China accounts for more than a third of export dollars earned by Australia.
The figures, for the 12 months to October, cover the period of coronavirus disruptions and disputes over trade.
They apply to physical exports rather than harder to measure services, and are dominated by record high Chinese takings of Australian iron ore.
But they mightn’t last.
China is changing, transitioning from growth driven by the iron-ore hungry expansion of cities and manufacturing to growth driven more by the supply of services.
Externally, its “belt and road” infrastructure investments facilitate the supply of resources from locations other than Australia, among them the Simandou iron ore and bauxite deposits in Guinea, West Africa that will eventually offer higher quality ore than Australia from a region China may regard as more friendly.
Even if this source is slow to emerge, China will seek to diversify its supplies of iron ore by other means, as suggested by Australia’s former ambassador Geoff Raby in his recent book China’s Grand Strategy and Australia’s Future in the New Global Order.
One will be to ensure a steady supply from Brazil which, with China, is a member of the BRICS group of major emerging national economies.
Australia produces few manufactured goods and pays for the considerable quantity it imports by exporting commodities, mostly to China.
The loss of this export channel would be serious, but how serious?
Iron ore matters more than we think
Conversation authors John Quiggin and James Laurenceson argue the effects would be small. They point out that mineral exports account for only 1% of Australia’s national income and that China would hurt itself if it cut off the flow.
But China’s size means the damage to China would be proportionately smaller than the damage to Australia.
And while the mining sector is not the largest in Australia’s economy, its growth since 2002 has brought with it a secondary boom in Australian service industries. Australia’s East Coast cities have prospered even while most of the mining has been occurring in the Pilbara.
The mining boom brought a substantial boost to our terms of trade (the earning power of our exports relative to the cost of our imports), pushing up the Australian dollar and making imported goods much cheaper.
A reversal would see our terms of trade fall and our cost of living rise.
Some commentators place store in our ability to redirect exports of wine and barley, and whatever else is affected by trade disputes, to other customers.
At least for iron ore, however, there are few other customers at current volumes. This suggests a decline in export prices and in Australia’s terms of trade.
Damage to us, a mozzie bite for China
So its worthwhile attempting to quantify the damage from a winding back by China of its imports from Australia.
We have conducted simulations of the effect of shutting down Australia-China trade by 95% in which we allow time for capital flows and production and employment to readjust and assume that monetary policy and fiscal balances remain unaltered throughout the world.
We find the shock to the demand for Australian products is large and it is only partially offset by the redirection of our exports, even with a large depreciation of the Australian dollar.
The reason for this is that the loss of Chinese exports reduces the rate of return on investment in Australia, forcing financial markets to reallocate finance to other parts of the world.
The effects on Australian gross domestic product and real disposable income per capita are big (6% and 14 %), while those on China are mosquito bites by comparison (0.5% and 2.4%).
It’s wise to be prepared
Important things we can do to hedge against such an occurrence include maintaining strong relations with current and potential export destinations and fostering innovations that will allow our export product mix to adjust so as to better service the markets that remain open.
Examples include the proposal by Ross Garnaut to turn Australia into an exporter of green energy and associated plans by Fortescue and others to raise exports of energy by more than the east coast of Australia currently consumes.
Without such innovations a substantial decline in trade with China would cut investment in Australia and cut living standards.
It is, of course, entirely possible that the worst won’t happen, but we don’t think that’s something Australians can bank on.
If our ship does begin to sink, capital and skills will jump off and what we are left with won’t be enough to support us in the manner we have come to expect.
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.
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.
From there, its management became a major economic and political issue.
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.
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.
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.
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.
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.
When US President Donald Trump announced via Twitter on Friday that he was slapping tariffs on an extra US$300 billion of China’s exports, it was widely expected that China’s currency would slide against the US dollar.
What wasn’t expected was that on Monday it would break the seven Chinese renminbi (RMB) to the dollar barrier, a line held by China since 2008.
The RMB/USD exchange rate is tightly managed by the People’s Bank of China. The rate is permitted to move only 2% away from a midpoint fixed by the bank each day.
Although in its official statement the bank attributed the slide mainly to changes in demand and supply, the slide would not have happened had the bank not allowed it. In the past it spent as much as US$107 billion in a single month defending the renminbi.
Will Trump’s trade war with China ever end?
It is more reasonable to believe that the devaluation was a deliberate decision taken to offset the effect of the punitive tariffs.
By making China’s exports cheaper in US dollars it will neutralise the effect of Trump’s decision to impose tariffs that would make them more expensive.
But it will have far-reaching implications, so far-reaching as to suggest that Beijing has run out of alternatives.
In part, China is hurting itself…
The exchange rate – the external price of money – affects almost everything, including inflation in China itself, which will receive a boost as imports to China become more expensive.
Chinese inflation is already on the rise due to disruptions in supply of food staples such as pigs.
There isn’t much the People’s Bank of China can do to restrain inflation. Pushing up interest rates might choke the economy given that China’s GDP just posted its smallest quarterly gain since 1992.
It would also make it even more difficult for already heavily indebted state-owned enterprises and local governments to make payments on their debt.
If the Chinese think the currency is going to continue to fall they’ll attempt to take their money out of the country while it still has buying power.
