Back in March, Joe Biden lamented “the international system that the United States so carefully constructed is coming apart at the seams”.
“As president,” he declared, “I will take immediate steps to renew US democracy and alliances, protect the United States’ economic future, and once more have America lead the world.”
Among the closest allies of the US, none arguably has more at stake in Biden making good on his promises than Australia.
The international system Australia wants repaired is one defined by rules and consensus. As a middle-ranking power, it has long recognised its national interests are best protected by international agreements and the rule of law, rather than one in which might makes right.
At the heart of Australia’s desired international trade system are multilateral trade deals, rather than bilateral deals which tend to favour the stronger nation, and a strong international authority – namely the World Trade Organisation – to negotiate rules and adjudicate disputes.
Donald Trump’s presidency undermined both. His “America First”
polices were grounded in grievances about other nations playing the US for “suckers”. He obstructed the WTO, turned his back on multilateral deals and started trade wars.
A Biden presidency promises a return to multilateralism. But it remains to be seen how it approaches the WTO.
Trump’s war on multilateralism
As president, Trump rapidly undid decades of mutilateral trade negotiations.
In his first week in office he withdrew the US from the Trans-Pacific Partnership, the multilateral trade deal intended to strengthen economic ties between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Singapore, Peru, Vietnam and the US. (The agreement was modified and signed without the US as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.)
Trump’s trade war with China was also an exercise in power over principle. Both the escalating tariffs and the truce struck in January, known as the “Phase One Agreement”, repudiated established free-trade principles.
Along with commitments to reduce “structural barriers”, China is required to buy an extra US$200 billion in specified American goods and services over two years in return for the US cutting tariffs on $US110 billion in Chinese imports.
This worries Australian exporters.
The US shopping list for China includes more American seafood, grain, wine, fruit, meat and energy – all markets in which Australia is a significant exporter to China. As former Australian prime minister Kevin Rudd asked at the time the deal was signed:
How can the US pursue another $US32 billion of American beef, wheat, cotton and seafood – all listed in the agreement – without Australian exporters becoming collateral damage?
The deal, as the Minerals Council of Australia rightly noted, undermined “the principles of free trade which have underpinned Australia’s bipartisan approach to trade policy for many decades”.
Blocking the World Trade Organisation
The Trump administration has also continued the slow strangulation of the World Trade Organisation, on the grounds it doesn’t serve American interests.
The US has blocked every recent appointment and reappointment to the WTO’s Appellate Body, which hears appeals to WTO adjudications. Appointments require the agreement of all of the WTO’s 164 member nations, and the Appellate Body requires three judges to hear appeals. US obstruction reduced the number of judges to just one by December 2019, meaning it simply cannot function.
It’s important to note that US antagonism to the WTO predated Trump. The Obama administration also blocked appointments it considered would not sufficiently represent US preferences. But the Trump administration certainly upped the obstructionism.
Indeed, just days before the 2020 election it blocked the appointment of former Nigerian finance minister Dr Ngozi Okonjo-Iweala to head the World Trade Organisation. A highly regarded development economist with a 25-year career at the World Bank, Okonjo-Iweala is widely considered to be an outstanding candidate to lead the WTO. The United States stood alone in objecting to her appointment.
What will change under Biden?
Dropping opposition to Okonjo-Iweala and other appointments so the WTO’s processes can function would be an important symbolic and practical first step for Biden. It would reassure Australia and others that global rules still matter.
How quickly, and on what terms, Biden returns the US to multilateralism remains to be seen.
He has acknowledged the importance of deals like the Trans-Pacific Partnership to ensure an increasingly powerful China “doesn’t write the rules of the road for the world”. But he has also pledged to not enter any more international agreements “until we have made major investments in our workers and infrastructure”.
For Australia – and other US allies – it is important that the US return to the multilateral negotiating table sooner rather than later. For global stability, long-term interests need to override the temptation of short-term expediency.
