According to business information analysts IBISWorld, Australia stands to be caught in the middle of a trade war between the United States and China, as the world’s two largest economies launch increasingly retaliatory tariffs at each other.
While some local industries may become more exposed to risk as a result, IBISWorld believes Australia will also have the rare opportunity to seize export market share in both markets.
“Australia is one of the best-placed countries in the world to reap the gains of a trade war, due to our natural advantage of having ease of access to maritime trading with both major economies,” said Mr Jason Aravanis, Senior Analyst at IBISWorld. “In addition, Australia has beneficial bilateral free trade agreements with both China and the US, which provide more stability to international trade.
“While the trade war presents opportunities for some sectors, others will likely be at greater risk, as Australia is being caught between its largest trade partner and its largest investor; between the economy we rely on and the nation we look to for our security.”
Why USA and China matter to Australia
According to IBISWorld, the United States and China are both vital trading partners for Australia, but for different reasons. China is Australia’s largest two-way trading partner, accounting for 17.7% of all imports into Australia and 29.6% of Australian exports in 2016-17.
As such, the Australian economy is intrinsically tied to the performance of the Chinese economy.
Many industries rely on Chinese demand for exports, or Chinese supply of imported production inputs.
The United States is Australia’s third largest trading partner, after Japan. However, the United States is the largest foreign investor in Australia, with over $860 billion invested in 2016. In contrast, China is only the seventh largest investor in Australia.
As China and the United States increasingly lock each other out of their domestic markets, certain Australian industries have the ability to seize market share.
“The Australian agricultural sector is likely to be one of the largest winners, as China has enacted tariffs on popular US food products,” said Mr Aravanis.
In 2017-18, China is expected to account for 25.1% of export demand in the Australian Wine Production industry, and this is forecast to grow in response to a 15% tariff imposed on US wines this month. Similarly, a 25% Chinese tariff on US soybeans will create massive opportunities for the Australian Grain Growing industry, particularly as China consumes about two-thirds of global soybean production each year.
Rising demand for premium meats in Chinese households has led to strong growth in Australia’s Meat Processing industry, and this industry’s performance is expected to further improve as a 25% tariff is imposed on US meats.
Other Australian agricultural industries are also likely to benefit, including fruit and seed industries.
According to IBISWorld, some Australian industries also have the opportunity to gain market share in the United States, however Australian exports are likely to encounter greater competition from other countries in this market, such as Canada, Brazil, and the European Union.
“As the United States has imposed a 25% tariff on steel and 10% tariff on aluminium from China, the Australian Black Coal Mining and Aluminium Smelting industries may experience greater demand from US clients. In addition, US tariffs on Chinese chemicals, medicinal products, and electronic components are likely to create opportunities for Australian firms,” said Mr Aravanis.
Despite the positive gains for some Australian industries, others are likely to be negatively affected by a trade war.
“On a macro-economic scale, a downturn in either Chinese or US GDP growth is highly likely to undermine the growth of Australia’s GDP. This could lead to an increase in unemployment, as well as a sustained hit to business confidence as the stability of trade liberalisation in undermined,” said Mr Aravanis.
“Some industries are highly exposed to the risk of a trade war. Major mining industries such as the Iron Ore Mining industry could be affected by a slowdown in Chinese economic growth, which would lead to far lower export prices and total demand. Tourism in Australia would also likely be negatively affected, as a hit to consumer confidence in both China and the United States would encourage consumers to postpone luxury expenses such as international holidays.”
Despite these challenges, IBISWorld believes the overall Australian economy is well placed should a trade war eventuate, at least relative to the conditions of other global economies. However, a trade war would likely lead to an overall decline in economic prosperity for Australia.
Tariffs imposed by China and the United States against each other:
|Soybeans and grains||25%|