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The trade war between the US and China presents a very sensitive challenge for Australia. On the one hand over 30% of everything we export is purchased by China. On the other hand we have an equivalent dependence on the US for our national security. The implicit protection of the US military is very important to Australia.
Australia has successfully straddled these apparently conflicting goals for many years. Respected analysts of this topic remain confident in Australia’s ability to continue to manage the expectations of both China and the US despite the rise in tension between the two economic behemoths.
Economists argue about a lot of things, yet many would probably agree on the benefits of free trade, which generates wealth by allowing the free flow of goods across international borders, without taxes and other such barriers.
Notwithstanding that there may be a very good reason to impose a restriction on the flow of trade, when a restriction is placed on the flow of goods and services the cost of that good or service will increase. It is also worth noting that any cost increase will flow into similar global markets even when that market has not had the cost directly imposed on it.
Trade agreements will set out the rules that each nation will accept to allow goods and services to flow between them in a mutually beneficial nature. A “free” trade agreement, like any other, must be respected by both parties for it to be successful in practice.
China had been accused of unfair trade practices for many years and Trump had campaigned against these practices on his way to winning the presidency. As President, Trump took steps to address these imbalances as early as July 2017, when he and President Xi Jinping agreed to a 100 day plan for trade talks.
These talks have dragged out over several years with both sides taking increasingly hard positions. We have provided an extract attributed to Hamish Douglass that describes the current situation as well as any.
Hamish is the founder and Chief Investment Officer of the very successful Magellan Financial Group. It is worth noting that Hamish is at this point perhaps one of Australia’s most successful fund managers and arguably one of the most brilliant financial minds this nation has produced for a generation. Douglass says that he doesn't think Trump is right about a lot of things but that he is right about the core issue in the trade dispute – and that is China fighting the trade war on unfair terms.
"They have been stealing intellectual property, they’ve been requiring foreign companies who come to participate in their massive market to effectively transfer their intellectual capital as a cost of doing business," he says.
"If they can't get it they go and steal the technology through cyber theft, and they have massive state-owned enterprises who get huge subsidies and they use those subsidies for taking market share on a global scale. So, that is a very, very real issue and they're trying to reset that relationship. "
The negotiations have been the backdrop for each nation to apply increasingly punitive tariffs on goods and services. The share market is pricing for a conclusion to negotiations and most likely because it would be in Trump’s favour to have a conclusion going into the next presidential election cycle.
There is however a chance that Trump will stick this out and try for a genuine reset of the trade agreement to one based on free market terms. While this may be a better outcome for global trade many years into the future, it will also likely cause volatility in the short term.
It is true that Australia needs both the US and China and it is not an option that we take a side. However, predicting how the trade war will impact Australia in the longer term is not possible.
We are mindful that negative consequences are possible, however, it is worth noting that in spite of media devoting a lot of energy to discuss the potential negative outcomes, Australia has recently recorded a record trade surplus!
A tribute to the remarkable life of Charlie Munger By Ben Graham
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