Although the People’s Bank of China has demonstrated its capacity to control capital flight, it has increasingly had to do it using harsh measures that harm legitimate trade and investment.
The devaluation will essentially act as tax on net importers, which in China are households. This means it will work against China’s goal of rebalancing the economy away from investment to private consumption.
…and endangering global recovery
An RMB that breaches seven is also bad news for the global economy. It means weaker demand from China, which will depress global economic growth.
In that way it can be thought of as spreading the cost of US tariffs onto China’s trading partners, which are themselves likely to devalue in something of a currency war. The Australian dollar has fallen through 68 US cents, a low not seen since the global financial crisis.
Asian economies are also likely to devalue, among them South Korea, Vietnam, Thailand and Indonesia. The European Central Bank has also signalled rate cuts and other measures to bring down its exchange rate as has the Bank of Japan.
Other nations will devalue…
The US Fed itself will be under pressure to cut rates further in what the Pacific Investment Management Company has warned
could lead to a “full-blown currency war with direct intervention by the US and other major governments/central banks to weaken their currencies”.
On Tuesday Australia’s Reserve Bank signalled its willingness to cut interest rate again, although in our case the drop in the Australian dollar might have made it nervous. It would prefer a controlled rather than unpredictable decline in the dollar.
John Connally Jr, Richard Nixon’s treasury secretary, once said in 1971 that the US dollar was “our currency, but your problem”. He meant that the rest of the world had to live with whatever the US did for its own reasons.
…meaning none of them will win
As the currency of the world’s second largest economy increasingly moves to the centre of global trade, China is able to say much the same thing. But an international currency war could hurt China as well by endangering the still not complete international recovery from the global financial crisis.
The People’s Bank of China has tried to reassure the world that it “has experience, confidence and capacity to maintain renminbi exchange rate at a reasonably stable equilibrium”.
It might do more for confidence if it wound down its control, as have other countries, relying less on manipulating the exchange rate for strategic reasons.
The ever-escalating tensions in trade relations between the US and China have caught the nerve of politicians, businesses and the public. This conflict is challenging the traditional approach to trade disputes, which usually involves one of the disputing countries taking the case to the World Trade Organization (WTO) for arbitration or adjudication.
International institutions, including the WTO and the International Monetary Fund (IMF), have warned that the consequences of the conflict could include growing economic nationalism, rising protectionism and a downturn in global growth.
This will have flow-on effects for other countries such as Australia and New Zealand.
A new framework
Both countries have developed close political ties with the US while fostering strong economic ties with China. As China is a top trading partner for Australia and New Zealand, the impact of the US-China trade war on their exports could be significant.
Although the dollar value of any effect of the trade war is difficult to gauge, a qualitative analysis is important so that policymakers, investors and businesses can develop an informed view of this live event.
To analyse the impact of the trade war on the exports of third-party countries, we have developed a new framework.
The first factor to consider is whether an original demand for products from a disputing country has been redirected to a third-party country. For example, China’s demand for Brazil’s soybeans has sky-rocketed over the past year, with 5.07 million tonnes imported from Brazil in November 2018, up more than 80% from a year ago. It is predicted that members of the European Union, Mexico, Japan and Canada, among other countries, may capture about US$70 billion of US-China bilateral trade affected by the trade war.
The second factor is whether an original supply from one disputing country to another has been redirected to a third-party country. It has been reported that soybean exports from the US to the European Union have increased by 133% from July through mid-September 2018, compared with the same period in 2017.
European Union consumers and downstream businesses of the soybean industry, such as producers of animal feed and biofuels, have enjoyed the benefits of a lower price of soybeans as a result of the additional supply from the US.
Changing international supply chains
The third factor is whether the trade tension has disrupted the global supply chain of an industry (e.g. smartphones) that is important to the third-party country. The levies imposed by the US government on imports from China are said to destabilise international supply chains inside and outside of China that companies have invested in over years. Countries such as Thailand, Cambodia and Vietnam are catching up with China in terms of manufacturing expertise and capacities. Companies from already industrialised economies such as Taiwan and South Korea are considering revamping their home country’s competitive advantages.
Uncertainty in the price and supply of intermediary goods from these countries into the third-party country’s supply chain are critical for determining the spillover effect on the third country.
The last factor is whether the focal industry in the third-party country has developed a proactive response to the risk from the trade war. A proactive response would mean that companies in the focal industry in the third-party country have started to adjust strategic investment in research and development, sourcing, and manufacturing in or outside the US or China.
Risks and opportunities
The trade war will create risks and opportunities to third-party countries such as Australia and New Zealand. Filling the supply and demand gaps caused by higher tariffs on both sides of the trade war is an opportunity for a third-party country. But this requires flexibility in production and export capabilities in companies and industries.
As the trade spat continues, it remains a balancing act for the third-party country dangling between two political and economic powers. We have already seen the tensions between the US and China spill to this region in the context of the US ban on Huawei and its persuasion of Australia and New Zealand to follow suit.
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.”
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.
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.
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.
Six signs China wants to avoid a trade war
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%).
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.
But 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.
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.
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.
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.
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.
Australia 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.
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.
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”.
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.
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.
Ironically, the American manufacturing sector could suffer greater damage from lost international competitiveness than from cheap steel and aluminium imports.