For “America to lead again” there’s a long and difficult diplomatic road ahead. The international trade system and the WTO are not perfect, but a world without rules would be far worse.
The giant Regional Comprehensive Economic Partnership between Australia, China, Japan, South Korea, New Zealand and the ten members of ASEAN (Brunei, Cambodia, Indonesia, Laos, Myanmar, The Philippines, Singapore, Thailand and Vietnam) was signed online on Sunday, November 15.
India left negotiations in November 2019, but even so, the deal will cover one third of the world’s population and economy.
Australia and the other governments refused to release the text until after signing, continuing Australia’s regrettable secrecy about deals it is about to sign.
India left the RCEP because of concerns about its potentially negative impact on local industry development.
Since Australia already has free trade agreements with all of the remaining members, India’s absence significantly diminishes what might have been in it for Australian exporters.
What’s left are some agreements on common standards and the claimed ability for Australia to talk to China more than it can through its own one-on-one trade agreement.
The text was completed before the pandemic and has not been revised since.
As it happened, Australia took actions during the pandemic that were technically contrary to the rules embodied in the RCEP in order to boost local manufacturing capacity for essential products.
We’ve already bent the rules
But the rules signed up to on Sunday will integrate Australia further into regional production chains and commit Australia to avoid assistance for local industries of the kind that will arguably be needed to rebuild and strengthen the economy.
Other rules signed up to on Sunday open essential services such as health, education, water, energy, telecommunications, finance and digital trade to foreign investors and restrict the ability of governments to regulate them in the public interest.
It remains to be seen whether these rules will give governments the flexibility they will need to get “the balance right”
Oddly for an agreement dealing with standards, there’s nothing in it about forced labour or child labour, and no mention of climate change.
But there are also welcome omissions.
No further rights for foreign investors
The final text confers no special rights on foreign corporations to sue governments through what are known as Investor-State Dispute Settlement clauses common in other agreements, although there is an opportunity for the members to revisit the idea two years after ratification
Nor are there increases in patent monopolies for medicines of the kind included in the original Trans-Pacific Partnership. These were suspended in the revised Comprehensive and Progressive Agreement for Trans-Pacific Partnership now ratified by Australia and six other countries.
The RCEP will be reviewed by a parliamentary committee which, as is usual in these agreements, will be unable to change the text.
The Coalition has a majority on that committee.
Some commentators see the RCEP through the lens of US-China competition..
Looked at this way, the US has been weakened by the Trump administration’s decision to pull out of the original Trans Pacific Partnership.
It is argued that the RCEP is China’s creation, and the incoming Biden administration will need to counter it by re-joining the revised Trans-Pacific Partnership, which excludes China.
But this is a US-centric a view that downplays the leading role of the ASEAN countries in creating the RCEP.
A Biden administration is unlikely to re-join the Trans Pacific Partnership any time soon. Parts of the Democratic party remain strongly opposed to it.
The US will rejoin genuinely multilateral organisations such as the World Health Organisation and the Paris Climate Agreement.
But Biden’s trade policy is likely to focus on domestic priorities such as the pandemic and climate change, about which the RCEP says nothing.
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.
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”.
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.
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.
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 culmination of an 18-month investigation, China’s move threatens to wipe out Australian barley exports to China, worth A$600 million in 2019, unless China withdraws the measure either unilaterally or following a successful challenge at the World Trade Organisation (WTO).
However poorly justified, there are precedents for what China has done, many of them from Australia.
Australian anti-dumping and countervailing measures by country, March 2020
Australia was among the first wave of countries to adopt anti-dumping legislation alongside Canada, New Zealand, the United States and Britain in the early years of the 20th Century.
It remains a prolific user of the system compared to other countries, with an outsized number of measures imposed against imports from one country, China, and imports of one product, steel.
What are anti-dumping measures?
