Will US - China tariff trade war impact Australian Economy?

Team Veye | 17-Jun-2019 Australian Economy

Australia faces uncertainty ahead after China defied US President Donald Trump over tariffs — further escalating an already alarming trade war. Meanwhile, the world is looking on nervously as the two enormous economies square-off. But amid it all could be an opportunity for Australia.


Vietnam has already emerged as the largest beneficiary of a diversion in trade flows as a result of the ongoing tariff fight between the U.S. and China. Other major beneficiaries from the trade war are Taiwan, Chile, Malaysia and Argentina.


“This is very, very complicated,” says senior lecturer in American politics and foreign policy at the University of Sydney Dr David Smith. “There are certainly ways in which a tariff war could hurt Australia. There are also ways in which a trade deal could hurt Australia. And there are some scenarios in which it’s not going to affect us that much, especially if we’ve got a fairly predictable idea of what’s going to happen”.


He says the biggest danger is that both countries are now raising tariffs beyond what had been anticipated. “They’ve raised them beyond levels for which there’s been very much economic modelling, so it’s hard to tell exactly what the impact will be. But the biggest danger is a drop in global GDP”. And the global economy, while growing, has already been slowing. “There are fears this could accelerate that,” he says.


“There are concerns about if the US does a deal with China that greatly increases its exports, then Australia could actually lose out because China might — as part of some deal — start buying goods from the US that it was previously buying from other places, including us.” However, such a deal is looking increasingly unlikely.


“You could say the whole long term picture, for the foreseeable future, is — regardless of whether we get a deal now — a future of constant tit-for-tat between the US and China around tariffs. If that’s the case, Australia can probably find a way to deal with it”.


As the performance of the stock and currency markets shows, the US-China trade war is profoundly affecting the globe. The trade war has proven to be a real challenge due to the imposition of tariffs by the US and the retaliation by China over an increasing amount of imports. Currently, the discussion focuses mostly on the US and China, however, the trade war will undoubtedly affect other parts of the world such as Australia, which is a trading partner of both the US and China.


The impact of the US-China trade war on Australia needs to be analysed on a case-by-case basis. In the short term, it may not be as bad for some Australian exports such as agricultural products. However the US-China trade agreement will mean more imports of US goods by China, such as beef and wine. This will negatively affect the exports of Australian products like agricultural products and liquefied natural gas. In other words, Australia may reap fewer benefits from its free trade agreements with the US and China, which provide it with preferential market access in goods and services.


In the long term, the trade war is not necessarily good news. The US has threatened to pull out of the World Trade Organization (WTO) and has blocked judicial appointments at the WTO’s Appellate Body, which is unprecedented. This marginalising of the WTO and the multilateral trading system means that the WTO can’t settle global trade disputes. This will be harmful for the predictability of the global trading system and may lead to the rise of protectionism, which isn’t good for any country.


Simply put, the trade war may affect the prospect of the world economy and slow down economic growth. This may affect the demands for Australian exports of trade and investment. It may also affect the global value chain as exporters to the US may reconsider how to allocate their businesses in an unstable and unpredictable context. The future of the trade war depends on the economic performance of the US and China.


Two of Australia's largest exports - the resources and education sectors - are particularly exposed, with a falling Chinese currency weakening its buying power, discouraging Chinese parents from sending their children to Australian universities, and a slowing economy reducing demand for iron ore and coal.


A best-case scenario modelled by KPMG, where tariffs would not escalate beyond the current threats from the White House, would see Australia’s GDP projected to be 0.3 per cent lower by 2022. This represents a $36 billion drop in economic growth over five years.


"It impacts would last almost a decade, with an estimated loss of national income of nearly half-a-trillion dollars over 10 years, or the equivalent of losing just over 40 per cent of last year’s household disposable income," KPMG economist Brendan Rynne found.


"Job losses in Australia would also be significant under such a scenario, falling almost 60,000, and pushing real wages down by about $16 per week for the average worker."


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