Implication of the Trade War on the Australian Economy

PART A: IMPLICATION OF THE TRADE WAR ON THE AUSTRALIAN ECONOMY

China is Australia’s principal trading partner accounting for 29 per cent of exports, particularly commodity metals such as iron ores. On the other hand, the US accounts for around 6.8 per cent according to the central bank. A full blown trade war between Australia’s main trading partners would create devastating long term ripples throughout not only Australia but also in the global financial markets.

President Trump’s introducing more tariffs on US imports, recently a 10 per cent tax on $US200 billion which might rise to 25 percent in January 2019, is forcing China to retaliate tit-for-tat. Following this announcement, the local S&P/ASX 200 fell by 0.4 per cent on Tuesday 18th September 2018 demonstrating investor’s loss of confidence amidst trade tensions.

According to OECD data, Chinese exports accounts for around 2 per cent of Australian GDP and KPMG estimated a slowdown of 0.5 per cent over 4 years with tariffs increasing to 25 per cent costing Australia approximately $36 billion over the next 10 years. This will ultimately reduce consumption by both the US and China which will negatively impact on Australia’s export market on which 20 per cent of Australian jobs depended on according to Trade and Investment Minister Simon Birmingham. With the US trade borders tightening, below cost Chinese goods might be diverted into the Australian effectively affecting demand and consumption of domestic products forcing the Morrison government to adopt stricter anti-dumping laws to protect the local industry. An internal RBA report dated back in March stated that the Australian economy would decline by 2.5 per cent with unemployment rate rising 0.25 per cent with RBA looking at cutting back cash rate to 1 per cent to counterbalance. The value of the Australian dollar might also take a plunge but central bankers speculate that this might make local exports more attractive and hoping domestic stimulus will offset the effects of an export shock.

China as retribution will also tighten the already strict capital outflows policies the country has in place further hindering the growth of Australian sectors such as the real estate market which is already experiencing a slowdown. The impact on the US and China will indirectly affect Australia through a substantial loss in direct investment which represents almost 30 per cent of the current stock. The downshift in momentum coupled with the local political uncertainty offers meek prospect for the development of the economy. If the effect of the tariffs is passed through onto the consumers, the loss in consumer confidence and higher volatility in financial markets will only make businesses more reluctant to invest. Banks will also tread with caution due to their exposure to the affected industries which will consequently lead to even higher costs of borrowing affecting the price and flow of credit.

President Xi Jinping and economists have warned that no one wins in a trade war and the World Trade Organization (“WTO”) are attempting to resolve the dispute between the two parties much to the displeasure of President Trump. RBA’s September meeting also discussed how the "significant tensions around global trade policy and that this represented a material risk to the [economic] outlook" indicating the uncertainty in the future regarding not only the Australian economy but the global one.

PART B: POTENTIAL GLOBAL CRISIS DUE TO THE TRADE WAR BETWEEN US AND CHINA

The World Bank has warned that the escalating tensions between the US and China would have consequences equivalent to the 2008 global financial crisis (“GFC”). Developing nations will be hit the hardest as reflected by the plunge in MSCI Emerging Markets Currency Index. Global economic prospects report that increasing tariffs globally above the levels permitted by the WTO would result in a 9 per cent decrease in global trade. According to WTO, global merchandise exports rose to 11 per cent in 2017 to amount for $US17.2 trillion. It has been estimated that the imports affected by the new taxes will eat away about 0.5 per cent of global trade resulting in 0.1 per cent wipe out of GDP growth. The Trump administration did not impose tariffs only on China but also on the European Union, Mexico and Canada effectively unravelling decades of consensus over the benefits of free trade. The major economies being affected will have effect on the developing nations as those are dependent on them. It is projected that a 1 per cent decline in US growth leads to a proportional decrease on emerging economies. Other risk factors such central banks increasing interest rates