Australia needs to prepare for the trade war or end up a casualty

Whatever the outcome of the building trade war between the US and China, Australia's economy will be affected dramatically — for better or worse.

This just got big. The burgeoning trade war between China and the US was mostly gesturing until now — a few tens of billions worth of tariffs being chucked round. But Donald Trump has now taken it to a new level.

Trump this week announced tariffs on $200 billion of goods and pledged a further $267 billion worth if China dared retaliate. China, of course, retaliated. Sinophobic agent of chaos “Sloppy” Steve Bannon must about now be experiencing a great feeling of warmth. Which should send a chill through us all.

It is time for Australia to figure out how it will deal with this. Australia’s economy is at risk — although there could also be surprising bonuses for some. The risk of a trade war is that it makes the global economy weaker, which could hurt ours. The Reserve Bank mentions trade war risks all the time due to their seriousness — in its most recent monetary policy meeting minutes, these risks are the first ones mentioned.

[Labor’s incoherent trade policy evident from TPP and China-US tariff war]

Global trade sustains us. It’s like we are reef fish and global trade is the ocean current that brings us fresh water and life-sustaining nutrients. We individually may feed on the reef that is the Australian economy, but ultimately the ecosystem in which we survive is much broader. KPMG modelling released to the media suggests the trade war could wipe billions off Australia’s economy. Interrupting the currents of global trade is a bad idea.

Breaking the rules

Tariff escalation drama has been a recurring and harmful part of history. To avoid the cost of these intermittent fisticuffs, the world painstakingly developed a global rules-based regime — the World Trade Organisation.

If civilisation is the progress of rules-based systems that prevent selfish and ultimately self-destructive fights, then the WTO represents the civilisation of trade. And Trump has undermined it dramatically. Trump wants to remove the trade cop in the same way the most powerful street gang would like police gone from its neighbourhood: for the most powerful actors, rules are an inhibitor, not a protector.

Does it sound dry when someone exhorts us to protect “a rules-based trading system” as Frances Adamson, the secretary of DFAT, did this week? What it means for a medium-sized country is avoiding a world dominated by a bully that takes its boot off our neck only when it suits them. That bully could be the US, but it could equally be China, on whom we depend far more.

The most powerful country in the world can always do without the rules-based regime, for a time. For the rest of us it helps.

The silver lining

While the macro-economic impact is likely to be negative, tariffs on Chinese products could make Australian exports fly off the shelves in the US. This could be a big opportunity for some Aussie businesses.

For example, on the very long list of Chinese products that will be hit by Trump’s tariffs is this: “842.19.00 Dishwashing machines other than of the household type“. An Australian company — like Rhima, which makes and sells industrial dishwashers for the hospitality and medical industries — could step in to fill the gap.

We don’t know if companies like Rhima will grab market share in the world’s biggest economy, but with such a long list of Chinese products under pressure, there is little doubt some Australian companies will make hay. (“8433.30.00 Hay making machinery other than mowers” is on the US tariff list, so Australia’s makers of hay-makers could find themselves in this category.)

Aussie manufacturers might find themselves under a different type of pressure though. If Chinese dishwashers are harder to sell in the US, they might end up here instead. Exports could be diverted to our shores and if the Chinese companies have great surplus, they could be very cheap. Could Rhima compete with a flood of cheap imports? It is hard to predict.

Whether your own risk is to the upside or the downside, it’s worth paying attention to this trade war. The tumult Trump is letting loose is severe enough to change the systems we depend on dramatically.