Why China believed it had a case to hit Australian barley with tariffs



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Weihuan Zhou, UNSW

China’s landmark investigations into Australian barley led to the imposition of “anti-dumping” and “anti-subsidy” tariffs of 80.5% in May, threatening an Australian export market worth $A600 million a year.

China says it made its own calculations on the extent to which Australia subsidised barley after Australian authorities failed to give it all the information it needed in the form it requested.

It set out its findings on subsidies in a report at present only available in Chinese.

One was that Australian officials “did not comply” with its requirements in relation to the Sustainable Rural Water Use and Infrastructure Program.


‘The Australian government reported the overall situation in the answer sheet, but did not comply with the requirements of the investigating authority’

Australia disputes that conclusion.

At first glance the possibility that Sustainable Rural Water Use and Infrastructure Program could have had anything to do with subsidising barely exports seems baseless.

The Murray Darling Basin Plan, of which the Sustainable Rural Water Use and Infrastructure Program is a part, is a long-running program aiming to remedy a century of over-exploitation of water.

It includes no discussion of production targets, export volumes or anything else that might be expected to set off trade alarm bells.

Plan more than environmental

But the plan and its A$13 billion budget is about more than the environment.

It originally prioritised the environment, but in 2010 its goal was explicitly changed to address a triple bottom line of economic, social and environmental concerns.

From there, its management became a major economic and political issue.




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Scandals surround huge payments for dubious water rights, infrastructure spending that doesn’t actually save water, and massive subsidisation of irrigation expansion into areas that were not previously irrigated.

Stories abound of favoured companies or regions reaping large windfalls at the expense of taxpayers, other farmers, the environment, or all three.

Administered with ‘habitual’ secrecy

Australia’s Department of Agriculture says the government fully engaged with China’s investigation, “including providing extensive information on production and commercial information on the Australian barley industry”.

But the department hasn’t always been forthcoming about its operations.

A South Australian Royal Commission concluded that its claim to be committed to engaging in public debate and open dialogue should be regarded with “deep suspicion”.

The separate Murray Darling Basin Authority operated with “an unfathomable predilection for secrecy”.

The behaviour was “habitual”, in the assessment of the Royal Commission.

We might have given China a case

Even if Australian officials did participate in the Chinese investigation in good faith, the potential for confusion is considerable given the jargon that engulfs both water management and trade law.

Few water managers speak trade law and equally few trade lawyers understand the jargon of the Murray Darling Basin Plan.

From a trade law perspective, although the Sustainable Rural Water Use and Infrastructure Program and the Basin Plan do not explicitly subsidise exports, the fact that much of the Basin’s produce is exported means it could be argued that they distort trade.




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It is open to a country such as China to take action if the program has conferred benefits to an Australian industry and the subsidised exports have caused a material injury to a competing domestic industry.

China alleges this is the case for barley, but a stronger case could perhaps be argued for the Basin’s bigger export crops: cotton, almonds and walnuts.

Part of the reason is that the program involves government spending, but it is possible to argue that the implementation of the Basin Plan has also subsidised exporters in another way, by environmental mismanagement.




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The Barwon-Darling has been described by environmental regulators as “an ecosystem in crisis”. Contributing to the crisis has been a system that allocates scarce water to irrigators and diverts huge volumes of floodwater into private dams.

This arguably illegal practice of “floodplain harvesting” provides huge benefits to cotton exporters.

It is uncertain whether China’s barley decision will bring about changes to Australian water management that downstream communities, irrigators, Indigenous nations and environment groups have long called for.

It would help if water regulators explained what they were doing in terms that can be understood by ordinary Australians and Chinese trade experts alike.


Contributing to this article were Maryanne Slattery, a former director at the Murray Darling Basin Authority and a director of water consultancy Slattery Johnson, Rod Campbell, Research Director at the Australia Institute and Allan Behm, director of the Australia Institute’s International and Security Affairs program.The Conversation

Weihuan Zhou, Senior Lecturer and member of Herbert Smith Freehills CIBEL Centre, Faculty of Law, UNSW Sydney, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Vital Signs: Australian barley growers are the victims of weaponised trade rules


Richard Holden, UNSW

Trade tensions between Australia and China have escalated to the point where China has placed an 80.5% tariff on Australian barley imports, beginning this week.

