ASPI - The Strategist, ‘Would
a US–China trade war pay dividends to Australia?’, 09 Mar
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
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
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
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
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
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
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
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
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
What’s not to love about all this?
I really think I love Anglo-Saxons. This is going to be fun,
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
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
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.