US-China Trade Deal Not All Bad News – up to Australian exporters to stay competitive

Less than 48 hours after the US-China trade deal was reached, many Australian exporters are starting to worry that it will have a negative impact on them, anticipating a fall in Australian exports to the People’s Republic of China (PRC), especially in key sectors such as agriculture and energy.

But are their concerns premature and what can they do to maintain a competitive edge against US exports to China?

Under the deal, Beijing has agreed to remove unfair trade barriers and buy US$200 billion more of US goods over the next two years. There is a particular focus on agriculture and energy.

Not as bad as it sounds

Despite this, the “Phase One” trade deal struck between Washington and Beijing on 15 January is good news. To start with it, the news pushed markets to record highs. Wall Street’s S&P 500 soared to nearly 3300 points and Australia shares closed yesterday at an all-time high of 7041.8. Asian currencies have also seen rises following the news. You’ve got to ask, why are the financial markets doing so well off the back of this news?

The simple fact is the deal is good for the global economy. If you consider that China and the US are two of the major engines of the world economy, it follows that a trade war between them is not in anyone's interest in the modern global economic ecosystem - not even Australia's.

The “Phase One” deal and the prospect of further deals - keep in mind that the Phase One deal is not the end of the road but just the beginning – means a more stable global trading environment and opportunities for economic growth for everyone.

That’s why markets have rallied.

Always gonna have naysayers and doomsdayers

But not all segments of the markets have seen a rally. In Australia agriculture and energy stocks saw falls in their share prices following the trade deal news. Why? Because Beijing has agreed to buy an extra US$32 billion in US agricultural products, including beef, soybeans and seafood, and an extra US$52.4 billion in US energy, including LNG, crude oil and coal.

On the face of it, that’s not good for Australia, and share market traders shunned stocks in companies involved in these sectors. But were they right to do so?

In dumping these valuable stocks, they have neglected some fundamental facts about the deal and how international trade works:

1. A simple truth is that the US, even with this deal, does not have the capacity and infrastructure to displace Australia in many of the areas we will be competiting in. Just looking at coal, Australia has a strong competitive edge over the US, has been trading coal to China for several decades, and has considerable infrastructure in place to support it. the US on the other hand would need to ramp up production considerably and build the infrastructure to displace Australian exports;

2. Because of the China-Australia Free Trade Agreement (ChAFTA), Australia enjoys zero tariffs on many products it exports to China, including beef, wine and other agricultural products. The US, even under the Phase One deal, will still face tariffs of up to 25% on many of its products imported into China. Lower tariffs give us a competitive advantage over many US products;

3. Many of the product areas the US will benefit in are areas in which Australia is not a major player on the world market, such as soybeans;

4. China still has a strong preference for Australian agriculture’s “clean and green” image, the current bushfires notwithstanding; and,

5. As Robert Gottliebsen put it in today’s The Australian, Beijing, which is wary of the risks of a future trade conflict with Washington, will not want to jeopardise its access to agricultural (and, I might add energy) supplies from Australia. As Gottliebsen put it, “Our agricultural industries will not be hit hard if, for the moment, they are smart and stay away from the areas of agricultural production dominated by the US.”

If Donald Trump really is the genius he thinks he is, he’d be pushing for a Free Trade Deal (FTA) between the US and China. But that won’t help his narrative, or his mercantilist policy of “America First.” Also, he may fear that securing an FTA with Beijing may take years, possibly more than a decade. Therefore, a tit-for-tat piecemeal trade deal remains the better option for Trump.

Time is on our side

That's not bad for us and gives us time to improve our competitiveness against the US.

On a final note, having spent 13 years in Beijing where I worked for several US agricultural industry associations on strategies to secure market access and Chinese Government support, I would add that Australian agricultural industry associations can and should do more. An important difference I saw with American agricultural industry associations was that they did not rely on the US Government to do everything for them. They understood the limitations of their government, of what the US embassy and consulate network could achieve for them. As a result, they hired consultants to assist them in identifying Chinese political stakeholders and engaging them to lobby the Central Government in Beijing and provincial governments around China to support their market access and anti-counterfeiting initiatives.

The US threat to Australian agricultural exports to China is more of a long-term matter. If the Trump Administration moves to its Phase Two deal and it succeeds in securing even better market access and even lower (perhaps zero) tariffs for its agricultural products, Australian exporters will find themselves on a level playing field - and not in a good sense as we currently have the advantage over US exporters.

If US exporters start competing against us on the same terms in China, we will need to be playing the same game as the US. Given this likelihood it would be better to start playing the US’s game now while there is time to learn from the playbook, a playbook I helped to write.

What can I say - call me.