China has been a huge market for Australian barley. It accounted for more than 70% of Australia’s exports between 2015 and 2018 and in 2016–17 it bought almost 6 million tonnes.



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While China’s imports fell to 2.5 million tonnes last financial year, this was still more than half of Australia’s total barley exports, worth about A$600 million to Australian farmers.

The tariff on Australian barley won’t hurt China much. It can simply buy from other countries such as France, Russia, Argentina and Canada.

In terms of Australia’s total volume of exports (more than A$450 billion annually) the likely losses are not huge. But it is meaningful and painful to Australia’s barley industry.

It is important this matter be resolved.

But the broader issue is how to avoid ongoing conflict with our biggest trading partner. Doing that means understanding what the barley dispute is really about. Because it’s unlikely to really be about barley.

What is China upset about?

It would be reasonable to deduce China’s recent actions stem from Australia’s advocacy for an investigation into the source of the COVID-19 pandemic – something first raised by foreign minister Marise Payne and championed by Prime Minister Scott Morrison, along with the United States and other countries.

But there is a longer history of simmering tensions between the two nations.

There is, for example, Australia’s exclusion of Chinese company Huawei from building our 5G telecommunications network. This is a matter China’s ambassador to Australia, Cheng Jingye, called a “sore point and thorny issue” as recently as February.

Another view is that it is about trade issues – that China is accusing Australia of dumping in retaliation for Australia’s use of global anti-dumping provisions against China.

As pointed out by my colleague Weihuan Zhou:

Dumping is essentially price discrimination, in which a producer sells a product to an export market at a lower price than it sells it at home. As such, it is often condemned as ‘unfair trade practice’ which accords exporters a competitive advantage over producers of similar goods in the market of importation.

Australia has been a keen user of the World Trade Organisation’s rules against dumping. Many Chinese industries have been targeted under anti-dumping cases brought by Australia (and other countries), including steel, aluminium products, solar panels, and even copy paper.

So perhaps this is a case of “what goes around comes around”.




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In any event, it is shaping up to be a thorny issue for Australia.

Australia’s trade minister, Simon Birmingham, has rightly disagreed with China’s characterisation of Australia as dumping barley, saying: “We reject the basis of this decision and will be assessing the details of the findings while we consider the next steps”.

Australia will take this case to the WTO and argue it has not subsidised barley being exported. But these cases are tricky to prove, can take substantial time (likely more than a year and possibly much longer). In the meantime, China can impose duties, with dire consequences for imports of Australian barley.

Always in breach?

Precisely because it is difficult to determine the underlying economics of whether dumping is taking place, there is almost always an argument to be made that a country is dumping some product some of the time.

That leaves countries like China with a trigger to pull more or less any time they want.




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This is a similar trick to that used by authoritarian regimes to control their populations. If citizens have essentially always broken some obscure law on the books, they are free from prosecution only by the good grace of the regime in power.

One reading of events is that China is using a version of this tactic in international trade against Australia.

The importance of the WTO

All of this points to the importance of dispute resolution through international bodies.

Sure, anti-dumping cases may be tricky, but resolving such cases quicker would help prevent the threat of such cases being used as bargaining chips.

So, too, would a more precise set of economically based rules about what constitutes dumping in practice, and how to measure it robustly and transparently.

These are matters not only to be determined in free-trade deals between countries but also for international bodies like the WTO.




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It is sometimes suggested there is little to do in this sphere, because trade barriers are now so low.

But making the rules more precise and the dispute resolution procedures more timely is certainly one area for improvement.The Conversation

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

China might well refuse to take our barley, and there would be little we could do



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Weihuan Zhou, UNSW

Australia’s surprising call for an investigation into the origin of the coronavirus in China has provoked escalating threats of retaliation by China.

China started with a warning that Australia’s position might spark a Chinese consumer boycott.

It’s now threatening tariffs on Australian barley that would include a “dumping margin” of up to 73.6% and a “subsidy margin” of up to 6.9%.

The subsidy claims are thought to refer to drought support measures and Australia’s diesel fuel tax rebate.