One way to think about anti-dumping measures is the international equivalent of domestic measures intended to combat predatory pricing.
Guidance from the Australian Competition and Consumer Commission says that while it is usually okay to sell goods at a below-cost price, “it may be illegal if it is done for the purpose of eliminating or substantially damaging a competitor”.
But in the case of international anti-dumping measures, there is no need to prove purpose.
It suffices that an investigation finds the imported goods were sold below their corresponding price in the home market and that this caused or threatened to cause harm to a domestic industry producing the same sort of goods (known as “like products”).
Chinese steel, glass, cables and A4 copy paper
Technically, Australia imposes two types of measures: “anti-dumping measures”, which are additional duties on so-called dumped imports which are held to have injured Australian industry, and “countervailing measures” which are additional duties on subsidised imports that have injured Australian industry.
They are currently in place or proposed against Chinese wind towers, glass, electric cables, chemicals, herbicides, A4 copy paper and aluminium products, as well as steel.
In theory, WTO rules only allows anti-dumping measures for limited periods (China’s measures on barley have been imposed for five years) but in practice, once in place these measures can be difficult to remove.
They shield us from cut-throat competition
In the broader context of Australia’s relationship with China, they play an important role, shielding Australian import-competing industries from the full and potentially crushing impact of free trade with China.
One aspect of their use that has been particularly galling to Chinese officials is Australia’s failure to follow through on a commitment it made during the China-Australia Free Trade Agreement negotiations to treat China as a market economy for the purpose of anti-dumping investigations.
The concession was seen as highly significant by China and would have made it harder for Australia to conclude that some goods were not being sold at fair prices.
Australia’s continued use of anti-dumping measures has come under repeated criticism from the Productivity Commission, almost entirely on the basis of economic efficiency arguments.
However, these criticisms ignore a number of important concerns, including the need to keep these measures so they can be used to hit back against other countries that use them. It would make little sense to remove them until other big users agreed to do the same.
Another important consideration, which has received greater attention during the current coronavirus crisis, is the need for – systemic resilience. If Australia becomes totally reliant on other countries for (say) steel, it’ll have less ability to get it when it is needed.
Before asking ourselves whether we are prepared to liberalise or do away with our current anti-dumping regime, we need to be able to answer the very important question of whether we are equally prepared to do away with our domestic steel, aluminium, paper and other industries.
I suspect that the answer to this question is no.
There are of course other ways to reinforce these industries or shield them from import competition, but it is more than likely that none would be as effective as the current system of anti-dumping duties. We have kept them because we still have some use for them.
The Australian government needs to urgently act to protect Australia’s 180,000 trade apprentices from the economic effects of the coronavirus.
Advertised vacancies for new apprentices have collapsed due to COVID-19 – from 1,731 vacancies in January to 880 in March 2020.
If the trend continues over the next year it will lead to a loss of 35,000 new apprenticeship jobs. But the reduction may be much larger, given the uncertain economic environment ahead.
The low number of new apprenticeship vacancies doesn’t show the full extent of the problem. There are currently another 180,000 enrolled apprentices, many of whom may have already lost their jobs or been stood down.
Australia must ensure we do not lose the workforce we will need as part of any recovery effort after the coronavirus restrictions end.
What is the impact?
While official data on the early impact of the coronavirus on apprenticeship numbers won’t be available for another six months, the size of the challenge can be estimated by looking at apprenticeship figures during the previous few years.
Data shows the industries with high numbers of apprentices include construction, automotive, electrotechnology, hospitality and beauty services.
Many of these industries are already hard hit by the coronavirus outbreak, particularly hospitality.
While some industries may remain open, such as construction, any downturn will likely impact apprentices. Evidence shows apprenticeship numbers are sensitive to changes in the employment market.
Increases in unemployment result in a decrease in apprentice numbers, as well as employers taking on fewer new apprentices.
This means even in industries that remain open, higher unemployment will likely have big impacts on apprenticeship numbers.
