Australia’s economy is at risk of becoming collateral damage in the escalating US-China trade war, economists warned, after President Donald Trump confirmed China would be punished by tariffs on $US200 billion of US imports.
China is expected to swiftly retaliate against Mr Trump’s 10 per cent tariffs, leaving Australia’s export-dependent economy vulnerable to a slowdown in commerce between its two largest trading partners.
The Reserve Bank of Australia’s monetary policy minutes published on Tuesday, based on its September 4 meeting, said “significant tensions around global trade policy” represented a “material risk” to the global economic outlook.
Shiro Armstrong, an economist specialising in Asia at the Australian National University, said with Mr Trump also threatening to impose tariffs on Japanese cars, Australia’s top three export markets were on the brink of entering a risky international economic clash.
Trump about to impose new China tariffs
“We could quickly descend into a contagion of a global trade war where every country retaliates tit for tat,” Dr Armstrong said.
“Even if we do not get tariffs directly levied on us, we’ll suffer significant consequences.”
Mr Trump dramatically escalated his tariff war with Beijing, slapping a 10 per cent impost on roughly $US200 billion ($279 billion) of imports that will rise to 25 per cent within months unless China capitulates.
The Australian dollar fell slightly after Mr Trump unveiled the tariff package and the local stock market was weaker, while US stocks faltered in the final hour of trade as anticipation of the tariffs rose.
Economic modelling by KPMG suggests the local economy would be about 0.5 per cent smaller over four years if the trade war between the US and China escalated to a 25 per cent tariff on all goods traded between them.
Brendan Rynne, KPMG Australia chief economist said rising tariffs by the US and China would raise prices and reduce consumption by the two countries.
“That could ultimately feed through to reduced demand for our exports,” Mr Rynne said.
“Australia needs to be quite cautious about the escalation in trade tensions, because we could start to suffer more broadly as this ratchets upwards.”
The 10 per cent tariff will take effect on September 24, and remain in place until the end of the year, before rising on January 1 to 25 per cent.
Mr Trump also warned that any retaliation by China to the latest attack would “immediately” trigger preparation into tariffs on another $US267 billion in imports.
China’s top officials reportedly convened an emergency meeting to work out its response.
While the latest announcement covers a vast array of agribusiness, technology, consumer electronics and toys, Mr Trump’s ultimatum would ultimately see the equivalent of a tax on every item imported into the US by the world’s second-largest economy and Australia’s number one trading partner.
Alarm among businesses is intensifying throughout the US, China and beyond. They fear that doubling down on trade sanctions will end up damaging the global recovery and eventually whip back at the US economy, which is currently enjoying a sweet spot.
Mr Trump, whose Republican Party is under pressure ahead of the November mid-term elections, has shunned appeals from businesses in the US for restraint, and is now directly challenging China to either backdown or face even tougher measures.
The president believes the US is being unfairly treated because it has a massive trade deficit with China, and is subjected to the forced transfer of intellectual property as the cost of doing businesses in the country.
“We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly,” Mr Trump said late on Monday (Tuesday AEST).
“But so far, China has been unwilling to change its practices.”
Trade and Investment Minister Simon Birmingham said one in five Australia jobs were dependent on exports and Australia would continue to push for countries to follow the international trade rules on tariffs and subsidies.
“Tariffs ultimately result in consumers paying more and disruptive trade practices ultimately hurt economies, rather than help them,” he said on ABC Radio.
Mr Birmingham said the Morrison government would protect local producers by enforcing anti-dumping laws to ensure below-cost Chinese goods are not diverted into the Australian market.
Analysts expect China to respond swiftly with retaliatory tariffs on $US60 billion worth of US goods, with officials in Beijing saying on Monday the country would take “necessary measures” to safeguard its legal rights.
America has already imposed tariffs on $US50 billion of Chinese imports, triggering matching measures from Beijing.
Brookings Institution trade expert David Dollar said the fact that the administration’s “globalists” managed to talk Mr Turmp down to 10 per cent from the planned 25 per cent complicates China’s next step as it is “a kind of concession”.
“The obvious compromise for China is to proceed with the $60 billion but with tariffs no higher than 10 per cent and to accept the talks but come with low expectations and no concessions,” he said.
Another round of bruising tit-for-tat tariffs has dashed hopes of Washington and Beijing returning to negotiating table any time soon, even after the Trump administration offered last week to resume talks.
China has also sought to open new avenues towards a resolution, inviting Wall Street bankers to meet senior officials in Beijing this week to build momentum for a backdown by Mr Trump.
In his latest statement, Mr Trump said China was still refusing to change its practices – “and indeed recently imposed new tariffs in an effort to hurt the United States economy”.
“As President, it is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country itself.
“My Administration will not remain idle when those interests are under attack.”
Mr Trump said China has had “many opportunities to fully address our concerns”.
“Once again, I urge China’s leaders to take swift action to end their country’s unfair trade practices,” he said.
“Hopefully, this trade situation will be resolved, in the end, by myself and President Xi of China, for whom I have great respect and affection.”
Thomas Block, a policy analyst at Fundstrat in Washington DC warned the latest developments may not be enough to get China back to the negotiating table.
“Trump may not have exit strategy,” Mr Block said.
“The President’s experience with negotiations is centred on real estate where if you don’t get the property you move on with another property.
“The trade war with China is more complex, and an exit strategy may not be as simple as looking for another location for a casino or golf course.”
Treasurer Josh Frydenberg said in a statement “no one wins from a global trade war.”
“We believe that our interests are best served by a rules-based order and strong alliance relationships.
“Australia’s strong and growing economy is an example to the world of the benefits of free trade and investment.
“Our plan for a strong economy has seen us sign the Trans-Pacific Partnership and trade agreements with China, Korea and Japan opening new markets for Australian farmers and businesses.”
Reserve Bank of Australia governor Philip Lowe has periodically warned of the economic risks of a trade war.