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Together with the dumping tariff (a penalty for allegedly selling barley too cheaply) they would amount to a tariff of 80.5%, effectively putting an end to Australian barley sales to China.

Australia’s exporters and the government have been given ten days to respond.

There’s more to it than barley

A series of decisions and reactions to events that were perceived as anti-China has pushed relations between Australia and China to the verge of a historic low.

Each time, China has urged Australia to reconsider its position and on some occasions has threatened to retaliate.

Recent examples include Australia’s exclusion of Huawei from its 5G network for fear of the influence of the Chinese government on its activities, and the COVID-19 travel ban which singled out China when introduced on February 1 even though by then the virus had spread to other countries.

China targeted barley for good reasons.

Why barley?

China is Australia’s largest market for barley exports.

Between 2015 and 2018, China imported, on average, 4.6 million tonnes or A$1.3 billion of Australian barley accounting for over 70% of Australia’s barley exports.

A tariff increase would have significant impacts on Australia’s barley producers who are scattered over several Australian states, putting considerable political pressure on the Australian government.

China meanwhile has other suppliers from which to choose. It can restrict imports of Australian barley while continuing to buy barley from elsewhere.

And contrary to the claims by Trade Minister Simon Birmingham, the Chinese tariffs are not legally unjustifiable.

The tariffs would be the result of an ongoing anti-dumping investigation into barley exported from Australia that China’s Ministry of Commerce initiated on November 19, 2018.




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Anti-dumping measures, which seek to prevent lower-priced imports from causing injury to domestic industries, are permitted under the rules of the World Trade Organisation and the China-Australia Free Trade Agreement.

Australia itself has been one of the most frequent users of anti-dumping measures, particularly against China.

The 2015 China-Australia Free Trade Agreement cut Chinese tariffs on Australian barley exports to zero. But it included an exemption: anti-dumping provisions that could increase the tariffs to any rate.

At the start of the 2018 investigation, China’s barley industry requested an anti-dumping tariff of 56.14%. The proposed rate was increased to 73.6% after investigations by Chinese authorities.

That is the investigation that authorities will finalise by May 19, the one started eighteen months ago, on November 19, 2018.




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It began long before COVID-19, motivated among other things by Australia’s enthusiastic use of anti-dumping measures on products such as Chinese steel.

But its timing has made it a useful way to push Australia to change its anti-China position on an inquiry and on other matters in the future.

Since China’s investigation began, Chinese customers have become “very cautious about buying Australian barley” in the assessment of the Canadian barley industry which has benefited by selling Chinese customers barley they once would have sourced from Australia.

The actual imposition of the tariff will hurt more.




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The only legal avenue for Australia to challenge it would be the World Trade Organisation’s dispute settlement mechanism which had been brought to a near halt by the United States refusing to appoint appellant judges and would in any case take years to process without a guaranteed win.

Even if Australia is successful, China may simply begin a reinvestigation which may maintain the original decision.

What’s the best way out?

Australia needs to take actions to ease the tensions and strengthen economic relationship with China.

Abundant evidence has shown that China will remain an irreplaceable Australian customer meaning it would be neither possible nor wise for Australia to decouple from China.

Diplomatic actions, such as the appointment of a special Australian China envoy, will be desirable but not sufficient. Australia has to ensure its future policy decisions are not biased against China.




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To help, Australia could consider a gradual reduction of travel restrictions on China based on China’s success in fighting the virus and renewed more realistic assessment of the potential health risks posed by Chinese travellers.

Australia needs to be cautious in foreign investment decisions which have already been regarded as discriminatory against China before the pandemic.

The pandemic brought forth temporary changes of Australia’s foreign investment rules, making all proposals the subject of Foreign Investment Review Board scrutiny regardless of size.




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While the changes applied to foreign investors from all countries, Australia’s decision to reject two from China has raised concerns about whether the decisions have been compromised by anti-China politics.

Instead of direct rejection, Australia might have been better off offering to approve them under conditions sufficient to address national interest concerns.

Australia should reassess its position on the 5G network to ensure it focuses on risks associated with 5G equipment rather than the nationality of 5G suppliers, as have Britain and the European Union.

