‘Wrong place at the wrong time’: how the US-China trade war is putting the squeeze on Australia | Business
When Canberra’s finest strategic thinkers released a white paper in 2012 about Australia’s place in the Asia–Pacific region, the country’s choices seemed obvious. There was even a suggestion that everything was written in the stars. Australia, the paper said, was in the “right place at the right time” to take advantage of the massive social and economic changes sweeping the continent to the north, led by China. Relations with the US would remain important but there was no doubt where the future lay.
Seven years on, things are starting to look much more complicated. As Scott Morrison sits down to a state dinner in the White House on Saturday night he has, in the words of one expert, a lot of hard decisions to make.
Donald Trump’s trade war with China is threatening to dismantle the rules-based global economy from which Australia has prospered so handsomely, and the prime minister will be eager for the president to seek a compromise with Beijing.
More alarmingly for Morrison, however, is that the American political establishment is in rare unity about China, with bipartisan support for tough action on trade, intellectual property and defence. Australia risks being wedged into a corner and forced to choose between its most important strategic ally, the US, and its most important trading partner, China. It might come down to a choice between democracy and profits.
Andrew Walter, professor of international relations at the University of Melbourne, says the short-term impact of the trade war is not much to worry about for Australia. But the longer-term questions over the strategic position are much more serious.
“Looking back to the 2012 white paper you could say that Australia is now in the wrong place at the wrong time with respect to how it balances its economic dependence on China with its strategic dependence on the US,” he says.
“If US-China relations continue to deteriorate – and I’m not optimistic about the situation – it puts Australia in a very difficult position in the longer term. How long can Australia stay out of contested island disputes? And how long can it resist pressure on trade policy or education? China has shown that it can be quite brutal over perceived slights. The optimism of 2011 is over. Australia has some hard decisions to make now.”
When the trade dispute began 18 months ago over tariffs on steel and aluminium, it did not appear to be especially intractable. But since then Trump has consistently upped the ante to the point where he has signalled that tariffs will be placed on nearly all Chinese imports into the US and he has even ordered US firms to start getting out of China. Beijing has responded with tit-for-tat levies on US exports, especially food.
Even then, the trade dispute has not been bad for Australia – so far. The hugely valuable export to China of industrial commodities such as iron ore and coal – the basis for Josh Frydenburg’s forthcoming budget surplus – has continued. Some markets have even been boosted. Exports of liquified natural gas have rocketed thanks to 25% tariffs on US exports to China.
A report by the Department of Agriculture noted this week that although the trade war has led to weaker growth in China, which might mean reduced demand for some Australian products, it nevertheless presents “opportunities” for the agriculture sector.
For example, there are more Chinese buyers for Australian cotton, fruit and nuts since tariffs were placed on US produce. The value of almond exports to China increased by 107% in 2018–19. On the downside, Chinese tariffs also mean US produce such as canola oil, once destined for China, is now looking for new buyers and competing with Australian exports to Europe. The same thing is happening with Australian beef exports to Japan.
The Australian economy could also benefit if a similar pattern pattern were to be repeated in service industries. Education – in the form of Chinese students coming to study – is Australia’s fourth-most valuable export after coal, iron ore and LNG. If the political situation between the US and China continues to deteriorate, Beijing may encourage students to steer clear of US colleges and instead opt for an Australian education. Ditto for tourism, although the number of Chinese visitors to Australia has grown more slowly than at any time since the GFC in the past year.
The current weakness of the Australian dollar – a side effect of the trade war as the US dollar has risen in the past 18 months – can also be seen as a strength.
The Aussie hit a 10-year low this year but that has helped soften the blow of falling demand for Australian commodities in some markets. Many of Australia’s biggest exports, such as iron ore and wheat, are priced in US dollars, so their value has increased as the Aussie has tumbled. The Australian dollar is seen on foreign exchange markets as a kind of proxy for the Chinese economy. When the latter looks as though it’s struggling a bit, the Aussie takes a hit too because investors think Chinese demand for commodities will fall.
Ben Udy of the consultancy Capital Economics says: “Australia has balanced the political relationship between the US and China reasonably well. Both sides are not unhappy with Australia, so if China does do anything on education it is likely to advise people not to study in the US and not likely to advise against going to Australia.”
But it is important to keep an eye on the bigger picture.
Crucially, China’s economy was already slowing down before the trade war and the longer-term consequence for Australia will be significant. “We expect the Chinese economy to slow further,” says Udy, “and the impact on the Chinese construction sector will be marked so iron ore and coal will suffer a real hit.”
At the same time, concerns that China may not be a benign partner for Australia have increased amid fears throughout western capitals that Beijing is using its economic might as a Trojan horse. The US has put pressure on allies such as Australia and the UK not to hand the Chinese technology company Huawei any contracts for systems infrastructure over fears that the hardware could be used for espionage.
The financial markets have so far ticked along without any major crisis since the trade war exposed the widening fault lines between the superpowers. The US and China will resume talks next month, keeping hopes of a deal alive. But not everyone thinks it will work out.
Damien Klassen, of the investment company Nucleus Wealth, believes the status quo that has existed for 30 years is breaking up.
“The big issue is whether you believe a cosmetic solution is going to be enough to do a deal or whether there are deeper structural issues – we are in the latter camp. There may be a cosmetic deal but the underlying structural issues have been laid bare … multinationals have started a decade-long process to take China out of the supply chain.
“Australia has also been managing a delicate political process, how to profit from China by selling commodities but maintain a close relationship with the rest of the democratic world. We will likely be forced to choose one or the other. My expectation is that Australia will choose democracy over profits – but there are likely to be plenty of vested interests urging the opposite.
“We’re at a point where we have to decide who are we going to side with.”