‘Cold’ war a trade threat to Australia

The two superpowers are already locked in an escalating trade war over tariffs, sparking fears they may want their respective key trading partners to pick a side – with either China or the US.

Prominent trade analysts, Michael Every, has warned farmers about the scale of the threat, but other commentators say superpowers are a long way from demanding concessions from their allies.

But on one point, agreement is clear. 

Australia needs to share its eggs between more than one trade basket and develop links into new growth markets like Japan, Indonesia and India.

Agricultural exports currently play a significant role in Australia’s trade surplus with China. It’s our largest market for farm produce, which has risen a whopping seven-fold since the turn of the century, and was worth $14 billion in 2017–18.

However, many countries have lost markets as China has risen to become an export juggernaut, and received little access to its booming domestic market in return.

Most significantly, China’s aggressive pursuit of expansion through mercantilist trade policy, pulling out all stops to maximise exports and limit imports, has provoked the US to follow suit.

In March this year, 11 nations, including Australia, signed up to the Trans Pacific Partnership, ratified by the federal government this month.

The TPP was originally intended to include the US, but it withdrew from negotiations in 2017.

In January, however, US President Donald Trump signalled he could push harder for “substantially better" Pacific trade deal for the US.

President Trump has already twisted the arm off allies in Canada and Mexico to sign up to renegotiated North American Free Trade Agreement.

That deal includes anti-China terms requiring Mexico and Canada to notify the US before trading with non-market economies.

Rabobank’s Mr Every, a Hong Kong-based Asia-Pacific head of financial markets research, calls it a cold war between the two global superpowers.

At last week’s National Farmers Federation convention he warned  that, one way or another, access to China’s gargantuan domestic market could be cut short.

“China has made it clear there will be a gun put to your forehead and you’ll be asked are you with us, or are you with the US,” he said.

“If you answer the US the Chinese can slam the door shut.”

Mr Every said the US would look to renegotiate the TPP with a clause “no trade with China”.

“Australia needs to pick a side, before it’s picked. You’re in a much stronger position if you can pick,” he told the Canberra forum.

At the Lowy Institute, international economy program director, Roland Rajah, is less fearful of a stark choice between China and the US looming in Australia’s near future.

However, the situation could escalate over time.

“It’s far too early to say which scenario we’ll get,” Mr Rajah said.

“If you extrapolate the trend line of the way things are going, then we could be headed towards an us-and-them situation.

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“But at this time it's not clear how far things will go.”

He said the jury was out on the impact of clauses that could restrict the ability of Canada and Mexico to pursue a trade deal with China.

"It’s unclear how powerful that will be. Some say it will be very constraining, others say it won’t really change anything legally speaking,” he said.

“I say it is meaningful, especially if you think of domestic politics when a country negotiates with China.

“Business interests will immediately worry about the risk to their trade with the US and start making loud noises against jeopardising that, which could be politically hard to ignore.”

US Vice President Mike Pence has been clear on how the US sees the picture.

He took aim at China this month, warning of its “emboldened” and growing military aggression, abuses of domestic minorities and trade policies that profit at the US’ expense.

“To advance our vision of a free and open Indo-Pacific, we’re building new and stronger bonds with nations that share our values across the region,” he said.

Mr Pence said China used “an arsenal of policies inconsistent with free and fair trade” such as tariffs, quotas, currency manipulation, and foreign subsidies that are “handed out like candy”. 

“As we respond to China’s trade practices, we will continue to demand an economic relationship with China that is free, fair, and reciprocal,” he said.

A recent Bloomberg report highlighted the security threats driving these concerns.

It alleged a Chinese military operation secretly inserted microchips in computer parts of 30 US companies.

Chinese manufacturers denied the claim. 

The components, made in China, were in some cases used by the US government in the Department of Defence and the CIA.

Australia has followed the US in restricting Chinese telco Huawei from the rollout of 5G mobile networks, citing security concerns.

Mr Every expected national security concerns to drive foreign policy.

“When national security comes in, free trade goes out the window. Now, they’re putting pins into maps,” he said. 

“Australia is the canary in the mine. There is no country more aligned with the US militarily in this region, and no country more correlated with China economically.

“The US can say to Australia this deal will be part of overarching military strategy, you'll be comfortably tucked under our wing.