These actions would signal a strong political will to repair the relationship that would build the foundation for the two economies to broaden and deepen economic engagement for mutual benefits.The Conversation

Weihuan Zhou, Senior Lecturer and member of Herbert Smith Freehills CIBEL Centre, Faculty of Law, UNSW Sydney, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

G20 summit bring a truce in US-China trade relations – but it’s likely to be temporary


Tony Walker, La Trobe University

The United States and China have arrived at a temporary truce in a trade conflict that was threatening to further destabilise world equity markets, entrench a global slowdown and cause more damage to a rules-based international order.

Agreement by US President Donald Trump and his Chinese counterpart, Xi Jinping, to allow further negotiations before threatened tariff increases on Chinese imports come into effect is a welcome development.

However, this is a temporary respite, a short-term fix, not a long-term solution to myriad trade and other tensions that have put the US and China at odds with each other.

For their own purposes and in their own interests, Trump and Xi have come away from the Argentine capital with a deal that papers over differences that extend from China’s activities in the South China Sea to its mercantilist trade policies.




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As far as we know, China’s ruthless assertion of its sovereignty over disputed waters in the South China Sea was not a material subject for discussion in Buenos Aires except, possibly, in passing.

China’s rise and America’s relative decline ensure these global economic superpowers will continue to bump up against each other.

So, what was achieved and what are the prospects for an accord reached on the sidelines of the G20?

In their efforts to lower trade tensions and prevent a further erosion of global confidence, Trump and Xi agreed to a 90-day extension on the imposition of additional US tariffs on some US$200 billion of Chinese imports.

Trump had threatened to increase tariffs from 10% to 25% on an initial batch of Chinese imports from January 1. He had also flagged his intention to impose levies on another US$267 billion worth of imports if progress was not made in resolving broad-based trade differences.

A joint statement laid out a timeline for continuing negotiations. It reads:

Both parties agree that they will endeavour to have this transaction completed within the next 90 days. If, at the end of this period of time, the parties are unable to reach an agreement, the 10 percent tariffs will be raised to 25 percent.

In return for these temporary concessions, China agreed to:

… purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between the two countries. China has agreed to start purchasing agricultural product immediately.

China also agreed to crack down on sales of Fentanyl by making it a controlled substance. The US is battling an opioid crisis in which Fentanyl is a lethal component.

In retaliation for US trade actions, China had imposed duties on US$110 billion of imports. A principal component of this is soybeans, effectively killing one of America’s more lucrative export markets.

Trump has been under huge pressure from his Mid-Western rural heartland over a collapse in the Chinese market for American agricultural products.

The two sides also agreed to address structural problems in the trading relationship. These extend to five areas – forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft.

These are highly complex issues and unlikely to be resolved in the short term, if at all.

In the wash-up of the Xi-Trump discussions it appears China has got more out of the deal than the US – at least for now. It has secured a stay of execution for the implementation of tariff increases and forestalled, for the time being, tariffs on an additional bloc of Chinese exports.

In return, it has agreed to buy unspecified quantities of US products and to talk about differences.

Trump’s willingness to compromise after months of bombast reflects pressures from a shellshocked grain-producing constituency and alarm on Wall Street at prospects of a full-blown trade war.

From Beijing’s perspective, China has demonstrated that its growing economic heft has enabled it to avoid the appearance of yielding to US pressure.

If not a “win-win” for China – as Chinese officials are fond of saying – it is certainly not a “lose-lose”.

In a statement at odds with months of fire-breathing rhetoric over China’s allegedly perfidious trade practices, Trump hailed his understanding with Xi. He said:

This was an amazing and productive meeting with unlimited possibilities for both the US and China.

For their part, Chinese officials were more circumspect.

Foreign Minister Wang Yi said the talks were conducted in a “friendly and candid atmosphere”. The presidents:

agreed that the two sides can and must get bilateral relations right… China is willing to increase imports in accordance with the needs of its domestic market and the people’s needs.

Impetus for a face-saving deal in Buenos Aires has been prompted by growing concerns about the global economy. The signs of a slowdown are clear. Trade volumes had begun to moderate in the third quarter, heightening worries of a global retrenchment.

