Why Australian ag would be a loser in a China, US trade war

While Australian agriculture has remained a bystander for now to this ugly spat, it will feel the waves of this offshore turbulence if a trade war isn’t averted.

The past six weeks have seen several key stages in the skirmishes between the US and China since Trump’s original announcement.

First up, China announced its intention to put tariffs of 15 per cent or 25pc on a list on 128 products imported from the USA in retaliation to steel and aluminium tariffs. Many of these were agricultural – products including pork, wine, nuts and fruit.

In addition to steel and aluminium, the US then pledged to levy tariffs worth US $50 billion on imports of various products from China (largely non-agricultural in nature).

In response, China announced a list of a further 106 US products that would be subject to a 25pc tariff.

Of these, 33 were agriculture related and included the big one for US China trade – soybeans.

Also included were sorghum, wheat, cotton, beef, corn and frozen orange juice. 

Not to be outdone, the US then pledged to look at imposing an additional US $100 billion in tariffs on imports from China (products yet to be decided).

An important point to note here is that most of these threats are yet to be implemented, and so there is still time to avoid a trade war.

Only the tariffs on the Chinese ‘list of 128’ are now in place. As such, the US and China have given themselves time to negotiate, and it is still possible that all this could be avoided.

However, given the recent momentum of this dispute, and lack of evident negotiation so far, consideration should be given to what it would mean for Australian agriculture if all these threats are implemented.

Ironically, in the early stages of such a trade war it might appear that Australian agriculture is winning from it.

Capital is likely to fly to safe havens, and push our currency down against the US dollar, increasing our competitiveness in world markets.

Chinese tariffs will make US products more expensive in China, opening up some additional opportunities for Australian exporters of products like almonds, wine, cotton, beef and canola.

To what extent we benefit would depend partly on how much the US can manage to ship product into the Chinese market via other channels (including Hong Kong), how other competitors respond (such as Canada in grains) and on the redirection of shipments from the US into other markets where we compete (like South East Asia).

However in the long term, Rabobank believes Australian agriculture would emerge a loser from a trade war between China and the US.

A significant trade war would slow global economic growth, impacting demand for our products.

As an export-oriented sector, we would lose much from the shift away from a rules-based system in global trade.

The US may exert pressure on Australia not to benefit from any penalty imposed on them in the Chinese market. And if tensions between China and the US continue to rise, it is quite possible that at some point we would be asked to choose which market we trade with between these two giants.

Besides watching with alarm, there are a few things we can do to respond to rising tension between China and the US. Producers, processors and traders have a range of risk management tools they can use, and should consider whether deploying them makes sense for their situation and risk appetite.

More broadly, rising tensions highlight the merit in having a range of trading relationships that diversify our risks between various markets.

In the current context, the merits of free trade agreements with Britain and Indonesia look stronger.  Of course, this may all yet blow over and look in retrospect like pure theatre.

But planning for unpleasant possibilities is what risk management is all about.