Research has shown changes in the number of new apprentices take between six months and a year and a half to flow through into total apprentice numbers.
Apprenticeships are usually three to four years in length. Economic downturns affect the pipeline of apprentices moving through the system. The result is that a decline in people starting apprenticeships can be felt for many years to come.
This means Australia risks a generation of lost apprenticeships as young people lose connections with their employers and cannot complete their training. It also threatens any recovery effort by removing skilled workers from industries trying to rebuild after the pandemic.
What has happened previously?
Research from the 2008 global financial crisis and 1992 recession shows the impact of economic downturns on apprenticeship numbers.
During the GFC there was a 6% seasonally adjusted drop in people starting apprenticeships. While this drop was relatively small, many of those who lost their jobs during this period did not return to complete their apprenticeship training.
The 1992 recession tells a more disturbing story. The 5% increase in unemployment resulted in a 25% drop in apprenticeship numbers.
There are also no guarantees of a quick return to the normal employment conditions necessary to maintain current apprenticeship numbers.
What can be done?
The wage subsidies announced by the Australian government are a great start to maintaining current apprenticeships. Many employers will be eligible to access the JobKeeper payment to pay apprentices A$1,500 per fortnight.
Businesses ineligible for the JobKeeper payments, may be able to access the Supporting Apprentices and Trainees program. This program was announced in early March and means the government will pay employers up to 50% of an apprentices wage.
However, these measures only help current apprentices and don’t allow new apprentices to move into the system. Also, they only last six months. We need to begin planning to make sure apprentices stay working while offering opportunities for new apprentices following the coronavirus response.
One way to do this is to support education institutions to offer training to out-of-work apprentices. This is difficult during current restrictions because online learning may not be appropriate for many apprenticeships. But education institutions, particularly TAFEs, can offer simulated work environments.
This will allow any out-of-work apprentices to gain valuable training and work towards meeting qualification requirements.
Intermediate labour market programs can also help keep apprentices in work while the job market remains weak. These programs have traditionally been used as a bridge to employment for the long-term unemployed.
They provide actual work experience and usually involve working on projects that have a community benefit. Work should start now to ensure such programs are ready to be deployed if needed.
It is vital to make sure we keep apprentices enrolled and connected to workplaces. If we don’t, we risk causing problems that will last beyond the current period and impact the lives of Australia’s young people and the economy.
The Regional Comprehensive Economic Partnership has been touted as the best hope for keeping world trade flowing after the attacks on the World Trade Organisation.
The WTO isn’t dead yet, but in a two-pronged attack, US President Donald Trump has been flouting the spirit if not the letter of its rules by on one hand imposing tariffs on China and other countries, and on the other blocking appointments to its appellate body. The latter means that after December the appellate body will no longer have enough members to hear new cases.
Although nothing like a proper replacement for the WTO (it would have 16 member nations instead of the WTO’s 164) the Regional Comprehensive Economic Partnership (RCEP) is being talked about as a backstop. The 16 RCEP members account for almost half the world’s population; among them China, India, Japan, Indonesia, Malaysia, Vietnam, Australia, and New Zealand.
The RCEP negotiations have dragged on since 2012, in part because of what had been seen as a near intractable sticking point: so-called investor-state dispute settlement (ISDS) procedures.
ISDS was one of worst parts of the RCEP
The World Trade Organisation doesn’t have ISDS. In the WTO, governments can take action against governments under WTO rules but corporations can’t sue governments.
ISDS provisions, present in many one-on-one or regional trade deals, allow foreign corporations (but not local corporations) to take on governments.
When the Philip Morris tobacco company lost its case against the Australian government over plain packaging laws in Australia’s High Court, it was able to have a second go in an international tribunal using the ISDS provisions of an Australia-Hong Kong investment treaty. This right would not have been available to an Australian company.
