The coming US–China trade war will present opportunities for Australia in RCEP & FTAAP.

Posted by Kumiko Oumae on Sunday, 12 March 2017 04:29.

ASPI - The Strategist, ‘Would a US–China trade war pay dividends to Australia?’, 09 Mar 2017:

Among many other colourful characters, Donald Trump’s cabinet appointments include two protectionist and anti-China hardliners, Robert Lighthizer and Peter Navarro, who sit at the helm of US trade and industry policy. That decision confirms a belligerent change of tack in Sino­–American economic relations. But what are the implications for Australia?

A number of monetary economists, including Saul Eslake, have warned that a potential escalation to a full-blown China–US trade war poses the single biggest economic threat to Australia. That position argues that the already struggling global economy can’t face a superpower trade war, likely to be triggered by the Trump administration at the monetary level, when the RMB/USD exchange rate will reach the unprecedented level of 7 to 1 (it’s currently sitting at around 6.9). Furthermore, a falling Chinese currency combined with protectionist measures in the US will dampen the Chinese economy by way of reduced volumes of exports and higher interest rates that will spread across the Asia–Pacific. According to such reasoning, that could have negative impacts for Australia’s economy; prices for iron ore, coal and natural gas could possibly drop—we’ll know by the middle of the year.

However, it’s questionable that such crisis would be detrimental to Australia. In fact, focusing on monetary dynamics alone fails to capture the role of industrial production and regulatory arrangements in the global supply chain.

On the contrary, after triangulating the trade and industrial data of the US, China and Australia and considering the current trade regulatory framework, there are substantial reasons to argue that Australia is well placed to fill the gaps left by a wrecked US–China trade relationship at the best of its industrial capacity. Australia is indeed one of a handful of countries to have solid free trade agreements in place with both the US and China.

As it currently stands, the annual US–China trade balance is worth over US$600 billion—around the yearly value of Australia’s overall trade volumes.

Australia’s rocks and crops economy—in particular the growing productivity potential of its agricultural and mining sectors—is strong enough to rise above global monetary tensions and falling commodity prices, thanks to rising export volumes to both the US and China. It appears that the harder the two superpowers use their trade relations as leverage in their strategic competition, the harder they’ll need to look for other sources to sustain their industrial production levels and corporate supply chain.

In a trade war scenario, the possible initial hiccups in the global supply chain will likely be short-lived. In fact, let’s consider that about half of US imports are estimated to be made of intra-firm trade, and that protectionist measures from abroad tend to have insignificant effects on the production input of Chinese State-owned firms. Thus, multinational corporations are proven to be particularly adept at   quickly replacing the flows of their industrial production and distribution, as is shown by history.

In other words, in the event of a Sino–American crisis, the major trading actors in both countries will be able and willing to promptly move their business somewhere else.

Thanks to the existing spaghetti bowl of international economic partnerships, Australia is in prime position to be this “somewhere else” for both countries. In fact, Australia is the second largest economy and Sino–American trading partner of the only six countries that have in place free trade agreements with both the US and China, including South Korea, Singapore, Chile, Peru and Costa Rica.

The liquefied natural gas (LNG) trade is a significant case study for Australia in this instance. Australia is the world’s second largest LNG exporter, and is set to become the first by 2020. It exports more than $16 billion a year of LNG and by 2020 the LNG industry is expected to contribute $65 billion to the Australian economy, equating to 3.5% of its GDP. 2016 saw the start of LNG exports from the US and an unprecedented boost of Chinese imports. In a trade war scenario, the US would be locked out of China’s thriving market and thus LNG prices would rise even higher than they already have. With sharply rising production capacity, Australia needs to expand and diversify its customer base to keep the lion’s share of the global LNG market. China’s response to Trump’s trade policy is set to dampen the rise of a   strong emerging competitor of Australia’s highly lucrative LNG industry, and thus open up new commercial frontiers.

The LNG example clearly shows that Australia’s economy would benefit from a contained US–China trade crisis. Nevertheless, should that trade crisis escalate beyond the economy, Australia’s luck may run out.

