Hedging our bets: what are Australia’s paths forward amidst a trade war?


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Australia is skating on thin ice.

Amidst revelations that the Trump administration remains concerned about surges of Australian aluminium exports, it is clear that while cooler heads prevailed against imposing US tariffs on Australian aluminium, the hawkishness of President Trump’s trade advisors means that Australia’s hot seat is warming again.

And unfortunately, the much-anticipated meeting between Presidents Trump and Xi at the G20 summit seemingly accomplished little more than a temporary truce.

US concern about China’s economic conduct pre-dates the Trump administration, transcends the polarised political divide in Washington and draws consensus among the American public.

Significant aspects of this trade war could very well go unresolved by Trump and linger into the next presidential administration, if not beyond.

US competition with China is here to stay. Australia can only duck and weave so long.

Looking beyond the potential harm of aluminium tariffs, KPMG modelling shows Australia risks losing 0.5 per cent of GDP (A$58 billion) if the US-China dispute continues.

This would be a devastating hit at a time when Australia’s Reserve Bank has cut interest rates to record lows and its governor has gone as far as to sound the klaxon and publically call on the government to step up its fiscal stimulus.

So far, the US has done the heavy lifting with China by demanding Beijing implement structural changes on issues like forced technology transfer, IP theft, subsidies for state-owned enterprises, and non-tariff barriers.

When the winds of the trade war have drifted towards Australia, it has been able to secure exemptions from tariffs and lean on increased agricultural exports to heed them off. That is no longer guaranteed.

Amidst an unceasing trade war between its largest investment partner and its largest trading partner and a protectionist White House, how should the Morrison government proceed?


READ MORE: Former Trade Minister warns of global trade future


So far, Canberra has urged for trade disputes to be settled in the WTO  and the US to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) – a multilateral trade agreement that improved upon lingering inadequacies of the WTO.

While these are not the wrong tactics for Australia to adopt, it’s unclear if they’ve been effective when it’s unproven what impact anyone can have on Trump’s aversion to multilateral approaches to trade.

The Morrison government has also convened negotiations with partners over the Regional Comprehensive Economic Partnership (RCEP), touting its complementarity to the CPTPP despite the fact that it is unlikely to address the inadequacies of the WTO in any substantial way.

Working within the existing institutional frameworks and regional initiatives offers Australia more feasible opportunities to effect change.  But there’s more that Canberra can do.

Firstly, Australia should redouble its efforts to expand the CPTPP beyond the current 11 countries.

The US absence from the CPTPP is significant but from an Australian perspective, widening the net to accommodate more countries in the CPTPP – especially those with strategic importance for China such as the ASEAN states and South Korea – sets a benchmark that incentivises better behaviour in China and in the region more broadly.

In its present form, the CPTPP enshrines ‘rules of the road’ in several key areas, including digital trade, e-commerce, investment provisions, rules of origin, cross-border financial services, state-owned enterprises and labour and environmental standards.

As these can be phased in at different rates for emerging economies under the agreement, this is an attractive option for potential members.

The integration of more Asian countries in a CPTPP-aligned regional supply chain would also hedge against the worst economic impacts of the trade war.

Barring further expansion of the CPTPP, Canberra should also consider carving out piecemeal multilateral agreements on international standards for digital trade and state-owned enterprises (SOEs).

Australia has the expertise to play a role in both these domains and it should not be afraid to do so.

Secondly, on the digital front, Standards Australia has led the way in enabling closer trade and investment ties with the expanding ASEAN market through the Digital Trade Standards Initiative; a joint endeavour that aims to help level the playing field for Australian small and medium-sized enterprises in expanding sectors such as e-commerce.

Australia’s experience shaping and implementing successful international standards like those that cover information security management opens the way for Canberra to concretely address sticking points like data localisation.

Likewise, the suite of Australia’s reforms to its state-owned enterprises (SOEs) in the 1990s puts Canberra in good stead to facilitate dialogue between US and Chinese negotiators on competitive neutrality for Chinese SOEs. In practice, a piecemeal approach may frustrate the business community, but it can still be an effective albeit slow strategy for building up to an agreement like the CPTPP.

Speculation abounds that a US-China trade deal is once more within reach. But from China’s perspective, with the threat of new tariffs for non-compliance looming large, it’s a case of many sticks and very few carrots.

In the likely event a lasting trade deal cannot be reached, trade exposed countries like Australia will need to do more than just rhetorically champion the status quo. It’s time to put those words to work.

 

Freya Zemek is a special projects officer and Jared Mondschein is a senior fellow at the United States Studies Centre at the University of Sydney.

 

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