President Trump has followed up his promise to save U.S. manufacturing jobs in the presidential campaign, with 25% tariff on steel and 10% tariff on aluminium slapped in May 2018, which sparked retaliation from key allies including the EU and Canada.
The protectionist approach escalated more recently. On 6thJuly, The U.S. imposed a 25% duty on $34 billion of Chinese imports, while China immediately responded with 25% tariffs on U.S. agriculture products and cars. The U.S is currently reviewing tariffs on another $16 billion worth of Chinse goods, and Trump last week has indicated that he may expand tariffs to nearly all Chinese imported goods.
It seems the trade war is now full-on and escalating quickly between the world’s two largest economies. So, what is the impact on Australian businesses?
Over the short-term, there will be limited impact on Australian businesses, as long as Australia is not directly targeted. Given Australia was exempted from the steel and aluminium tariffs and the fact that U.S. actually has a trade surplus with Australia, Australia is unlikely to be targeted by the U.S. anytime soon. Moreover, the largest amount of goods exported to U.S. are covered by the Australia-United States Free Trade Agreement. If we look at the financial market, it tells a similar story, with S&P 200 index at its 5-year high. It appears that the market is not worrying too much about the trade war.
In fact, Australia could stand to benefit from the trade war between the U.S. and China. The initial list from China targets US agriculture products, including soybeans, wines and meats. Australia is well placed to provide substitute for the demand.
The longer term impact of Trump’s trade policy on Australian businesses is more uncertain. It all depends on whether the current protectionism approach is used as a negotiation tool over trade or the Trump administration intends to implement it in the long run.
If parties cannot come back to the negotiation table and the trade dispute prolongs, it will eventually hit the economy of both sides, and slow down the global economic growth. It also brings further uncertainty around the globe. Businesses do not like uncertainty and will most likely cut back investments. For Australia, this likely means lower demand and price for its commodity exports. Minerals and fuels account for 45.5% of the total Australian exports in FY2017.
However, it is very likely that the U.S. will not burn down the current international trade system it led to establish. First, past experiences have revealed that tariff does more harm than good to the economy. It does not protect the industries it intends to and consumers eventually pay for the price. Second, there is a risk that an escalated trade war will start to weight on the strong performing U.S. economy, which will have negative impact on the upcoming mid-term election. Third, according to Deutsche bank, U.S. actually have a trade surplus of $1.4 trillion dollar when both direct trade and the sales of multinational companies are taken into account. It is in fact benefiting from globalization. Therefore, it is difficult to image the U.S. will adopt a full scale protectionism approach over the long run. It is more likely that Trump is using tariffs to negotiate better deal on trade and other things. If this is the case, the impact on Australian businesses is limited.
Dr Ronghong Huang, Lecturer in Finance at UQ Business School.