US-China Trade War – where to next?

As the US-China trade war continues, we take a look at the triggers for the tensions, what happens after the ceasefire and the implications for Australia’s economy.

The US-China trade war 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.

US-China trade war takes hard line on China

The US-China trade war began when President Trump commissioned the United States Trade Representative (USTR) Robert Lighthizer to produce a special report on China’s trade behaviour.2 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 products.

So far, the US has applied tariffs on US$250 billion (AU$352 billion) worth of Chinese products, and has threatened tariffs on US$267 billion (AU$376 billion) more.3 In turn, China has slapped tariffs on US$110 billion (AU$155 billion) worth of US goods, and is threatening a range of “quantitative and qualitative” measures that would affect US businesses operating in China.3

Where is the US-China trade war now – 90 day ceasefire 

After a dinner meeting between President Trump and his Chinese counterpart, Xi Jinping, at the G20 summit meeting in Argentina in December 2018, the leaders agreed to a 90-day ceasefire in the US-China trade war, which expires on March 1. Without further agreements, at 12:01 AM on March 2, tariffs on US$200 billion (AU$278 billion) of Chinese goods are expected jump from 10% to 25%.4

Of course, the two parties are still talking. Negotiating teams met in Beijing early in January, and China’s Vice-Premier Liu He led a delegation to Washington on January 30-31.

What the US wants from the US-China trade war

It is expected that the US would like China to be specific about what it will buy, by specific dates. The US also wants China to list fully its subsidies, in particular those offered by provincial and municipal governments. US negotiators are pressing their Chinese counterparts for concrete means of verifying that China is meeting its promises, and that hurdles for US and other foreign firms operating in China actually decrease.5

And China...

For its part, it’s believed that China does want to end the US-China trade war on favourable terms. Particularly as the Chinese economy needs this resolution in light of its slowing economy. China’s economy grew by 6.6% in 2018, down from 6.8% in 2017, to its slowest growth rate since 1990.6 Its exports were down by 4.4% in 20187, the worst result since 2016 in US$ terms – likely due to pressures stemming from a slowdown in global trade growth and the increasing impact of US trade sanctions.

China’s massive manufacturing sector also contracted in December 2018 for the first time in 19 months.8 And although China is on track to surpass the US in retail sales in 2019 for the first time9, a continuation of the trade war may impact these expectations.

In terms of the future, China also has several very big-ticket economic strategies in motion. Firstly, it’s ‘One Belt, One Road’ infrastructure plan10 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’ plan11, which is Beijing’s push to dominate high-tech industries in the next decade across ten sectors: robotics, maritime equipment, new energy and energy-saving vehicles, aviation and aerospace equipment, railway transportation, energy, IT, agriculture, new materials, and bio-pharmaceuticals and high-tech medical devices.

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 understood 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 from the US-China trade war?

China’s trade data in January showed decreases in imports and exports, the first fall in iron ore imports in eight years, and the biggest fall in total imports from Australia since mid-2016.12 The country 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.13

Modelling prepared by KPMG Economics Australia13 suggests an escalation in the US-China trade war could be extremely serious for Australia. The impacts could last almost a decade, with an estimated loss of national income of nearly half-a-trillion dollars over 10 years, or the equivalent of losing just over 40% of last year’s household disposable income. Job losses in Australia would also be significant under such a scenario, falling almost 60,000, and pushing real wages down by about $16 per week for the average worker.

In a limited US-China trade war, where the tariff increases are restricted to those already announced, KPMG’s modelling suggests Australia’s GDP would be about 0.3% lower after five years and we would incur a real GDP loss of A$36 billion over a decade. This is mostly due to the reliance of Australian commodities as intermediate inputs in the production process in China, and the likely loss of services exports in education and tourism to China.14
5 Refer to ‘Constructive talks bring US, China closer on trade,’ Lingling Wei, Wall Street Journal, republished in The Australian, 9 January 2018 – print only.
12 Refer to ‘Chinese exports decline as US trade war bites’ David Rogers, The Australian, 14 January 2019 – print only.
13 Rio and BHP to win from China’s blue-sky wars
14 Trade wars there are no winners, KPMG Australia, refer to page 3:

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Information current as at 6 February 2019. This article is produced by BT Financial Advice (BTFA). BTFA is a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian Credit Licence 233714 (Westpac).

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