Here's what a US-China trade war would mean for the Australian economy

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  • Despite escalating US-China trade tensions, analysts from UBS and CBA said Australia should be relatively insulated in the near-term.
  • CBA said China’s economy was big enough to weather a trade war, and Australian exports aren’t on-sold to the US.
  • UBS said in the event of a tit-for-tat escalation, Chinese policy makers will step in to support their economy.

President Trump put trade war fears firmly back on the agenda last week when the US threatened China with 10% tariffs on another $US200 billion worth of goods.

Analysts at UBS think they’ll most likely be implemented, which means a tit-for-tat escalation between the two countries is still on the cards.

Such a scenario would almost certainly have implications domestically for Australia. For one thing, China is the country’s biggest trading partner. And as a small, open-market economy, Australia is particularly sensitive to trends in global trade.

So what would an all-out trade war mean for Australia? Based on the analysis so far from local market experts, the answer is — not much (for now).

The Commonwealth Bank said Australia is relatively insulated when it comes to the ramifications of a trade war.

“Our long held view is even if the US applies tariffs on all of its goods imports from China, the economic impact on China, the US and Australia will be very small,” CBA currency strategist Joseph Capurso said.

He said China’s economy is too big for US tariffs to have much of an effect. And Australia is further insulated by the fact that most domestic exports to China aren’t used as inputs to be on-sold to the US.

Source: CBA

For example, Australia’s biggest export to China — iron ore — stays in China to be used in construction.

CBA chief economist Michael Blythe highlighted the key numbers in a research note today:

  • China takes about 30% of all Australian exports, equivalent to 5.6% of GDP;
  • of that, 77% is consumed in China and the remaining 23% is reexported in some fashion (with 20% of those exports going to the US);
  • so 1.4% of Australia’s trade, or 0.08% of Australia’s GDP, is exposed in a US-China trade war.
  • “The economies that will be hardest hit from the US-China trade frictions are the small East Asian economies such as Korea and Taiwan because they are integrated into China’s export supply chain,” Capurso said.

    UBS economist George Tharenou also noted that commodity prices have stayed relatively resilient so far, particularly bulk commodities (such as iron ore) and LNG — two of Australia’s biggest exports.

    And he said in the near-term, negative effects from a trade-related slowdown could be somewhat offset by a fall in the Australian dollar, given its position in markets as a risk-proxy for global growth.

    In addition, Tharenou said that rather than hit back at the US, Chinese policy makers will probably respond to further tariffs by focusing on the domestic economy.

    China only imports around $US150 billion worth of goods from the US, so it won’t be able to respond proportionately to the $US200 billion tariff threat anyway.

    UBS expects Chinese authorities to increase liquidity for banks, and ease restrictions on excessive leverage to maintain appropriate levels of credit growth and infrastructure investment.

    Blythe said he expected Australia’s economic growth to maintain a rate of round 3% over the next 12 months.

    “Commodity prices are at risk in a trade war that slows global growth, especially one involving our major Asian trading partners. But the AUD would be expected to play its usual buffering role in a major trade event,” Blythe said.

    Tharenou based his forecast on the bank’s current base case of a continued escalation in US-China tensions, rather than an all-out trade war.

    “Overall, we expect little impact on Australia from the current trade escalation scenario and so maintain our long held GDP forecast of 2.8% for 2018 & 2019,” Tharenou said.

    Factoring in the effect from US tariffs and the domestic response from Chinese policy makers, Tharenou forecast China GDP to slow slightly in 2018/19, down to a range of 6.2-6.5% from previous guidance of 6.4-6.6%.

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