Although Australia successfully had the case thrown out, it took it seven years and cost A$24 million. Australia recovered only A$12 million from Philip Morris.
ISDS provisions were developed in the post-colonial period after World War II to compensate international investors for the direct expropriation or taking of property by governments. But over the past 20 years they expanded to include “indirect” expropriation, “minimum standard of treatment” and “legitimate expectations”, which do not involve taking of physical property and do not exist in many national legal systems.
Because the cases are very costly, they are mostly used by large global companies that already have enormous market power, including tobacco, pharmaceutical, agribusiness, mining and energy companies.
The tide is turning against it
Legal experts like former High Court Chief Justice Robert French have noted they are conducted by temporary tribunals often presided over by practising advocates who can represent a corporation or government in one case and then sit on a tribunal the next, calling into question their independence. The decisions need not make use of precedents and have no appeals, meaning they need not be consistent.
Both the United States and European Union are moving against ISDS provisions. In January the 28 EU member states decided to terminate ISDS arrangements between themselves.
The EU is not including ISDS in any of its current negotiations, including those for a EU-Australia free trade agreement.
In the longer term, Europe is pursuing a controversial proposal for a permanent Multilateral Investment Court, which would once again allow foreign investors to sue sovereign governments but would address procedural concerns about temporary tribunals. It hasn’t yet gained support from the US, Japan, Australia or other key players, so is not likely to be implemented soon.
The US and Canada have excluded ISDS from their part of the new North America Free Trade Agreement, known as the United States-Mexico-Canada Agreement.
Two institutions that oversee ISDS cases, the United Nations Commission on International Trade Law and the World Bank International Centre for Settlement of Investment Disputes, are conducting reviews of the system.
It looks as if the RCEP will be free of it
Australia is notoriously tight-lipped about international trade negotiations. But late last week Malaysia’s trade minister Datuk Darell Leiking revealed that Malaysia and each of the other 15 parties to the RCEP negotiations had agreed to exclude ISDS provisions from the deal.
Malaysia, India, Indonesia and New Zealand are all officially opposed to ISDS provisions, but this is the first public sign that all the RCEP countries have agreed to exclude it.
“Once the agreement is in force, which is within two years, the member states will re-look into it and see whether or not we are going to have the ISDS. But it must be an agreement made by all countries,” he is quoted as saying. “For now, there is no ISDS.”
Opposition to ISDS is growing. The Australian government’s apparent agreement to remove ISDS provisions from the RCEP raises questions about why it is continuing to pursue such provisions in the Indonesian and Hong Kong trade deals currently being reviewed by the parliament’s joint standing committee on treaties.
It also raises the question of whether Labor, the Greens and the Centre Alliance, each of which has has policies opposing ISDS, will support the agreements when committee reports on them in mid-October.
But problems remain
Defeating ISDS in the RCEP will be a victory for social movements and governments concerned to retain public interest regulation.
But other problematic proposals remain on the RCEP agenda.
These include longer monopolies for medicines that would delay the the availability of cheaper medicines and would have the worst impacts in developing countries.
It remains to be seen whether this and other sticking points can be resolved and the negotiations completed by their current target date of the end of 2019.
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.
China now buys almost a third of Australia’s exports – about twice the value bought by second-placed Japan, and about nine times fifth-placed United States.
In February and March customs officials in Chinese ports reportedly held up Australian coal imports. This was interpreted as a signal from Beijing about moves in Canberra to limit Chinese influence in Australia.
“We are incredibly dependent on China – in some ways we are a state of China,” said business commentator Robert Gottliebsen. “China is now the world’s number two country and they will not stand for being lectured to by anyone — let alone a minnow like Australia.”
Is Australia really that dependent on China?
As a commodity exporter, Australia is vulnerable to any downturn in global markets due to a Chinese economic slump. This makes the fallout from the US-China trade conflict concerning.
But being penalised as a supplier by China for some perceived diplomatic slight is a different matter.
