trump, (for all his faults), has been astute enough to recognise that's what was happening in the U.S. and to his credit, is trying to address the issue. ( although in a somewhat "Ham-fisted" manner) EPILOGUE: Next time a young person should ask you, "what exactly is the Whitlam Legacy" , simply drive them to the docks and point to the empty containers heading back from whence they came....... that's it ! Chuck Solide, Melbourne
Martin Ambrens | Thursday, October 11, 2018, 4:57 AM
Well - I think there are upsides for Australia as follows: Firstly - I would have thought that the Chinese government cant afford to let their economy suffer too much from a contraction in US demand. For two reasons - both political. Firstly - it would reflect on the judgement of Chairman Xi - and he cant be seen to have made a mistake. And secondly, declines in growth produce the threat of social unrest. So - they will do whatever is necessary in order to maintain demand and growth. But at the same time - I think Chinese commercial prestige will be severely damaged by this. All of a sudden China is not a low risk, low cost extension to our supply chains. It is starting to look like a predatory dictatorship that is ready to behave hostilely towards the rest of the world and which is under the control of a dictator. (Yuk!) So - strategically - everyone who is sourcing from China must now begin to hedge their bets - and that means firstly other alternative regional low cost producers (and that was already happening) and secondly looking back inside Australia - and balancing security against cost. So - there is upside for Australia manufacturing (which DOES still exist) Finally however - the most exposed sector is Education: there is risk that he flow of students will be switch OFF. That would hurt the Unis badly. But it would only reinforce the view that China is not to be trusted. (I'm not sure about Real Estate. Chinese might still try to get money out - and see Australia as a "safe haven". Don't know.)
Alexee Gulikov | Thursday, October 11, 2018, 5:35 AM
wake up from sleeping on iron ore mine, develop australian resouce based technologies, making it up through technology export should be one way...