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.

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Move over Canada and EU, Australia is best placed to benefit in the US-China trade tug-of-war


Giovanni Di Lieto, Monash University

Australian firms are in a sweet spot between the bickering United States and China, where they can sell more and buy more cheaply because of weaker competition in both markets. Essentially, the mutual tariffs are a double blessing for Australia.

The latest escalation of the ongoing tariff war promises to impact on international trade exchanges to the tune of A$130 billion per year across a broad range of economic sectors, including metals, drugs, motor vehicles, electronic components, industrial machinery and foods.

Australia is one of the best placed countries in the world to reap the gains of the likely trade diversions. For example, Australian beef producers will be much more competitive in exporting to China as their American competitors have to grapple with the 25% tariff on their beef. On the other side, as China raises tariffs on soybeans, Australia could buy this product more cheaply from US farmers keen to find new distribution channels.

And the same goes for all other products appearing in the US and Chinese hit lists on both the export and import sides of markets.




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Australia’s main competitors for this double market grab are just a handful of highly developed economies with sizeable commercial ties with both the US and China. These include Canada, the EU, Japan and South Korea.

But in comparison with these trading competitors, Australia has a natural advantage due to the ease of access to maritime routes right across the Asia Pacific region.

While Europe is also in between the American and Asian continents, its overland trading routes are far less developed than the maritime ones and are also clogged by hostile countries such as Russia, Turkey, Iran, Pakistan and India.

Canada is also at a disadvantage to Australia because of its more embedded economy and supply chains with the US. The challenging renegotiation of the North America Free Trade Agreement with the US and Mexico could also stunt Canada’s range of trading action.

Similarly across the Pacific, Japan and South Korea share Canada’s tricky position as they are too close to their powerful neighbour, in this case China. Not to mention that South Korea is also under intense geopolitical pressure from President Trump to renegotiate its advantageous bilateral free trade agreement with the US.

Australia is sitting pretty

Australia doesn’t pose a direct strategic threat to either China or the US, as its economy and military power is not too big. And it’s not so small that it can be easily trumped. Also, its location is not too close, yet not too far from any of the major contenders for primacy in the Asia Pacific region.

Australia has skin in the game but not to an indispensable degree. More important still, Australia has solid and mutually beneficial bilateral free trade agreements with both China and the US, which gives more predictability to the country’s trade and investment flows.

In fact, as the Australian Trade minister, Steve Ciobo remarked, Australia is relatively safe from any retaliatory action from the Trump administration thanks to a negative trade balance with the US.

On top of that, in terms of foreign direct investment Australia has ample room and need to diversify its over-reliance on US money. Official data show the US tops the list of foreign investment in Australia with 27% of total value by country, which is a level 10 times bigger than Chinese investments. On the other hand, Australian capital mostly flows out to the US (28% of total value) and not very much to China (only 4%).




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It’s handy for Australia that the US Trade Representative has flagged new restrictions on Chinese investment in the US to
contain “China’s stated intention of seizing economic leadership in advanced technology as set forth in its industrial plans, such as Made in China 2025”. This means more investment spillovers are likely to flow between China and Australia with more favourable terms than ever.

Deeper investment ties with China will make an increasing negative trade balance with Australia more acceptable to China over the long term. Also this dynamic places Australia’s economy in pole position to take advantage of the improving quality of Chinese financial markets. This is evident in the ongoing rebalance of the Chinese economy, as it moves towards more reliance on growing consumer demand and away from inefficient, debt-fuelled investment.

Overall we are in the presence of a paradox. What in ordinary times used to be Australia’s vulnerabilities may instead prove its strategic strength in the context of a trade tug-of-war between the US and China.

As long as the trade war does not escalate to a full-blown military conflict, on the face of it Australia can still afford to sit on the commercial fence. With this pragmatic economic approach, cynics may well define Australia as a vulture country.

The ConversationBut to be realistic, the US-China trade war gives Australia the unprecedented chance to expand its economic footprint in the geopolitical agendas of both global superpowers. At such uncertain times, even more than pure economic profit, this strategic improvement will be the sweetest fruit for the lucky country.

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

This article was originally published on The Conversation. 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.
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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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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.