Geopolitics and doing business in Hong Kong and China.
Unless you’ve been living under a rock, you’re probably aware of the US-China trade war.
Over the past year, the world’s two largest economies have imposed tariffs on billions of dollars worth of one another’s goods.
US President Donald Trump has long accused China of unfair trading practices and intellectual property theft.
In China, there is a perception that the US is trying to curb its rise.
Negotiations are continuing but have proven difficult, and the two sides remain far apart on issues including how to roll back tariffs and enforce a deal.
The imposition of tariffs from China and the US has made business nervous and increased stock market volatility around the world. The uncertainty is hurting business confidence and weighing on the global economy.
What does the US-China trade war mean for Australia?
In the long term, trade disputes are not good for Australia. We are a small, open economy and trade wars hit global growth and confidence.
But the medium-term outlook doesn’t look too bad.
According to the Reserve Bank of Australia, the impact of the US-China trade war on the Australian economy is likely to be “small”. In July, the bank predicted that the conflict would only shave about 0.20 of a percentage point off economic growth in 2019 and 2020.
Where currency is concerned, the fact that the trade war has driven the $AUD lower is good for Australian businesses selling internationally. because it reduces the cost of goods to overseas customers.
When it comes to specific sectors, there are winners and losers.
The wool industry has definitely felt the effects of the trade war. After the US increased tariffs on Chinese clothing products in August, Australian wool prices plunged almost 20%, as Chinese mills closed their order books.
Australian manufacturers who sell to the US and use Chinese inputs will also will also feel the pinch, unless they can demonstrate that the products meet the test as being essentially “Australian” products., products which include parts from China automatically attract higher tariffs than they did just a few months ago.
But there’s also some evidence that the trade war could benefit some sectors of the Australian economy.
Energy and Minerals
For example, China is increasingly reliant on Australian energy and mineral exports, which are some of our biggest commodity exports. Figures released recently show Australia supplied 46 per cent of China’s LNG imports in the year to June 2019, more than any other country and up from the previous year.
Demand for Australian iron ore has also spiked. Australia supplied a record 74 per cent of China’s imported iron ore in June, according to trade figures, almost double the monthly average from 10 years ago.
EY recently put together some modelling that suggested that in the short-term the trade war could deliver Australian farmers a bonus too.
Last financial year, Australia exported $12 billion worth of agricultural goods to China, much of which was beef, wine and wheat. The US is one of our biggest agricultural competitors in the Chinese market.
China has signalled it will block its state-owned enterprises from taking US farm products in retaliation for the Trump administration’s tariff plans.
If this goes ahead Australia would benefit from an extra $1 billion in farm exports that would generate 3900 full-time jobs in Australian agriculture and another 1000 jobs in the wider Australian economy. That benefit would probably be larger if the Australian dollar slipped further, making local goods even more competitive in the China market.
This wouldn’t be the first time that Australian farmers have benefited from a trade disruption. In the year after Japan banned US beef imports in 2003 due to a single case of mad cow disease, Australian exports to Japan went up by more than 40 per cent. Another mad cow disease scare three years later resulted in a surge of high quality Australian beef into Japan. Both years remain the peak for Australian beef exports to Japan this century.
In summary, the US-China trade war isn’t great news for Australian business, but so far, it’s not a disaster either.