I’m not sure the US is mucking around with their war on China
The US has started a war with China.
But the question is, what kind of war?
Is it a trade war, where the US is simply trying to rebalance the global flow of trade (a little more in its favour)?
Or is it an economic war, where the US aims to give the Chinese economy a good thump on the head?
So far, the official story is that it’s a trade war, and the US is just protesting China’s unfair trade advantages.
But more and more it looks like an economic war, designed to squash the ambitions of a rival super-power.
That’s what Steve Bannon reckons. It’s also what China expert Richard Duncan reckons:
Bangkok-based Duncan believes the US$50 billion of Chinese products designated for 25 per cent tariffs by the Trump administration – in addition to a proposed 10 per cent tariff on an additional US$200 billion in Chinese goods – may represent the first steps in a policy shift by Washington that goes far beyond what many observers expect.
“I am becoming concerned that they really do intend to put up trade tariffs on a very large scale against China and that perhaps there’s more to this strategy than just balancing trade. They may be intent on stopping China’s economic growth altogether, now that China has become so large they are becoming not only an economic competitor, but potentially a military threat to US global dominance. If that’s the case, this could be a turning point in history,” Duncan said in a new South China Morning Post business podcast.
While it is too early to say how the trade talks between the two sides will play out, one concern is that escalating tariffs, beginning with the US$34 billion of Chinese products which went into effect on July 6, are about to become the norm, rather than the exception.
Another is whether the trade policies are really designed to reverse the deindustrialisation of the US economy – a theme made prominent during Donald Trump’s presidential campaign.
“Over the last 30 years the rapid economic rise of China has really transformed the world, but if the US starts putting tariffs on US$200 billion and US$500 billion of Chinese exports, then China’s economy could go into a very serious crisis,” Duncan said.
“The impact would be global and we would see a drop in metal prices and that would be a blow to metal and mining companies. Also as commodity prices fell, the economies of the commodity-producing economies would go into recession,” he said.
This isn’t just a theoretical exercise – a curiosity of modern history. This will have serious impact on the Australian economy.
China has been central to Australia’s economic miracle.
Just as the rest of the world took a hammering thanks to the GFC, and rising China insulated Australia from the worst of it.
The price though was a growing economic reliance on China. As a commodity exporter, we have let China become far and away our biggest customer.
And I’m not just talking about iron ore. Take a look at wool for example:
So if the US decides to launch an economic war on China, and they succeed in crashing the Chinese economy – which might not be all that hard given China’s reliance on exports and some pretty mind-blowing debt numbers – then Australia could find itself in the fall-out zone.
I think we all just assumed that the trend towards the global free-flow of goods and trade was a one way street. We bet the house on a perpetually strong China.
We’re not ready for things to be reversing.
I’m not sure really how to play this. The US’s intent is still not clear, and then a lot still depends on how well they execute, and how China responds.
But it’s looming as a risk for Australia.
Maybe it calls for more of a hedge in defensive assets.
In that sense, I still like property. The high-rise sector could be shaky if all those Chinese developers go bust.
But if an economic war unleashes a global recession, then time and again, property has proved to be a solid preserver of value. I wouldn’t think this time would be any different.
We might even see more foreign money from other nations coming to Australia looking for a safe-haven.
But this is something to watch out for. I’ll be watching the Chinese economy a little more closely from here on.