New world order: stuck in the middle with Trump

Results of the research are not yet available but a top-of-the-head calculation by NFF researchers strongly suggests disruption to global trade flows will not be good for the agribusiness sector more broadly. 

" US protectionism will have material consequences for the Australian economy.”

Allied with that are concerns about the impact on a global economy of a deepening trade and geopolitical conflict between the world’s two largest economies at a time when challenges abound.

China’s own economy is slowing as the country seeks to make a difficult transition from a credit to a demand-driven economic model.

On his latest trip to Beijing US Secretary of State Mike Pompeo was subjected to Chinese displeasure over an escalation in tensions across a range of issues from trade to Taiwan.

At a joint media event China’s Foreign Minister Wang Yi accused the US of having “constantly escalated trade frictions’’ and warned if Washington persists it would harm cooperation on issues like North Korea.

These testy interactions do not augur well for a forthcoming encounter between presidents Donald Trump and Xi Jinping at a G20 summit in Buenos Aires at the end of November.

Vulnerable

Australia is particularly vulnerable to a China slowdown. A weakening yuan would reduce Chinese buying power for Australian commodities, including agricultural products.

China’s currency is down about 10 per cent against the US dollar this year in any case.

Moreover, an increasingly important services sector would be affected.

The latest Department of Agriculture (ABARE) commodities overview echoes these concerns.

“Many countries in Asia have close economic ties to China,” it said. “A sharp economic downturn in China resulting from any ramp up in the coverage or the rate of existing tariffs by China and the United States could have significant implications for income growth in the region.

“Income shocks in Asia are likely to have a greater effect on consumption choices in emerging and developing economies than in advanced economies. Approximately 75 per cent of agricultural goods exported to Asia are destined for low- and middle-income countries.’’

Australia’s exports of goods and services to China in 2017 accounted for about one-third of the total Australian exports. China ranked first as an export destination for both merchandise trade and services.

A KPMG study reports if the US holds its tariff increases on Chinese imports at present levels of between 10 per cent and 25 per cent, Australian GDP growth would be 0.3 per cent lower by 2022. This would represent a $A36 billion drop in economic growth over five years.

In other words, US protectionism will have material consequences for the Australian economy.

Out of concern over implications for Australian business of disruptions to a trading environment, the country’s peak industry bodies, including the NFF, commissioned a study of the benefit of continued Asia-Pacific Trade Integration without American participation.

The study, conducted by American academic economists, found Australia would derive real benefits from an expansion of the 11-member Comprehensive and Progressive Trans-Pacific Partnership (renamed from the Trans Pacific Partnership) and the 16-member Regional Comprehensive Economic Partnership (RCEP).

“Deeper integration through regional agreements will generate additional trade and output gains in Australia’s sector of comparative advantage, including agriculture, mining, early stage processing activities related to these sectors and services,’’ the report said.

It said the new Asia-Pacific agreement would keep trade liberalisation on the global agenda and “likely attract further cooperation from large partners, including Europe”.

“Eventually, even the United States might find that it is losing out and change its mind about joining these larger trade blocs, with attendant benefits for Australia’s economy,’’ the economists concluded.

Contagion

In the past week the UK, post-Brexit, indicated it would be interested in joining the CPTPP.

Among concerns of the government and the agricultural sector, particularly, is rising US protectionism - after years of painstaking efforts to lower trade barriers - will be contagious.

Little noticed in Australian media reporting is other countries have followed America in adjusting tariff levels to protect local industries.

India, for example, has been ratcheting up tariff and non-tariff measures at the expense of Australian farmers. It has imposed a 30 percent tariff on imports of chickpeas and lentils, a 50 per cent tariff on field peas, and doubled the tariff on wheat to 20 per cent.

At the same time, it has increased subsidies on mung beans and yellow peas and sugar. This latter measure is adding to pressure on sugar prices at a time when Australian sugar producers are crying out for government support.

At risk of derailing free-trade negotiations which have been limping along in any case, Australia is considering a challenge to the World Trade Organisation to test India’s adherence to global trading rules.

As a leading member of the Cairns Group of agriculture producing countries – the group’s membership accounts for one-third of agricultural exports – Australia has long been at the forefront of efforts to break down tariff and non-tariff barriers for agriculture.

Farm leaders are warning an environment in which protectionism is on the rise will serve no-one’s interests, even if short-term opportunities might be created.

“In the short-term, some Australian farmers are probably feeling we could benefit from some of the sanctions that are being applied  because the US is one of our biggest competitors into some of the markets,’’ said NFF president Fiona Simson - who also chairs the Cairns Group Farm Leaders.

“However, we think it’s a very slippery slide and, if the trade wars were to escalate, then Australia could well find itself caught in the middle of something that is going to be detrimental rather than offer anything positive to Australian farmers,’’  she said.

In July NFF Chief Executive Tony Mahar called on the Australian government to register its disapproval over the Trump administration’s decision to provide $US12 billion in subsidies to American farmers to compensate for China’s retaliatory tariffs on a range of agricultural products, including soybeans and beef.

Mahar described US tariffs as “reckless actions’’ detrimental to a global trading system more generally.

“Our fear is that this is deepening the potential for a global trade war that will hurt producers and consumers alike,’’ he said.

Those concerns were raised at AUSMIN (Australian-US ministerial) talks mid-year between Australian and American official but to little avail.

Since the first round of tariffs were imposed in April this year the US has continued to ramp up pressure on China in what is shaping as a three-phase process which will account for about U$500 billion in US imports from China.

“We’ve taxed them $US50 billion – that’s on technology. Now, we’ve added another $US200 billion. And I hate to say this but behind that, there’s another $US267 billion to go on short notice,’’ Trump said on September 7.

US tariffs initially were imposed on intermediate and capital goods like steel and aluminium but this is being extended to items that will hurt the American consumer. China’s retaliatory tariffs have included car imports, as well as soybeans, pork, fruit, nuts and other agricultural products.

On the face of it, constraints on US market access to China might create opportunities for Australian agricultural exporters of sorghum and beef but counterbalancing these potential advantages will be the capacity of subsidised American farmers to sell into a global market more generally.

In the view of NFF researchers this will not be a zero sum game.

Prise

All this works against years of campaigning by Australian governments and farm groups to prise open the American market.

Limited progress has been made under an Australian-US Free Trade Agreement but gains have been hard-won against an entrenched American farm lobby.

What cannot be argued is Australia has no choice but to press on with its attempts to build a regional trade infrastructure - with or without American involvement.

As the US academic study commissioned by Australian business concluded: “participation in these agreements (CPTPP and RCEP) would represent powerful signal for international economic integration in the face of the rise of protectionism under the inward-looking policies of President Trump.”

“It would strengthen the global coalition of countries that support the rules-based system, including institutions such as the World Trade Organisation and regional cooperation forums in the Asia-Pacific,” the study found.

“Australia’s interests, as a sophisticated mid-sized economy, argue for supply chains that connect seamlessly.’’

Tony Walker is a former Financial Times correspondent in China and a bluenotes contributor