A lot can happen in three years.
This week, China’s Vice-President Wang Qishan addressed Davos attendees to warn of the perils of “unilateralism” and “protectionism” being pursued by President Trump and to settle global nerves about a marked slowdown in China’s rate of domestic growth revealed in official accounts on Monday.
The global trade war, which once seemed so ludicrous to Davos attendees, has well and truly arrived.
Trump’s tariffs on Chinese imports – from steel and aluminium to washing machines – have been in force for almost a year.
Designed to “make America great again” by protecting domestic industries and reducing the United States’ trade deficit with China, the impact of the tariffs has so far been muted.
The Sino-American trade deficit actually increased during the year, fuelled by Trump’s other economic policy of large corporate tax cuts, which has strengthened the domestic economy.
But as that stimulus wears off, tariffs are beginning to bite.
American manufacturing firms have begun to close, unable to afford the cheap imported intermediary goods they need to survive.
China, too, is beginning to feel the impact of not only a trade war, but an overhang of domestic debt and waning infrastructure investment.
The International Monetary Fund this week shaved its forecasts for global growth this financial year from 3.9 to 3.7 per cent – a far cry from the 4 plus per cent rates before the global financial crisis.
In a ramping up of tensions, Trump has threatened that if China does not sign up to a free trade agreement by March 1, he will order more tariffs to apply to another $US200 billion ($280 billion) of Chinese imports, meaning almost all China imports will be taxed.
The world economy has entered a “dangerous” new phase of growth, according to Stephen Kirchner, the program director of trade and investment at the University of Sydney’s United States Studies Centre.
Kirchner says it is unlikely the US will soften its stance, if Trump follows the advice of his hardline US Trade Representative appointment, Robert Lighthizer, and trade adviser Peter Navarro. A recent report by the trade authority called for China to sign up to stringent standards on intellectual property, foreign investment and state subsidies: “the whole gamut of US grievances”, as Kirchner puts it.
“The real issue here is whether Trump settles for something which is very superficial and he’s happy with that. But that won’t be the advice he’s getting from Lighthizer and Navarro. They would be pushing for a very tough deal.
“The problem is what the US is asking for is so far-reaching. I find it very hard to believe that they’re going to reach agreement on all those things. What the US is asking for really goes to the heart of the Chinese government’s control of its economy.”
Kirchner expects an escalation of trade tensions, including further tariffs that will inevitably slow global growth further, with inevitable flow on effects for Australia.
The Reserve Bank should cut interest rates, he says. “I have long argued that the easing cycle is not over and never has been.”
“I think this is shaping up as a synchronised global downturn and Australia will be on the receiving end of that. I think our get-out-of-jail card is the exchange rate; it will fall dramatically, and that helps. The Reserve Bank will also have to step up and reduce interest rates.”
Paul Bloxham, the chief economist at HSBC Bank Australia, disagrees, noting that Australia has largely escaped any fallout from the Chinese slowdown to date.
“The main thing we’re watching is commodity prices”, says Bloxham. “China’s economy has already been slowing down but iron ore and coal have held up quite well so far.”
Chinese environmental measures, which have forced the shutdown of domestic dirty coal and iron ore mines, has, in fact, boosted demand for Australia’s relatively high grade ores and deposits.
Job figures released this week showing Australia’s jobless rate falling to 5 per cent also auger well, says Bloxham. As does above average business confidence.
“We’re watching all these things, but at the moment it’s not clear that the slowdown we have seen in China is transmitting, yet.”
If it does, Bloxham points out several lines of defence.
As celebrations ramp up to mark the 70th anniversary of the People’s Republic of China, Chinese authorities have shown a consistent appetite to maintain growth by unleashing huge stimulus, such as during the GFC.
China’s central bank is also experimenting with new ways to increase liquidity, reducing reserve requirements for banks in recent months.
Speculation is rising the Chinese government could follow the lead of Trump, targeting tax cuts for companies (by reducing the VAT they pay) to stimulate investment and growth. This could add between 0.9 and 1.6 percentage points to China’s GDP growth, currently 6.4 per cent, according to HSBC estimates.
Australian authorities, too, remain well placed to support growth, should things turn sour, says Bloxham. With a budget nearly back in surplus, in part owing to solid commodity prices, and an election soon, “that does give the government scope to fund fiscal expansion, through spending or tax cuts”.
Bloxham does not yet think the Reserve Bank will cut interest rates again. Markets, however, are increasingly jittery, pricing a more than 50 per cent chance rates will head lower by the end of the year.
On Tuesday, Treasurer Josh Frydenberg warned of “storm clouds” hanging over the Australian economy, including a global slowdown, unwinding property boom and the continued drought.
The early delivery of the 2019 federal budget on April 2 may prove advantageous for the Coalition, getting in before any forecast writedowns. ANZ economists this week warned the Chinese slowdown could ultimately knock 40 per cent off Australian commodity prices over the coming year.
Inflation figures next week will be keenly watched by markets, as will the Reserve Bank’s first meeting of the year on February 5.
One thing’s clear, according to Bloxham: “The Australian economy is navigating rougher seas. The global backdrop is not as favourable as it has been in the last couple of years.”
The road to Davos 2020 could be a rocky one.
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.
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