International Monetary Fund managing director Christine Lagarde at the G20 summit.
AAP/EPA/G20 handout

On the sidelines of the G20, the International Monetary Fund’s managing director, Christine Lagarde, noted:

Pressures on emerging markets have been rising and trade tensions have begun to have a negative impact, increasing downside risks.

In its October Outlook statement, the IMF warned about threats to global growth due to trade disturbances.

In their final communique, G20 leaders danced around contentious issues on trade to accommodate American objections to having the word “protectionism” inserted in the document.

In the end, participants settled on the need for reform of the World Trade Organisation to describe a world trading system that is falling short of its objectives. Washington has been agitating for a review of the WTO to strengthen its dispute resolution and appeal procedures.

The US has also objected to a continuing description of China as a developing country, with concessions that enable it to take advantage of less developed country status in its access to global markets.




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On climate change, Washington separated itself from the other G20 members. All, except the US, reaffirmed their commitment to the Paris Agreement. The US announced in 2017 it was pulling out of Paris.

Foreign policy specialists will be sceptical about a de-escalation of trade hostilities given the range of issues bedevilling the US-China relationship.

Reflecting a hardening of US attitudes towards China, and in contrast to the optimism that had prevailed for much of the past two decades, Ely Ratner in Foreign Affairs notes:

Even if tariffs are put on hold, the United States will continue to restructure the US-China economic relationship through investment restrictions, export controls, and sustained law enforcement actions against Chinese industrial and cyber-espionage.

At the same time, there are no serious prospects for Washington and Beijing to resolve other important areas of dispute, including the South China Sea, human rights and the larger contest over the norms, rules and institutions that govern relations in Asia.

A stiffening view in the US towards China is shared more or less across the board. In those circumstances, a temporary ceasefire in Buenos Aires is unlikely to be sustained.The Conversation

Tony Walker, Adjunct Professor, School of Communications, La Trobe University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Trump versus China means picking sides



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If the trade war with China escalates, siding with the US is going to cost, but Australia’s long-term national interests still lie with it.
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Giovanni Di Lieto, Monash University

As Donald Trump escalates his trade war with China, slapping a 10% tariff on roughly $US200 billion of imports that will climb to 25% if China retaliates, he appears to found something of a soul mate in Scott Morrison.

“We both get it,” Australia’s new prime minister said this week. What they get, he told the New York Times’ Maureen Dowd, is that some people feel left off the globalism gravy train: “The president gets that. I get it.”

His words signal a profound change of tack in Australian economic diplomacy as the new US approach threatens to break down the World Trade Organisation and universal trade agreements in general.

Under Trump, trade will depend on stronger bilateral (one on one) agreements that support US geopolitics.

It’ll mean Australia picking sides.

Double dangers in middle of the road

The status quo of relying on China for trade surpluses and on the US for security patronage might not be sustainable in the long run.

Siding with neither China or the US, attempting a “third way” of non-alignment, runs the risks losing out on both trade and security.

Broadly speaking, we can summarise the trade war between the US and China as a contest between sea and land.

The US aims to secure trade routes through the Indian and Pacific oceans. China wants to shift the bedrock of international trade to Central Asia.

Its Belt and Road Initiative is a grand strategic plan to join Eurasian economies from Lisbon to Vladivostok. The plan would end the historic era of Anglo-American hegemony founded on controlling trade routes across the Atlantic, Indian and Pacific oceans.




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Australia faces an existential strategic choice.

Leaving political ideologies aside, its economic prosperity depends on trade by sea. The return of Marco Polo’s world would eventually make Australia little more than a price-taking commodity supplier to trade and investment hubs from Beijing to Venice.

This means our national interests lie with the US defence of its seaborne trading routes.

Picking a side will be costly

In the short term, especially if the trade war escalates, siding with the US will be costly. We could lose a good deal of China-related export and business opportunities. Over the longer run we could offset the losses by diversifying to trade and invest in countries with shared strategic interests, such as Indonesia and India.

