As US and China squabble, Australia’s trade riches rise

Luckily for Australia, the US-China trade war happened.

A BHP freight train carrying iron ore to port. Picture: Bloomberg

Luckily for Australia, the US-China trade war happened.

Australia faced a personal-­credit crunch, housing slump and weak business confidence, threatening to derail the longest-running growth streak in the developed world. Then it received a trade boost as US-China relations soured.

Australia ships around a third of its exports to China, mostly commodities such as iron ore and coal that are used by heavy industry and in the building of apartments. Those exports are in demand as Beijing accelerates construction spending to head off damage caused by Washington raising tariffs.

Trade has been so buoyant that Australia logged its first current-account surplus — a measure of trade and financial flows with other countries — since 1975 in the second quarter of this year. That has provided much-needed juice to Australia’s economy, on a 28-year run without a recession, as other headwinds to growth intensify. Australia’s gross domestic product expanded at its slowest pace since the global ­financial crisis in the second quarter.

“It seems like a contradiction,” said AMP Capital chief economist Shane Oliver. “We are hearing all this talk about trade wars, which should obviously affect trade, and yet we have a record trade surplus that’s been far greater than anyone expected.”

Australia’s trade experience is unusual for a US ally, some of whose economies have become collateral damage in the trade dispute. Germany’s exports in June fell 8 per cent on a year earlier, and its current-account surplus has declined.

Global trade volumes grew 4.4 per cent in the first quarter of 2018, when the first US tariffs were imposed, from the same period a year before, the IMF says. But growth had slowed sharply by year’s end, with trade up 1.6 per cent in the fourth quarter from the prior year. Trade volumes fell 0.4 per cent in the second quarter of 2019 versus the same period a year ago.

Investors are skittish, evidenced by a global sell-off of equities last month and the yield on the US 30-year Treasury bond falling to a record low.

The trade war continues to take twists and turns. Chinese and American officials last week agreed to meet next month for high-level trade talks, although expectations for a breakthrough are low. The US is in the process of introducing additional levies on clothing and other imports from China, while China is retaliating with its own measures.

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A sharper slowdown in global growth would hurt Australia. Businesses could become more reluctant to invest, consumers unwilling to spend and foreign demand for goods could weaken.

Much depends on Beijing’s response. “The domestic stimulus in China to offset the trade dispute has contributed to a short-term boost to the Australian economy and significantly mitigated the impact of the trade disputes on us,” Reserve Bank deputy governor Guy Debelle said last month.

Australia has logged a 30 per cent rise in nominal exports to China since early last year, around the time the US tariffs were first imposed, said JPMorgan, which thinks Beijing would again turn to stimulus rather than risk a deeper economic slowdown.

Adding weight to that view is how Australia’s economy behaved during the GFC a decade ago. China’s huge economic-stimulus program drove up prices of iron ore — Australia’s No 1 export — and helped to prevent a recession Down Under. The iron ore price has surged again this year. It rose 74 per cent in roughly six months to a peak in July, as Chinese mills churned out steel at record rates to support the national economy and the market adjusted to supply cutbacks in Brazil.

While iron ore prices have fallen by almost a third since then to $US88 a tonne, some forecasters think they won’t decline much further, and might even rebound.

Investors fearful of global recession risks have also been buying gold. That is good for Australia, which counts the precious metal among its top exports.

Meanwhile, Australia appears to be benefiting from tighter US visa procedures for Chinese students. Growth in higher education enrolments by Chinese students in Australia far outpaced the US in 2017-2018, said Australian education provider Navitas.

The question is whether Australia’s terms of trade have peaked. Many economists think the drop in iron ore prices means it won’t be long before Australia returns to a current-account deficit.