"Consider this: Australia imports about 90% of all goods sold within our borders. Aside from food and political ineptitude, we barely produce anything locally".
Why the US-China Trade War Hits Australia Hardest
- Trump prepares to ‘go nuclear’ on China
- The trade war is only getting started
Melbourne, Australia Tuesday, 27 March 2018 Shae Russell, Editor Jim Rickards, Strategist
You need to know one thing when it comes to investing: Anything that happens with China has major long-term implications for you too.
For starters, they are our largest trading partner — though China is more important to Australia than we are to them. Our economic welfare is firmly hitched to their economy. Yet, to China, we are only their sixth largest trading partner.
This is why US President Donald Trump’s trade tariffs on Chinese exports are particularly concerning.
Earlier this month, Trump announced that he would apply taxes on steel and aluminium imports into the US. He followed through last week, announcing $60 billion worth of tariffs on Chinese steel. Trump claims tariffs on steel and aluminium are in the interests of US national security.
Whether he’s right or wrong, whacking tariffs on imported steel and aluminium brings the US one step closer to a trade war with China.
At least Trump will be able to keep one of his election promises — attempting to protect US domestic steel and aluminium industries…
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In order to get it through Congress, however, Trump couldn’t make it look like a blatant trade war. Instead, he had the US Department of Commerce investigate a little-known 1962 trade law. It turns out that increasing import taxes under the pretence of national security is legal.
Nonetheless, the biggest outcome of dredging up this little-known law is that it leaves the door wide open for Trump to apply tariffs when and where it suits him.
And that’s left China squarely in Trump’s crosshairs.
Regardless, research from IHS Global Trade Atlas suggests China won’t feel too much pain from Trump’s actions. Other countries, however, such as Australia, are far likelier to bear the brunt of the tariffs.
Source: MarketWatch
In the short term at least, Trump’s swagger may please the 0.11% of the US workforce slogging it out in the steel mills. But the US already knows how lacklustre the impact of tariffs is in protecting this industry. Several administrations have tried to protect steel mills since the early 1980s, yet the sector continues to shrink.
At its peak in the 1950s, the sector employed over 650,000 Americans. Today it’s one third of that.
An examination of the steel tariffs put in place by the George W Bush administration suggests the move did more harm than good. It turns out that manufacturing companies went looking for cheaper substitute materials to avoid the higher-cost steel. And the higher cost of steel still led to sackings regardless.
In the past four decades, import taxes and cheaper materials from other countries have decimated the industry. However, it’s also an industry that’s been heavily impacted by tech advancements.
Technology has led to greater production efficiencies, with steel mills needing fewer people to do the job. Furthermore, scrap metal is highly automated, and doesn’t require a lot of manpower.
But back to Trump…
At first, many observers thought Trump was shooting from the hip as he likes to do. But as Jim explains below, this is an out-and-out trade war with China.
And there’s good reason to believe China will be none too happy about it.
What’s certain is that further tariffs like this are likely to increase the friction between the two countries. That’s no laughing matter considering trade between them topped a staggering US$580 billion (AU$743 billion) in 2017.
What’s more, any tariffs are likely to create additional problems for China’s ‘Leader for Life’, President Xi Jinping.
As China’s quasi new emperor, Xi now can’t risk losing face in front of his people. Especially when he is reminding his billion-strong nation of its success under his leadership. He emphasised that changing leaders would risk China’s economic stability. It’s a case of better the devil you know…
What this does mean, however, is that there is a new layer of risk with Xi. To maintain power and control, Xi will need to enforce power and control. Doing this may lead to China’s international policies becoming unpredictable.
Here’s an excerpt from The Next 100 Years: A Forecast for the 21st Century, a book by geopolitical analyst George Friedman, predicting the type of reaction we might see from China as a result of any tariffs (emphasis mine):
‘China sends almost one quarter of all its exports to the United States. If the United States barred Chinese products, or imposed tariffs that made Chinese goods uncompetitive, China would face a massive economic crisis… Countries facing economic disaster become unpredictable. They can become aggressive in trying to open up other markets, sometimes through political or military pressure.’
The bolded part is what resonated with me.
Trump’s steel tariffs may not impact China much. Yet it proves once again that trade with China is clearly on Trump’s hit list.
Loss of manufacturing power would greatly impact the Chinese economy…and the debt that has fuelled its incredible economic two-decade-long expansion.
And then there’s Australia…
Trump’s actions have the potential to stifle Australia’s economic growth in the long term.
Australia will be little more than collateral damage. Aside from food, coal, gold and minimal amounts of oil and gas, we mostly import everything else.
