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What Trump's trade war with China will mean for Australia

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It's hard to remember a time when the international trading order looked more uncertain. We know trade disputes are part and parcel of international relations. But US President Donald Trump has taken it to a whole new level.

Since taking office less than two years ago Trump withdrew from the Trans-Pacific Partnership, continues to make threatening noises about the North American Free Trade Agreement, and, most significantly, imposed tariffs on $US200 billion worth of Chinese products.

Where will he stop?

The Chinese responded in kind with duties on some US goods. Beijing also ratcheted up the rhetoric, accusing the US of "bullying" and igniting "the largest trade war in economic history".

us president donald trump economic outlook

Hyperbole, to be sure (remember the Great Depression; don't worry no one does), but it highlights the heightened tension engulfing the world's trading system.

For Australia and its citizens the long-term ramifications could be slow - but painful.

In the short term it's unlikely there will be an immediate effect on our economy. We are not a manufacturing country, which is where this trade war is playing out; and resources, where we are a major global player, have not been affected.

Our sharemarket is also dominated by banks and other financial institutions, none of which has any significant exposure to overseas markets. So, any fallout should be initially minimal. So far, so good.

However, longer term a sustained US-China trade war can only dampen global growth, and Australia must also lose out.

If China's economy slows down we can expect weaker demand at lower prices for our commodities, especially iron ore and coal. This will also reduce demand for those commodities in other key markets.

invest in mining company sharesOur exports to countries such as Japan, Taiwan, and South Korea will suffer. The services sector could also fall foul of any trade war. Australia could lose the financial benefits that flow from the influx of Chinese tourists and fee-paying students. The property market would suffer with less foreign money flowing into the country.

A full-blown trade war between our biggest trading partner, China, and our historical defence ally, the US, would also be difficult for the Turnbull government to navigate. Its recent inept handling of the Beijing relationship has put at risk these emerging important commercial relationships.

There are also two other important factors to consider.

First, if, and it's a big if, Australia could successfully find a middle path through a China-US trade war, there could be substantial benefits. China could see Australia as a stable, reliable trading partner that is an important source of energy and food.

China values stability and Australia could help provide this at a volatile time. But with our increasing military ties as the US refocuses its attention on the Pacific, this is highly unlikely.

Second, a warring China-US could open the gate for exports, especially soft commodities. US primary producers are already feeling the backlash from China (Beijing has done its homework on US domestic politics), so Australian farmers could benefit.

But it's hard to know where this will end. What other countries will start using tariffs as a tool in international diplomacy?

The broad economic consensus is there are no winners in trade wars (again, remember the Great Depression and we will not hold it against you if you don't), only losers.

It's also worth noting 70% of China's growth comes from domestic consumption, so the notion the US holds all the trumps (bad pun intended) in this dispute is misplaced.

What is certain though is that a protracted trade war will test Australia's diplomatic and commercial skills.

The economic downside is palpable, but there will be opportunities too - if we can capitalise on them. However, our current track record in dealing with China does not inspire confidence we can do so.

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