The Chinese leadership doesn’t hide the fact that promoting international economic integration outside of the US control serves the purpose of carving greater geopolitical autonomy and flexibility in the global decision-making processes. Beside Trump’s trade policy, Xi Jinping’s diplomatic strategy may also speed up the end of the US­–China detente initiated by Nixon and Kissinger in the 1970s. It remains to be seen whether China will also pursue hard-line policies to push the US outside of the Asia–Pacific. In that instance, Australia would be caught between a rock and a hard place.

If the US­–China trade war were to escalate to the geopolitical level, the American order in the Asia–Pacific would enter uncharted waters. For one thing, such an unsavoury development may compel Australia to make a clear choice between trading with China and preserving America’s security patronage.

Giovanni Di Lieto lectures International Trade Law at Monash University.

One of the most interesting things about all this is that while Australia is going to be compelled to make that choice, the choice has essentially already been made through the pattern of trade relationships which Australian politicians have chosen to cultivate.

The only way that Australia would choose the United States in that scenario, would be if Australians decided that they would like to deliberately take a massive economic dive so that they can ‘Make America Great Again’ even though that is not their country, and so that they can avoid being called ‘anti-White’ by the legions of anonymous Alt-Right trolls roaming around on Twitter using Robert Whitacker’s ‘mantra’ on anyone who won’t support the geostrategic and geoeconomic intertests of the United States, the Russian Federation, and Exxonmobil specifically. 

Given that we know that Australians don’t care about America or Russia more than they care about the economic prosperity of their own country, the outcome is already baked into the cake. AFR carried an article last year which can be used to forecast what is likely to happen, and I’ll quote it in full here now:

AFR.com, ‘How our free trade deals are helping Australian companies right now’, 17 Nov 2016 (emphasis added):

Free trade should be embraced, not feared.

It has lifted living standards, grown Australia’s economy and created thousands of jobs.

While it is becoming more popular to denounce globalisation and flirt with protectionism, we cannot turn our back on free trade.

Australia’s economy has withstood global challenges and recorded 25 years of continuous growth because we’re open to the world.   Since Australia’s trade barriers came down, we’ve reaped the rewards.

Trade liberalisation has lifted the income of households by around $4500 a year and boosted the country’s gross domestic product by 2.5 per cent to 3.5 per cent, creating thousands of jobs.

One in five jobs now involve trade-related activities. This will grow as liberalised trade gives our producers, manufacturers and services providers better access to billions of consumers across the globe, not just the 24 million who call Australia home.

However, not everyone sees the value of free trade. Some see it, and the forces of globalisation, as a threat to their standard of living, rather than an opportunity to improve it.

When it comes to free trade, we often hear about the bad but not the good.

The nature of news means the factory closing gets more coverage than the one opening.

Chances are you heard about the Ford plant closing, but not the $800 million Boeing has invested in Australia and the 1200 people who work at their Port Melbourne facility.

You may have heard about Cubbie Station, but not heard that its purchase staved off bankruptcy, and has since seen millions of dollars invested in upgrades of water-saving infrastructure, a doubling of contractors, more workers, and of course, money put into the local economy supporting jobs and local businesses.

Key to attracting investment, jobs

The free trade agreements the Coalition concluded with the North Asian powerhouse economies of China, Japan and Korea are key to attracting investment and creating more local jobs.

The Weilong Grape Wine Company has said the China-Australia Free Trade Agreement is the reason it’s planning to build a new plant in Mildura.

This is a story being played out across the country.

Businesses large and small, rural and urban, are taking advantage of the preferential market access the FTAs offer Aussie businesses into the giant, growing markets of North Asia.

Australian Honey Products is building a new factory in Tasmania to meet the demand the trifecta of FTAs has created.

Owner Lindsay Bourke says the free trade agreements have been “wonderful” for  his business. “We know that we are going to grow and it’s enabled us to employ more people, more local people,”  he said.

It is the same story for NSW skincare manufacturer Cherub Rubs, who will have to double the size of their factory. “The free trade agreements with China and Korea really mean an expansion, which means new Australian jobs manufacturing high-quality products,” said Cherub CEO John Lamont.

It is easy to see why the three North Asian FTAs are forecast to create 7,900 jobs this year, according to modelling conducted by the Centre for International Economics.

Australia has a good story when it comes to free trade. In the past three years, net exports accounted for more than half of Australia’s GDP growth.

Exports remain central to sustaining growth and economic prosperity. Last year exports delivered $316 billion to our economy, representing around 19 per cent of GDP.

