11 April 2018
Trade wars threaten Australia
When Donald Trump announced his first round of tariffs on China at a special ceremony at the White House last month, Chinese President Xi Jinping said nothing. Instead, China responded with a set of matching tariffs, on products such as soybeans, pork and cars – all targeted at farming and industrial areas, which Trump’s Republicans need to win at the coming US midterm elections. Trump doubled down and proposed tariffs worth US$100 billion, raising the prospect of a trade war between the world’s two largest economies.
On Tuesday, Xi broke his silence. In a speech at the 2018 Boao Forum for Asia, he tried to soothe tensions and – without mentioning Trump – warned that raising barriers leaves countries “assigned to the dustbin of history”. Xi’s various concessions were hardly new, but they allowed Trump to claim an initial victory (he sent a thank-you tweet).
Trump is taking on Xi in a game at which China excels. Neither nation will win a trade war, and the losses, which could be disastrous, would be experienced everywhere, not least in Australia.
The causes for concern are not merely economic. But it is worth noting that Australia’s two biggest trading partners are China (trade in 2016 was worth AU$155 billion) and the US (AU$64 billion). The effects of any serious disruption to these two economies will be unpredictable, but almost certainly damaging for Australia, a nation that relies so much on them faring well. (In addition, Australia’s third and fourth largest trading partners are Japan and South Korea – and both these countries share their largest trading partners in China and the United States.)
Trump’s conduct is also a worrying reminder of the extent to which he is fuelling a dangerous global phenomenon, in which nations adopt unilateral solutions to transnational problems. This approach risks multiplying the pain for all. The most obvious precedent, which has been much cited in recent weeks, is the US’s Smoot–Hawley Tariff of 1930, which tried to protect American farmers but led to a wave of international tariffs that hampered global trade and deepened the Great Depression.
For Australia, a country with limited trade or military clout, the preference for solving disputes is talks and consensus, rather than threats and tweets. The World Trade Organization (WTO), which has been described as a “United Nations for global commerce”, was until recently the United States’ preferred method of resolving disagreements. The US has initiated 117 complaints – more than any other nation – and its main target has been China, which has been the subject of 22 complaints (Australia has been the subject of four). But Trump does not like the WTO or global deals. “I like bilateral,” he said earlier this year.
His punitive approach is likely to inflame tensions, stoke nationalism and breed protectionism – as Australia’s Foreign Affairs Minister, Julie Bishop, warned today. “This is not consistent with the US as a champion for the past 70 years of more open markets,” she said in a speech at La Trobe University.
In the United States, Trump’s approach has invited criticism from various corners and brought together parties that are often opposed – Republicans, Democrats, free traders, fair traders, farmers and bankers. Many of his critics believe that he is attempting to address a genuine problem: China has an economy that revolves around state-owned, state-backed firms, and it limits outside access, scrutiny and investment. This is a challenge the world may yet decide it wants or needs to deal with (or it may not). But Trump’s tactics reject the best ingredients for a solution – allies and cooperation – and instead risk directing the world towards the wrong precedent (at worst, 1930).
And he allows Xi to assume the mantle of global economic leadership – a prospect that China’s ‘President for life’ appears to relish.
At his speech on Tuesday at the Boao Forum, Xi declared: “Human society is facing a major choice to open or close, to go forward or backward.” For now, it is unclear – as with much of Trump’s theatrics – how far the US President is willing to go in seeing through his trade bluster. In a recent tweet, he appeared to shift tone, expressing hope of a tariff-free future and declaring that he and Xi will “always be friends, no matter what happens with our dispute on trade”.
So Trump may yet retreat. He and Xi could hold fire and agree on a “bilateral”. Either way, he is further weakening the US-led mechanisms that have helped to avoid conflict and allowed nations such as Australia to prosper.
Such mechanisms are ultimately unlikely to fall out of favour, but they may end up being directed by others. It is perhaps not surprising that so much attention was focused on Xi’s speech in Boao.