We would be well advised to reconsider the diplomatic benefit of RCEP, the China-led Regional Comprehensive Economic Partnership. This mega regional trade deal between the 10 members of the Association of Southeast Asian Nations and their bilateral trade partners has been dubbed the Chinese Trans Pacific Partnership. It can be seen as an extension of Xi Jinping’s major-power agenda.

After a promising start, RCEP negotiations now appear to be stuck. The main obstacle is India’s fear of worsening its already significant trade deficit with China.

Our interests lie with the US, and India

Another sticking point is that India, the Philippines and other potential members want countries like Australia, New Zealand and Japan to open up their markets for information technology and professional services.

In pure trade terms we would lose little if the RCEP did not proceed. We already have strong bilateral ties with all the negotiating countries apart from India, with whom we are presently negotiating a free trade agreement.

We would be well advised to use our limited diplomatic resources for that and supporting the US when it comes time to pick sides.The Conversation

Giovanni Di Lieto, Lecturer of international trade law, Monash Business School, Monash University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australia should steer clear of the sanction fight between the US and China


Bruce Baer Arnold, University of Canberra

Even though Australia follows the United States in much of its policy, Australian exporters and consumers will be hoping we don’t get caught in the crossfire as the US and China impose sanctions on each other.

US President Donald Trump has the power to impose trade sanctions on China for its disregard of US intellectual property (IP) rights: patents, trademarks and copyright.

These sanctions could make Chinese exports more expensive or prevent access to the US market. China has already indicated it will play tit for tat, imposing its own sanctions.




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Trade disputes are often as much about rhetoric as about reality. China will remind the world that the US began as a pirate nation, harvesting European technological innovation and cultural production (such as work by Byron, Shelley, Dickens and Trollope) on the basis that it was a developing nation and because it could.

Away from the headlines China will likely take the US to the World Trade Organisation (WTO), a global mechanism for resolution of trade disputes. The US has announced it will take China to the WTO over patent violations.

The US will presumably ramp up claims with the WTO against other trading partners (such as India, Indonesia, Thailand and members of the European Union) that appear on its watch list for allegedly pirating US knowhow.

What this means for Australia

Academics such as Matthew Rimmer have astutely highlighted disadvantages for Australian consumers as citizens of an IP colony. This is where we import more than we export in content and pay a premium for work from overseas.

For example, we pay more than our US counterparts for software and hardware that most people take for granted. Our IP regime – in principle and practice – construes many violations of IP rights as piracy.

Our regime is aligned with that of the US. That reflects our traditional defence policy and the significance of US investment. What is good for US companies Microsoft, Pfizer and Disney is deemed to be good for Australia.

But joining in this cascade of retaliation will jeopardise economic growth, foster political unrest in developing economies and penalise consumers. The salient feature of economic growth over the past four decades has been globalisation – trade and investment across borders – rather that fundamental productivity gains through information technology.

Integration with the global economy (alongside the hollowing-out of local manufacturing and the TAFE system) mean that we cannot turn back the clock to the days of Alfred Deakin. Deakin’s grand compromise – the Australian Settlement – promised to protect small farmers, local manufacturers and workers behind walls that restricted migration and imports.

The headline-grabbling sanctions from Trump might also not necessarily be supported. Some business leaders recognise the importance of trade across the global economy and are perplexed by the current policy that seems to be driven by Trump’s late-night tweeting rather than anything coherent.

Where does that leave China?

China’s response has so far been cool. Moderation in the public arena highlights the idiosyncratic nature of Trump’s statements. It also reflects a deeper reality.

China wants to sell high-technology products to Australia, the US and other nations. One is example is 5G telecommunication networks from Huawei.

It wants the advantages that come from exploitation of the global IP regime, with its innovators and entrepreneurs building portfolios of patents and buying leading Western brands. It is likely to emulate what we saw with Japan: from “pirate” to IP citizen, complying with laws, within a few decades.




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Beijing is slowly strengthening the enforcement of IP rules in key regions such as China’s Pearl River Delta. In part that’s an effort to reduce the backlash in its export markets and it’s also a recognition that growth may be a matter of fostering innovation rather than copying or cheap labour.