Australia’s coal exports to China in 2018 were worth about A$15 billion – or about 1% of what the nation spends on private and public consumption in a year.
One might think losing a quarter of coal exports to China will knock about 0.25% off our spending capacity. In economic terms that’s a big number. Our results, however, point to a much smaller loss – just 1/6th the impact, or about 0.04% lower national consumption. That equates to every person having $24 less to spend in a year.
Four determining factors
Any economic model necessarily abstracts from potentially important real-world elements, so its potential accuracy depends on the detail and data that goes into it.
So perhaps more important than the specific results of a cut to coal exports is how our modelling shows four interconnected factors determine to what degree the economy will be hurt by sanctions on any export.
The first factor has to do with the capacity to redirect exports to other markets. How easily can exporters find other buyers? How much will the price need to be cut to interest buyers? We call these “trade diversion effects”.
If Australia could not divert exports elswehere, China buying 25% less coal would see the volume of total Australian coal exports fall by about 6%. Our modelling shows the likely fall would be about 1/12th of this, at 0.5%.
The chart below shows our results. The blue line shows the effect on the total value of coal exports. The stacked columns show the effect of China’s cutback being offset by sales to other markets – notably Japan, South Korea and countries in Southeast Asia.
To sell more to another buyer, it’s likely exporters will need to reduce prices. Our model anticipates the Australian coal price will fall by about 3%.
The second factor is how easily resources can switch from coal production to other activities.
For any resource that can move to alternative uses, the impact of the trade sanction will be reduced. Labour is an example. A miner no longer needed to meet demand for coal will generally have skills transferable to other jobs, although this might require working at a lower wage in another region.
For any resource that cannot easily move – the capital invested in specific coal-mining equipment or transport infrastructure, for example – lower export revenue will mean lower profits from these assets.
How do lower profits affect Australian living standards? This depends on who owns the affected assets, and how much tax they pay.
So the third factor is the level of foreign ownership. More foreign ownership means more profits go overseas. This dampens any impact of lower profitability on Australian living standards.
For our modelling, we set foreign ownership of the coal industry at 80%, based on Reserve Bank of Australia estimates and an analysis of mine ownership in New South Wales coalfields. With just 20% of the after-tax profits staying in Australia, the impact of any change is minor.
The local economy, however, can also suffer due to lost taxes on the income of those foreign owners.
Taxation effects are the fourth factor.
Australian governments collect taxes through mining royalties (a tax on the value of production), corporate tax (on profits), and withholding tax (on interest and unfranked dividends).
We set the coal royalty rate at 8% of the value of coal production, and the taxation rate on foreign capital at 17% because the effective tax rate on foreign capital is about half the corporate tax rate.
A smaller cost than some think
With all these factors in play, our modelling suggests there is less to fear
from the Chinese government throwing its economic weight around than some think.
We think our conclusions probably hold for many of Australia’s exports to China, but acknowledge our investigation is preliminary.
For example, what would happen if the Chinese government decided to restrict the number of Chinese students studying in Australia? Finding new markets for education services might be tougher than for primary products. Resource redeployment might be easier, however.
Notwithstanding these caveats, this type of modelling could provide a clear framework to assess Australia’s economic vulnerabilities.
Perhaps no price should be put on upholding and expressing our liberal democratic and human rights values, and protecting our security interests, but the cost of economic sanction might well be less than many fear.
James Giesecke, Professor, Centre of Policy Studies and the Impact Project, Victoria University; Nhi Tran, Senior Research Fellow, Victoria University, and Robert Waschik, Associate Professor and Deputy Director, Centre of Policy Studies, Victoria University
The United Kingdom will have another prime minister by the end of July, when members of the Conservative party choose between Jeremy Hunt (who?) and Boris Johnson (yes, really).
Aside from the morbid fascination of watching this from afar, this leadership contest matters because it will determine who will (presumably) lead the UK out of the European Union, with or without a deal.