“But part of a new deal (TPP) could be an addendum that says Australia can’t walk in the front door to trade with China while US firms can’t. 

“That means you’re united with the US in breaking Chinese resistance to economic reforms.

“I don’t see how Australia can say no, otherwise it’s saying `sorry US, we are going to sneak in and steal your lunch while you do all the heavy lifting’.”

Mr Rajah said the US could continue to pursue trade restrictions, through measures already in place, namely US tariffs on Chinese exports.

“The US is pursuing a policy of decoupling from the Chinese economy, but it’s not clear if it will take a narrow focus on national security or pursue a broader agenda,” he said.

Mr Every felt the only way trade restrictions could be avoided would be for China to agree to buy a lot more US exports – namely resources and agricultural products.

“Australia needs to look at it as an opportunity, rather than a threat, and ask ‘what brand can we build for agriculture that allows us to thrive’, because trade protectionism won’t go away,” he said.

Mr Rajah said government should develop new markets, but there was no “silver bullet” to overcome our reliance on China trade.

 “It’s hard to get around the economic logic of trading with China.”

Australia's wool market, which exports 80 per cent of its output to China, may be the latest casualty of a deepening rift between China and the US, according to Australian Wool Innovation CEO Stuart McCullough.

The wool market dropped 53 cents last week - a trend Chinese wool buyers hinted was linked to stocks being "too fine".

Mr McCullough told Fairfax Agricultural Media that reasoning did not stack up.

“It makes no sense to me. I get that fleece lines will be a bit finer, but not that much,” Mr McCullough said.  

“It seems to me they are sitting on their hands. It just looks to me like they are out of the market at the moment.

“I am not sure why that is, but my biggest concern is the trade war between the US and China and our alliance with them and our own battle with Chinese trade.

“I don’t think our own government’s relationship with China is too good at the moment either.”

Mr McCullough, who left for China on Tuesday, said he would be meeting with the top 10 wool processors and would be aiming to determine if there is any pressure because of a deteriorating trade.

“We can’t jump to conclusions,” Mr McCullough said.

“With China as our biggest partner, something like this will throw a big spanner in the works.”

He said with demand strong and supply down by 10 to 15 per cent, theoretically the price should go up.

The only factor that could get in the way of that is some sort of boycott from China, he said.  

“All the business world is very concerned about this and we are no different,” Mr McCullough said.

Australian Wool Network managing director John Colley is a woolgrower, manufacturer, exporter and retailer with extensive interests in China. 

He contributed to a panel discussion about China at the National Farmers’ Federation congress in Canberra last week.

Mr Colley told the forum Australia would benefit long term by diversifying its wool exports into new markets, but expressed doubts about the readiness of growers to take the price hit required to do so.

“I think growers will vote with their pockets,” he said. 

“It could divide the nation, we are in uncharted territory.

“I don’t believe anyone understands China. 

“Anyone that tells me they actually understand what’s going on there as far as I’m concerned is just a liar.”

China’s emergence as a powerful agricultural market in the past two decades should not be taken for granted says Agribusiness Australia executive officer, Tim Burrow.

But he feels our farm trade ambitions are generally fairly diverse.

Mr Burrow said there was no doubting the value of China as a trading partner and investor in Australia’s agricultural sector and related infrastructure.

“However, I think our dependence on China is less obvious than, say, the mining sector,” he said.

“We still have other very important export relationships in Asia and fast developing trade ties with emerging economies like Indonesia and Vietnam.

“India, although quite self sufficient in many agricultural areas, also represents a lot of potential as a bigger trade partner – it’s probably at the same point China was 15 years ago.”

He said farmers also enjoy a diverse mix of quality export markets in the US and Europe.”

However, the geopolitical realities should not be dismissed.

“Don’t think you can separate business from politics, because you can’t – it just doesn’t work like that in real life,” he said.

Australia certainly had much to lose if the free trade gains of the past 20 years started to be replaced with new barriers or rules.

“The last thing we want is trade wars and tariff blocs – our farm sector has had to give up so much over the years to get to where we are today.”

Mr Burrow hoped current market tensions might prompt exporters to seek new market options, adopting a more pioneering spirit in search for opportunities.

- with Kristen Frost and Andrew Marshall