The ConversationAustralia sources many manufactured items from China, with that production often dependent on US, Japanese and EU IP. Our own economy depends on exports of commodities; universities are dependent on overseas (particularly Chinese) students. So we don’t want to see an increase in international tensions and don’t want a slowing of the global economy because of a cascade of tit-for-tat sanctions.

Bruce Baer Arnold, Assistant Professor, School of Law, University of Canberra

This article was originally published on The Conversation. Read the original article.

Why Trump’s tariffs will have little impact on Australia and a trade war is unlikely



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Donald Trump has announced import tariffs on steel and aluminium.
Shutterstock

Tony Makin, Griffith University

US President Donald Trump has levied a 25% tariff on steel and a 10% tariff on aluminium imported from all countries except Canada and Mexico. Trump had hinted that the trade protections would exclude Australia, but it wasn’t explicitly exempted.

Regardless, import tariffs on steel and aluminium will have only a small impact on the Australian economy, as Australia isn’t a large exporter of steel or aluminium. What Australia does export to the United States is covered by a free trade agreement.

Even though the European Union, China and other countries will have tariffs levied on their steel and aluminium exports, the US move is unlikely to escalate into a trade war. The World Trade Organisation has powers to sanction countries that arbitrarily impose tariffs.

And Trump’s justification for the tariffs in the first place, that the United States is losing something due to running trade deficits, has been thoroughly debunked by modern economics.




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A tariff imposed on any good is an extra tax that raises its sale price equivalently, making it less attractive to buyers than the domestically made product.

There could be some concern if the United States extends tariffs to beef, other meat products, aircraft parts, pharmaceuticals and alcoholic beverages. These goods comprise the top five Australian exports to the United States and account for considerably larger trade volumes than steel and aluminium.

Yet there is no reason to expect tariffs will suddenly be imposed on these major exports, given the provisions of the Australia–United States Free Trade Agreement.

This agreement comprehensively covers trade in goods and services, as well as investment flows, between the two nations. It eliminated many of the pre-existing tariffs affecting trade.

US Vice President Mike Pence has even described this free trade agreement as “a model for the world”.

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The World Trade Organisation to the rescue?

In 2002, President George W. Bush imposed tariffs of up to 30% on imported steel in the midst of major structural change in the US steel industry. Major steel exporters Canada and Mexico were exempt from the Bush tariffs under the provisions of the North America Free Trade Agreement.

The World Trade Organisation rejected the Bush administration’s claim that the tariffs were justifiable due to a surge in steel imports. The justification for the Trump tariffs is based on national security grounds, so it remains to be seen how the the World Trade Organisation will decide on the tariffs.

But there are grounds for hoping history will repeat and the World Trade Organisation will slap down the new tariffs, given the possible trade ramifications if countries retaliate with their own tariffs.

If the World Trade Organisation upholds the Trump tariffs, it could herald the end of the international trading system that has operated passably well over recent decades.

Trump’s new mercantilism?

Trump frequently laments the persistent trade deficits the United States runs against other major economies, notably China, Japan and Germany, and refers to these deficits to justify protectionist measures.

But this argument isn’t new – the idea that trade deficits are “bad” for an economy has been around since economics as an academic discipline began.

For instance, one strand of economics from Elizabethan England advocated achieving trade surpluses as the means to national prosperity. In the words of a leading proponent, Thomas Mun, it was necessary to “sell more to strangers yearly than we consume of theirs in value”.

But this doctrine has been soundly debunked, first by the father of economics, Adam Smith, and modern economic theory has since confirmed Smith’s position.




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There may be a silver lining to Trump’s trade policies


Modern economics shows that trade and current account deficits (a broader measure of trade that includes international money flows) are not problematic. This is because they are inflows of capital that can lead to increased domestic investment.

In other words, running a trade or current account deficit can actually assist economic growth, just as it has for Australia, by enabling lower long-term interest rates and higher capital accumulation than otherwise.

The major exception to this is when foreign capital inflow finances government budget deficits, thereby strengthening the local currency and worsening international competitiveness.

The ConversationIronically, the American manufacturing sector could suffer greater damage from lost international competitiveness than from cheap steel and aluminium imports.

Tony Makin, Professor of Economics, Griffith University

This article was originally published on The Conversation. Read the original article.