Trade War Intensifies

September 18th, 2019
The trade war between the United States and China is not limited to two nations, with global markets continuing to feel the pressure. As a chief political ally of the US and major exporter to China, Australia is somewhat caught in the middle. The trade war recently intensified with the addition of new tariffs, with the escalation sending shock waves across the world. The Reserve Bank of Australia (RBA) has noted multiple "longer-term downside risks" to the Australian economy, with preparation measures needed to reduce the impact.

The recent escalation saw increased tariffs imposed by both sides, with neither President Trump or Chairman Xi likely to give in any time soon. New 15% tariffs on US$112 billion of Chinese goods have been applied by the US, with China starting to impose 5% and 10% tariffs on another US$75 billion worth of US goods. All Chinese goods will be subject to tariffs by the end of 2019, and President Trump seems more keen than ever for US firms to stop doing business with China altogether.

Even though Trump claims that China is footing the bill for the tariffs, evidence suggests that most costs are carried over to US importers and consumers. After the latest round of tariffs were announced, hundreds of US companies and professional groups asked Trump to postpone the moves, saying they would destroy jobs and increase prices. According to a University of Michigan study, consumer confidence is at its lowest level since 2012, with US investments also down on some figures.

The risk to Australia is relatively small at the moment, but by no means insignificant. According to the RBAs latest assessment, we can expect a 0.2% reduction in economic growth for 2019 and 2020 as a result of the trade war. There are lots of additional long-term risks, however, especially if the negative trade environment leads to a global recession. Despite the reduced nature of acute impacts to the Australian economy, RBA governor Philip Lowe recently identified the trade war as the single biggest risk to the global economy. ;

In fact, there may even be an upside to the trade way, at least from Australia's perspective. If Chinese authorities resort to stimulus measures to keep their economy ticking over, there is likely to be increased demand for natural resources such as iron ore, coal and liquefied natural gas. While these short-term gains would be intensified ad prolonged if China reduces its business with competing US markets, we are at risk if China is given incentives to work with the US. ;

According to the RBA, "There may be some short-term upside, particularly if China stops buying agricultural goods from the US and if more Chinese tourists choose Australia over the US." However, "The issue is the distortions such purchase agreements will impose on the global trading system as we and other countries seek markets further afield for our goods... It could increase the cost of shipping, which means consumers and producers will face higher costs."