Consider this: Australia imports about 90% of all goods sold within our borders. Aside from food and political ineptitude, we barely produce anything locally.
Given how much we import, it’s unlikely the Aussie government will increase import tariffs. But with countries around the world raising tariffs in turn, a potential outcome is slowing global growth.
Yet slowing economic growth is the long-term implication.
The immediate pain will be felt in the export sector. Specifically, the very commodities we rely on to keep the export side of our economy ticking.
Last year, China imported over 1.075 billion tonnes of iron ore, which was a record. About 20% of that came from Brazil. However, a whopping 60% of iron ore came from Australia. In other words, we shipped about 600 million tonnes of iron ore over to China.
What happens to our iron ore when it gets to China? It’s mostly turned into steel.
Even if Australia is exempt from tariffs directly, we will still feel the effects indirectly.
The tariffs Trump is applying to Chinese steel is something we’ll likely feel through lower exports of iron ore.
If China imports less iron ore from us, that’s less income coming into Australia. What’s more, slowing consumption of iron ore from China is likely to reduce the value of iron ore per tonne. And that would force the Aussie dollar down.
It’s a vicious, tightly wound circle.
Trump may be taking aim at China but, if a trade war does kick off, Australia will get csaught in the crosshairs.
Click here to learn how you could protect your wealth from the fallout of this trade war.
Kind regards,
Shae Russell, Editor, The Daily Reckoning Australia
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Trump Prepares to ‘Go Nuclear’ on China
By Jim Rickards, Strategist
As you know by now, the Fed raised its target rate last week.
I’ll have more to say about that in the days ahead. But today I want to address some news that could have even larger ramifications for markets and the economy. The mainstream media haven’t given it nearly the consideration it deserves.
What am I talking about?
President Trump announced plans on Thursday designed to punish China for stealing American intellectual property.
The sanctions target China’s high-tech sectors and place restrictions on Chinese investments in the US.
It will likely trigger Chinese retaliation and reignite fears of a global trade war.
The news caused a bloodbath on Wall Street. The Dow ended the day more than 700 points lower.
This should come as no surprise.
The stock market traded down when the trade war headlines first gained prominence early this month. That was when the Trump administration announced tariffs on imported steel and aluminium. Incidentally, these tariffs take effect immediately.
Then stocks just as quickly bounced back on the view that Trump’s bark was worse than his bite and that the tariffs and sanctions would be full of loopholes and exceptions.
But that was just wishful thinking.
It’s true that Trump offered relief to Canada and Mexico — and they may be applied to Australia — on the steel tariffs, but that was only so he could gain negotiating leverage on the ongoing NAFTA talks.
If Canada and Mexico fail to give Trump the concessions he wants on NAFTA, those steel tariffs can bounce back to hit Canada and Mexico, as they already hit China and Brazil.
The bottom line is the world is now entering a trade war.
The trade war is only getting started
This is something I’ve been warning about for at least a year.
You must first understand that this is something Trump has been talking about for decades, going back to the 1980s.
Trump has long talked about unfair trade, the importance of tariffs, the importance of creating jobs and protecting US industries. This was the first thing he touched on when he announced his candidacy in 2015.
He’s never since varied in his position. So anyone surprised by his recent positions wasn’t paying attention, was in denial, or engaged in wishful thinking.
But why didn’t Trump announce these policies on day one?
Well, the answer is he wanted to. But there were constraints. The biggest single constraint had to do with North Korea.
A marginal economy always on the brink of collapse, North Korea depends upon the economic support of China. Trump therefore hoped he’d limit North Korea’s nuclear ambitions by convincing China to withdraw economic support if North Korea persisted in developing nuclear weapons.
These efforts mostly failed.
In the first place, North Korea considers nuclear weapons critical to its survival and was never going to completely abandon its program. It sees that America has only attacked countries that did not have nuclear weapons, like Iraq and Libya. It fears a similar fate if it doesn’t develop its own nukes.
Secondly, China did very little to curb North Korea’s nuclear program. But this should not have been surprising.
North Korea is a thorn in America’s side. And Beijing doesn’t want to help the US remove it. North Korea directly borders China. And China fears a united Korean Peninsula under the sway of South Korea and, by extension, the US. Why would China strengthen the American bargaining position?
Now Trump is taking the gloves off. And the trade war is finally here.
But the tariffs on steel, aluminium and solar panels are child’s play compared with the mother of all trade sanctions.
This is coming soon in the form of a report that will land on the president’s desk any day.
All the best,
Jim Rickards, For The Daily Reckoning Australia
