What did you do in the trade war, Scott? Not bloody much

The Morrison government’s supine position on Donald Trump’s war on the international trade system could do real long-term damage to an economy that heavily relies on a free global trade and open markets. Trump’s war on trade isn’t only confined to China — which is bad enough — but is expanding, like a rampant tumour, to any number of other markets.

Currently Trump is also attacking Japan and the EU, India and, late last week, Mexico, which is now being targeted with comprehensive tariffs because Trump is frustrated at his inability to get a win on his infamous border wall. Even Republicans and US businesses who normally grovel to Trump are appalled — perhaps it’s starting to dawn on Republicans that the President’s misuse of executive power under the fiction of national security will be precedent for the same misuse by a future Democrat president.

Morrison, invisible Treasurer Josh Frydenberg and Trade Minister Simon Birmingham have all gone missing in action as an increasingly erratic and unpredictable US President uses tariffs as a one-size-fits-all solution to any perceived domestic or international problem. Australia has readily fallen into line with the US war on Huawei (guilty of making the kind of surveillance-ready IT equipment for China that western governments like Australia’s want to force western IT companies to produce) and has stayed silent as Trump targets friend and foe alike with tariffs and sanctions.

Despite the commentary about how Trump has all the advantages with China in his trade face-off there, China has — unsurprisingly — refused to buckle and is now preparing a list of “unreliable” companies, countries and people that it will use to introduce sanctions of its own in the way the US has unilaterally sanctioned Iran, Russia, China and others. FedEx, the giant US freight forwarder, looks to be near the top of the list after a brawl with Huawei over diverted packages.

What’s happening here is a kind of analog to what Trump has done domestically in the US: the normalisation of irrational, self-harming and extreme behaviour that, whatever its short-term costs and benefits for the perpetrator, does long-term damage to the basic institutions, however flawed, that support our economic success.

Australia’s failure to say anything in defence of a rules-based free trade system while it is being subjected to ferocious attack only exacerbates the damage the undermining of that system will do to Australia in the long run.

Trump’s random lobbing of tariff bombs is worrying the Reserve Bank, which has been wondering about their impact on the global and Australian economies (the Productivity Commission had a look at what might happen to Australia in a trade war a couple of years ago). The question now is whether Trump’s trade policies start dragging the rest of the world towards a slowdown or worse.

The US economy is fading from the first quarter’s solid 3.1% (annual) growth; inflation is weak, 1.5% by the Fed’s preferred measure, not much more than Australia’s 1.3%. The price of key global oil futures is also falling, meaning after rising for the first four months of 2019, oil (and petrol prices) is heading lower at a time when central banks — and especially the Reserve Bank in Australia — were forecasting higher prices and higher inflation. 

AMP’s Chief Economist Shane Oliver (who was early to predict the RBA would be cutting rates this year, not raising them in 2018 and 2019), now also sees wage growth remaining soft in the coming year:

The minimum wage to rise 3% from July — but that’s less than last year’s 3.5% rise. So with around 20% of workforce (those on awards) getting the minimum wage rise it actually implies a 0.1% per annum fall in overall wages growth over the year ahead (i.e. from 2.3% year on year down to around 2.2% year on year) all else equal. Expect wages growth to remain soft! 

The combination of slower growth in the minimum wage, falling building approvals, soft credit growth, falling March quarter investment and likely only modestly rising capex in 2019-20 leave the RBA on track to cut rates on Tuesday by 0.25% with further cuts to follow.

Indeed, Oliver now sees the RBA cutting the cash rate to 0.5% by the middle of next year as the economy struggles to prevent a rise in unemployment — not the fall to 4.5% the RBA is hoping for.

Morrison was elected on a platform of doing nothing but mugging and smirking for the cameras. He’s likely to find that’s fine for a five-week election campaign but won’t cut it for running an economy reliant on trade.