New world order: on the precipice of a trade war

In Canberra officials will be assessing the fallout for Australian exporters of what may well prove the beginning of a severely disrupted global trading environment, with ripples already spreading outwards from Washington to neighboring Canada and Mexico - and now on to Europe and China.

"No one in Canberra pretends Australia would be left unscathed by a worsening trade skirmish.”

US President Donald Trump is making good on his threats to counter what he describes as unfair trading practices by selectively targeting imports from countries and regions with the largest trade surpluses with America. This includes, principally, the European Union, China and Canada.

Earlier in 2018 during the imposition of steel and aluminum tariffs on ‘national security’ grounds, the United States’ good friend Australia was spared – for the time being.

But no one in Canberra – or elsewhere around the trading world - pretends nations would be left unscathed by a worsening trade skirmish.

Consequences

Analyst views about potential fallout from any trade disruption are mixed. Forecasts range from a relatively mild impact of limited tariff measures announced thus far to more serious consequences if the US were to impose a 10 per cent tariff across the board fully passed on to consumers.

Modelling by Pictet Asset Management in London reckons this would tip the global economy into stagflation and knock 2.5 per cent off corporate earnings globally.

In our own Asia-Pacific region the most vulnerable economies, according to analysis by the Singapore-based DBS, are those of South Korea, Malaysia, Taiwan and Singapore. These would be worst affected by interruptions to global supply chains arising from disruption to US-China trade.

A Reuters report quoting OECD data - which breaks down the value-added embodied in Chinese exports by its source country - shows Taiwan as the most at-risk country in Asia with more than 8 per cent of its gross domestic product tied up in this exposure.

This is followed by Malaysia at 6 per cent, South Korea, Hong Kong and Singapore at 4 per cent to 5 per cent and Australia, Japan and Indonesia at 2 per cent.  

What is undeniable is any disruption to global trade will affect growth, not least because a vast proportion of goods traded these days are linked to global value chains.

As things stand, it would be an exaggeration to describe initial skirmishing as a ‘trade war’ per se, however interruptions to global supply chains, disruptions to domestic markets and, perhaps most critically, diminishing confidence in American global leadership  threatens to develop a life of its own.

Concerns about America’s continued engagement with the World Trade Organisation are legitimate given noises emanating from the White House, which could be interpreted as threats to suspend membership.

All this comes as Canberra embarks on what will arguably prove to be its most important bilateral trading and investment agreement in complex negotiations with the EU.

These negotiations were initiated formally in Canberra on June 18 by Australian Prime Minister Malcolm Turnbull, Trade Minister Steve Ciobo and EU Commissioner for Trade Cecilia Malmstrom.

It is hard to overstate the importance of these negotiations to an Australian economy, which has had patchy access to the European market - to say the least - since Britain’s Harold Macmillan announced in 1961 his country was joining the European Economic Community, later the EU.

At the time Australian agricultural exporters, principally dairy producers, believed the end of the world was upon them.

Now, if highly complex negotiations can be concluded with an EU representing 28 countries, Australian exporters of goods and services will have preferential access to a market of a half a billion people with the second largest economy in the world ($US19.4 trillion in 2017) behind China and ahead of the US.

Those negotiations began in Brussels late last week.

FDI

The EU is the world’s third-largest merchandise importer and second largest merchandise exporter. It has the largest stock of foreign direct investment (FDI) abroad and is the world’s largest host of foreign direct investment.

As a bloc, it is Australia’s largest source of foreign investment, worth $A1.1 trillion in 2017, and foreign direct investment valued at $A188.7 billion. In 2017, Australia’s stock of investment in the EU was $A612.1 billion, with FDI of $A117.8 billion.

These are big numbers. The EU is the second largest market for outward Australian investment.

In 2017, Australia’s merchandise trade with the EU was worth $A17.3 billion and trade in services $A11.6. Two-way trade is heavily in the EU’s favor.

All of this provides a foundation for a much-expanded trading and investment partnership at a time when uncertainties about US policy and leadership and unsteadiness with the UK’s exit from the EU make it all the more important for Australia to expands its options.

As things stand, the EU has higher tariffs than Australia on many industrial goods, including tariffs of up to 12 per cent on minerals and metals. Beef and sheep meat quotas into the EU are highly restrictive with Australian beef exporters limited to 0.2 per cent of European beef consumption under both a country-specific quota and shared access to a global grain-fed beef quota.

In the case of sheep, the EU quota limits Australian exports to 2 per cent of total EU sheep meat consumption.

Clearly, an Australia-EU free trade agreement in which restrictions were loosened would put a rocket under beef and sheep exports to the EU bloc (including the United Kingdom set to depart in December, 2020).

Australia is initiating separate free trade agreement negotiations with the UK to be put in place after it exits the EU, if in fact the departure comes to pass.

Regime

A useful article in The West Australian newspaper in July spelled out the potential for sheep producers in the event the Europeans put aside what is a highly restrictive import regime.

“The launch of FTA negotiations with the EU provides significant opportunity to revisit Australia’s red meat access to the European market for the first time in over 40 years,’’ Jason Strong, chair of the Australia-EU Red Meat Market Access Task Force told the newspaper.

Clearly, a more open European market will be of immense benefit to Australian business, more or less across the board, including services.

Those negotiations will proceed even as the world grapples with a disrupted trading environment which shows little sign of settling down.

The US announcement over the weekend that it would impose tariffs of 25 per cent on $US34 billion worth of Chinese goods, including agricultural equipment and aircraft parts, to be followed by an additional $US16 billion, hardly augurs well for an early resolution of the dispute.

On top of this Trump has threatened to extend escalating tariffs to $US450 billion worth of Chinese imports. This number approximates the value of goods imported from China in 2017.

In retaliation, China announced it would impose levies on imports from the US of soybeans, automobiles and lobsters. Soybeans imports will carry a tariff of 28 per cent of value compared with zero for other nations.

In its response to increases in US tariffs China is following the EU and Canada. These have put in place retaliatory tariffs on items such as Harley Davidson motorcycles in the case of the EU.

But it is the China trade upheaval that threatens to be the most disruptive given the greater percentage of companies reliant on global supply chains in which the Chinese are players.

What is particularly concerning for the global trading community - apart from threats to the stability, even survival of the World Trade Organisation - is a trade crisis between the US and China appears to be deepening without a commitment for either to compromise.

No trade talks are scheduled at this stage as both sides edge closer to something worse than a trade skirmish.

Tony Walker is a vice chancellor’s fellow at La Trobe University and a former China correspondent for the Financial Times