One way or another, this will affect Australia’s future trade relationship with the UK.
Selecting a new Tory leader
Selecting a leader of the Conservative party (or Tories) used to be easy. As late as 2003, a series of potential candidates would be “sounded out” behind-the-scenes by grandees, including lords and senior MPs, to see if they wanted the honour of leading the party (and, as a happy by-product, the country).
As with all leadership positions, not everyone wanted the job. When the men in suits offered Sir Alec Douglas-Home the honour of being prime minister in 1963, he famously replied: “Please, please not me!”
They ignored him and he went on to become one of the least successful prime ministers in British history.
But the sounding-out process was democratised in 1998 so that the party base could have a say. The process for electing a new leader of the Conservative party is that any or all members of parliament (MPs) can put their hat in the ring. If they gain enough support from fellow parliamentarians, they compete against each other in a series of votes among MPs, until there are only two contenders left standing.
At this point, the party members in the towns and shires (the so-called grassroots members) get to vote on who next becomes leader.
This innovation came at a moment in time when the Conservative membership was becoming highly unrepresentative of the country as a whole. And since the late 1990s, the number of members in the Conservative party is declining, the average age is increasing, and the membership is overwhelmingly white. This has led some people to describe the conservatives as “pale and stale”.
Johnson vs Hunt
This time round there were 10 runners. The field became “pale, male and stale” when the two female contenders, Esther McVey and Andrea Leadsom, did not gain the required number of votes to progress to the next round.
Eventually we got down to Hunt and Johnson.
Johnson, the former London mayor and foreign secretary, needs no introduction. Yet, despite a campaign mired in controversy about his personal qualities and his avoidance of most TV debates, Johnson was still in front among party members as of late June.
He may scandalise opinion outside the Conservative party, but the grassroots members still rate him. This is partly because he stands for leaving the EU without a deal on Oct. 31, 2019 – an article of faith among Brexit-supporting Conservatives.
In contrast, Hunt, the current foreign secretary, is more measured and presents himself as the more likely of the two candidates to secure a deal with the EU, as Johnson is not taken seriously in Brussels.
Of course, Johnson and Hunt’s respective positions on Brexit matter only so much because no change of leader affects the numbers in parliament. The real question then becomes, will the new leader call – or be forced into – a general election to break the parliamentary deadlock over Brexit?
What this means for Brexit
Brexit has radicalised the Tory base, which is broadly in favour of leaving with a no deal (unlike the rest of the country). A no-deal, or hard, Brexit means the UK would leave the EU without any agreements in place to soften the economic shock of leaving its largest trading partner, the EU. This is now Johnson’s stated position.
The success of the Brexit Party and a threat from the resurgent centrist and pro-Remain Liberal Democrats makes these challenging times for party strategists. In fact, the Conservatives are only united in their dislike of Labour leader Jeremy Corbyn.
Significantly, neither leadership contender really understands the multinational United Kingdom or seemingly cares about the strain Brexit is putting on the union.
Neither candidate has an answer to the Northern Ireland “backstop” issue, for instance, which seeks to avoid the reestablishment of a political border between the UK and the Republic of Ireland in Ulster (the source of past conflict). And a hard Brexit will see increased support for independence in Scotland.
What’s more, the results of a recent YouGov survey of Conservative party members and their attitudes toward Brexit added more weight to the idea that Brexit is, essentially, an English nationalism movement.
So, in keeping with the permanent state of political misery induced by Brexit, any outcome of the leadership contest and the subsequent UK-EU politics will make almost everyone unhappy.
Both sides feel like they are losing. This is a result of the referendum format; in an election cycle, you at least think your side might have a chance next time.
But deep divisions over Brexit mean that the future of the Conservative party is at stake. Like turkeys voting for Christmas, if Johnson is elected leader, there may not be a next time for either the Conservative party or the United Kingdom.