Trade Wars-What’s It All about... Really?

A dollar for every time I’ve been asked this question over the last few months.

Why is there a trade war and how will impact us?

​Everyone is having a crack at Trump for being a protectionist. And he is. But the US is still almost unmeasurably a more open economy than is China.

Here are 5 specific complaints that the US has with Chinese trade.

1. The Chinese have erected virtually unbeatable barriers to prevent trade in certain Chinese markets. On the other hand, China has relatively easy access to the US market and sells more to the US than any other country.
2. They sell products at a loss (funded by the Chinese government) to secure foreign market share, and force competitors out of business. This is known as “dumping”.  Australia has an “anti dumping” duty that it enforces if it believes a protectionist tariff imposed on foreign imports result in a price below fair market value (Bill Shorten intends to triple anti-dumping penalties).
3. They steal US intellectual property via cyber theft and other espionage.  Some of these are shameless knock-offs of Western brands.  We have all seen examples of this where products look and feel the same as a more familiar brand, but for a fraction of the cost. 
4. China often makes a condition of US investment in China, and access to the vast Chinese market, that the US company involved transfers the intellectual property of the product. Once the IP transfer is complete, the American firm is often shown the door, only to find it now faces internationally a lower cost Chinese competitor that possesses all its industrial secrets.
5. And maybe the most important one of all, every Chinese company has at its core a committee of the Chinese Communist Party and is required to serve Beijing strategic interests. That is why Huawei (a Chinese mobile phone operator) have been banned from being part of the proposed 5G mobile infrastructure roll-out in Australia.

The result of this is that the US has a $375 billion trade deficit with China. That is not sustainable and don’t be surprised that now Trump has done the hard work, that future administrations keep this in place until there can be a deal done where the Chinese buy more American stuff. 

What’s it mean for us?

The tariffs announced so far are not economically a game changer. It will be US consumers who will pay the highest price, but most won’t even notice. The yanks spend about $US13.5 trillion a year on goods and services. It imports $US200 billion of Chinese goods that will be subject to tariffs of 10%.

So assuming that Chinese exporters pass on the cost, that’s a 10% rise on about 1.5% of the shopping bill. Like I said, no one will even notice.

Should it escalate though, and US tariffs hike to 25% at the end of the year, and extend to all Chinese imports, as Trump has warned, there’s more to worry about.

China is our biggest trading partner and any shock to their economy will slow down their imports of our resources. In this scenario, KPMG modelling finds Australia’s GDP would be 0.5% lower over five years.

Our economy would certainly notice that.
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