Great powers get set to divorce

Investors, decision-makers and policy purists have every reason to feel whiplash from the wild gyrations set loose by US President Donald Trump’s tariff war on everyone. Given that markets are driven by the animal instincts of fear and greed, it is natural to expect the bumpy ride to continue as Mr Trump keeps everyone guessing on what his next moves may be.

Relief in response to Mr Trump’s tariff moderation on Thursday AEST melted away on Friday when it was realised the apparent backdown still meant tariffs of 10 per cent on most nations, with higher imposts on Mexico and Canada, and a colossal 145 per cent on China. The clear picture arising is that this has become a battle of wills and strategic competition involving the world’s two biggest economies, the US and China, with all the multidimensional complexity that entails.

It is still possible that Mr Trump will reach some accommodation with his equally determined Chinese counterpart, Xi Jinping. Mr Trump has mused about this possibility out loud, saying he is expecting a call from the Chinese Communist Party leader at any moment. But it is also possible that call may not come. Beijing has taken every opportunity to escalate in the face of Mr Trump’s tariff provocations.

As China correspondent Will Glasgow reports, there is a view that Mr Xi has miscalculated and done his country great harm by taking this approach. But some reports from Beijing suggest Mr Xi and his advisers believe a decoupling of Chinese and US trade and other relations is inevitable. If this is true it is a progression of hostilities that have been apparent for some time. It already has played out in the form of currency and market manipulations, and restrictions placed on the trade of strategically important goods in both directions. But as The Wall Street Journal notes, strategic decoupling on key goods makes more sense than a blanket cessation of $US600bn ($967.8bn) a year in two-way trade. And while the abuse of free-trade rules by the authoritarian regime in China is by far the biggest problem in the global trading system, Mr Trump’s targeting of all countries only weakens his ability to adequately respond by bringing like-minded nations with him.

Given that China is our largest trading partner and the US our closest and biggest defence relationship, the fallout presents a difficult dilemma for Australia. This is particularly so if suggestions are true that Mr Trump soon will expect allies to take a similar stiff tariff approach in their dealings with Beijing. China already has started to sow division among US allies, inviting us to join hands in response to Mr Trump’s actions. Sensibly, we have rejected these advances. Jim Chalmers is correct to point out that our interests are best served by more diverse, more reliable, more robust markets, and that the big economies in our region have a big role to play. The Treasurer singled out South Korea.

The lesson from Covid is that diversification away from an over-reliance on China for trade is essential. Mr Trump’s tariff war makes the journey more urgent, if also more fraught. As Gerard Baker observes, the tariff episode of recent weeks has left not only economic uncertainty but also clear harbingers of a perilous new phase in America’s deteriorating relationship with China. And the potential cycle of escalation carries huge risks, not just financial. This is particularly true for Australia, which is ill-prepared to weather the economic and geopolitical storm it will unleash.