This underscores the importance of free trade and why it is a key element of the Turnbull Government’s national economic plan.

The Coalition is pursuing an ambitious trade agenda, and more free trade agreements, to ensure our economy keeps growing and creating new jobs.

On Friday I arrive in Peru for the Asia-Pacific Economic Cooperation (APEC) Ministerial Meeting.

Free trade will be at front of everyone’s mind.

With the future of the Trans-Pacific Partnership (TPP) looking grim, my ministerial counterparts and I will work to conclude a study on the Free Trade Area of the Asia-Pacific (FTAAP), which sets out agreed actions towards a future free trade zone.

We will also work to finalise a services road map, which will help grow Australian services exports in key markets including education, finance and logistics.

More to be done

The Coalition has achieved a lot when it comes to free trade, but there is more to do.

Momentum is building for concluding a free trade agreement with Indonesia, work towards launching free trade agreement negotiations with the European Union continues, we’ve established a working group with the United Kingdom that will scope out the parameters of a future ambitious and comprehensive Australia-UK FTA and we’re continuing to negotiate the Regional Comprehensive Economic Partnership (RCEP), which brings together 16 countries that account for almost half of the world’s population.

The Turnbull government will continue to pursue an ambitious free trade agenda to keep our economy growing and creating more jobs.

Meanwhile Opposition Leader Bill Shorten continues to build the case for Labor’s embrace of more protectionist policies, claiming he will learn the lessons of the US election where it featured heavily.

What Labor doesn’t say though is that by adopting a closed economy mindset, they will close off the investment and jobs flowing from free trade. They’re saying no to Boeing’s $800 million investment in Australia and the Cubbie Station improvements; they’re saying no to businesses like Cherub Rubs and Australian Honey Products building new factories and the many local jobs they will create.

Steven Ciobo is the Minister for Trade, Tourism and Investment

Obligatory Taylor Swift
What’s not to love about all this?

I really think I love Anglo-Saxons. This is going to be fun, isn’t it? 

When Mr. Ciobo spoke of ‘a working group with the United Kingdom that will scope out the parameters of a future ambitious and comprehensive Australia-UK FTA’, he was not joking. That is happening and it is likely going to be another window that the UK will have into the formation of both RCEP and FTAAP, even though technically the UK is not physically in the Indo-Asian region.

I wrote an article several days ago called ‘A view of Brexit from Asia: Britain as a Pacific trading power in the 21st century.’ I chose at that time not to mention the Australian or New Zealand interface at all, but that article’s main point should be viewed as being reinforced by the point I’ve presented in here now.

I have also written an article today called, ‘US Government to build American competitiveness atop socio-economic retrogression and misery.’ It’s crucial to understand that time is of the essence, since the Americans are at the present moment in relative disarray compared to the rest of us. The Americans have not yet tamed and pacified the various economic actors in their own country, they are still working on that, and they also have yet to form a coherent internationalist counter-narrative to the one that is being enunciated by the governments of Britain, Australia, New Zealand, Japan, South Korea, Taiwan, China, and so on.

Some of you may be mystified by that statement. What do I mean that the Americans don’t have a coherent ‘internationalist counter-narrative’? I mean that while they are capable of explaining and rationalising their own position as a narrowly ‘America first’ position in a way that is pleasing to Americans, they are not able to export that view to regular people anywhere else in a way that would induce any other European-demography country to comply with America’s geoeconomic interests.

After all, if the Alt-Right people are going to careen all over the internet essentially screaming, “put America first ahead of your own country’s interests or be accused of White genocide”, and alternately equally absurdly, “you’re an evil Russophobe who supports White genocide if you invested in BP instead of Exxon”, then they should not expect that they are going to win the sympathy of anyone who is neither American nor Russian.

I want to say to British people, to Australians, to New Zealanders, to Canadians, Commonwealth citizens in general, that you know, it’s been a long time since you’ve taken your own side. This coming phase is going to be a time when it will become possible to do precisely that.

The time is fast approaching when it will be possible to choose neither America nor Russia. You’ll be able to finally choose yourselves and your own geoeconomic interests, and you’ll be able to choose to trade and associate with whoever else in the world you want to trade and associate with.

Kumiko Oumae works in the defence and security sector in the UK. Her opinions here are entirely her own.


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