As the US China trade dispute continues, we take a look at the triggers for the tensions, what happens after the ceasefire and the implications for Australia’s economy.
Trade friction between the US and China may stem from a deeper rivalry between the two countries, with the US striving to protect its position as the world’s largest economy. This was evident during President Trump’s election campaign where he promoted a list of accomplishments for his first 100 days in office. Featured on the list was a pledge to “stand up to countries that cheat on trade.”1 Fast forward to today, and the two countries are locked in trade talks with each side wanting an outcome to be resolved in their best interests.
Taking a hard line on China – how the trade war started
President Trump commissioned the United States Trade Representative (USTR) Robert Lighthizer to produce a special report on China’s trade behaviour2. It is the view of some in the US that Lighthizer’s report set in motion the opening skirmish of the trade war in July 2018, when the US implemented its first China-specific tariffs, to which China retaliated with its own tariffs on US products3.
So far, the US has applied tariffs on US$250 billion worth of Chinese products, and is in the process of implementing tariffs on US$300 billion more.4 In turn, China has slapped tariffs on US$185 billion worth of US goods, and is threatening a range of “quantitative and qualitative” measures that would affect US businesses operating in China4. The US also put Chinese company Huawei on a national security blacklist in May, preventing US companies from selling products to them5.
Where are we now?
Tensions between the countries eased briefly when President Trump and his Chinese counterpart, Xi Jinping, met at the G20 summit meeting in Osaka in June 2019. The US announced that China had agreed to purchase US farm goods and, in return, the US would hold off on imposing additional tariffs and approve the sale of some non-sensitive products to Huawei6.
While negotiating teams met in Shanghai on 29 July 2019, discussions ended without further agreement with the view that neither country had fulfilled their ends of the G20 discussions. Negotiations are expected to continue in Washington in September7.
Since then, President Trump has threatened new tariffs on US$300 billion of Chinese goods, while China halted purchases of US crops, allowed the yuan to fall to its weakest level since 2008 on 5 August 20198 and announced new tariffs to be applied on US$75bn of US goods9.
What the US wants
It is expected that the US would like China to clarify what it will buy, by dates agreed between them. The US also wants China to fully list the companies it subsidises, in particular those offered by provincial and municipal governments. US negotiators are pressing their Chinese counterparts for concrete means to verify that China is meeting its promises, and that hurdles for US and other foreign firms operating in China will decrease10.
The ongoing trade war has begun to impact the growth of the US economy. The US Federal Reserve decreased the Federal Funds Rate on 31 July 2019 for the first time since 2008, noting the intention to “insure against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are currently having on the economy” including the ongoing uncertainty with China influencing business capital spend11.
US companies operating in Asia, such as Apple and Microsoft, have had to reassess their businesses and consider moving out of China to alternative locations12.
The US agricultural sector has been hard-hit by the ongoing trade war, and the US government announced a new aid package announced totalling US$16bn to be paid to farmers from mid-August 201913. US data found that agricultural exports value fell to US$4.3bn from US$6.2bn across the same six month period last year14.
China’s economy grew by 6.2% (annualised) in the second quarter of 2019, down from 6.4% in the first quarter of 2019, its slowest growth rate in 27 years15. Pressures stemming from a slowdown in global trade growth and the increasing impact of US trade sanctions were likely to have contributed to Chinese exports falling by 1.3% in June 2019 and imports falling by 7.3%, compared to the previous year 16,17.
China’s massive manufacturing sector contracted in December 2018 for the first time in 19 months18. It has continued to contract across 2019, with the exception of March, where improvements were seen off the back of relaxed financing requirements and temporary improvements in relationships between China and the US19,20.
In terms of the future, China also has several very big-ticket economic strategies in motion. Firstly, it’s ‘One Belt, One Road’ infrastructure plan21 which is a global development strategy adopted by the Chinese government involving development and investments in countries in Europe, Asia and Africa.
The second is the ‘Made in China 2025’ plan22, which is Beijing’s push to dominate high-tech industries in the next decade across 10 sectors: robotics, maritime equipment, new energy and energy-saving vehicles, aviation and aerospace equipment, railway transportation, energy, IT, agriculture, bio-pharmaceuticals and high-tech medical devices, and new materials..
There is also the great set-piece of the festivities planned for October, when China’s ruling party will celebrate the 70th anniversary of the establishment of the People’s Republic. It’s expected President Xi would not want this event over-shadowed by the economic turmoil that a prolonged trade war could bring.
How could Australia be affected?
China is Australia’s largest trading partner and responsible for 25.2% of the total two-way trade in 201823. Iron ore is a major export for Australia, with China being one of the primary importers. Its iron ore imports fell to 75.18 million tonnes in June 2019, the lowest import quantity since February 201624. China is both constraining supply from its less environmentally justifiable domestic supply sources, while simultaneously paying a premium for higher-quality Australian products, particularly iron ore and coal.25
Modelling prepared by KPMG Economics Australia26 suggests that the trade war could result in national income losses, and Australia’s GDP falling 0.3% over 5 years. These losses would extend to job losses and a decline in real wages.
The US is Australia’s third largest two-way trade partner and was responsible for 8.7% of total two-way trade in 201827. Although this is a smaller portion of overall trade when compared to China, Australia’s trade is still affected by the more protectionist stance of the US. This may be mitigated by the Australian government’s involvement in ongoing negotiations on the Regional Comprehensive Economic Partnership. This is a free trade agreement between the 10 countries of the Association of South East Asian Nations (ASEAN) and those with an existing free trade agreement with ASEAN countries28.
10. Refer to ‘Constructive talks bring US, China closer on trade,’ Lingling Wei, Wall Street Journal, republished in The Australian, 9 January 2018 – print only.
25. Refer to ‘Chinese exports decline as US trade war bites’ David Rogers, The Australian, 14 January 2019 – print only.
26. Trade wars there are no winners, KPMG Australia, refer to page 3: https://assets.kpmg/content/dam/kpmg/au/pdf/2018/trade-wars-no-winners.pdf
Information current as at 11 September 2019. This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac).
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