World trading system under threat

China reckons American trade actions will hurt other states, including the US more than it will hurt itself.

“Trade wars are good, and easy
to win”

— US President Donald Trump

“In the end you will only hurt
others and yourself”

— China Foreign Minister Wang Yi

No one in Beijing will say as much publicly of course, but China’s government is settling down comfortably to enjoy a nice little trade war that it is confident will hurt others, notably the US, considerably more than it will hurt itself.

Wang Yi said last week, in the face of White House attacks, that China’s economy contributed more to global economic growth, about 30 per cent, than the US, Europe and Japan combined.

The latest trade figures — with China’s overall exports up 44.5 per cent in February, year on year — reflect both soaring international demand for Chinese products as the global economy recovers, and a weakening of the yuan, making those products cheaper overseas.

Trump has signed off on tariffs of 25 per cent on all imported steel and 10 per cent on aluminium, but China — although producing about half the world’s steel — is only the eleventh biggest seller of steel to the US.

It is directly responsible for about 2 per cent of American steel imports, just below India’s, and is only the fourth biggest source of aluminium imported by America.

And steel and aluminium only comprised about 3 per cent of China’s total global exports in 2017.

The White House has also expressed concern that China is damaging its own steel industry by exporting so much steel globally, some of which eventually reaches America circuitously if not directly.

But China has responded that it is constraining its steelmaking ­capacity.

Premier Li Keqiang announced in his state-of-the-nation address last week that China would further cut the capacity of the steel and coal industries — by 30 million and 150 million tonnes, respectively, this year — bringing the total reductions in capacity to 590 ­million tonnes of coal and 145 million tonnes of steel over three years, driven by both environmental and economic priorities.

More than half Australia’s own exports to China — worth $51.7 billion in the last financial year — comprised iron ore, used for steelmaking.

Coal, a substantial proportion of which was also bought by steel mills, was our next biggest category of exports.

We also sold in the same period $5.4bn iron ore to Japan, and $3.9bn to South Korea, as well as further billions of dollars of coal to each.

So while Australia’s direct steel sales to the US are now exempted from the tariff, if the impost is going to be effective it also risks diminishing iron ore and metallurgical coal sales to China, South Korea, Japan and other countries that export to the US.

South Korea provides 10 per cent of American steel imports, Japan 5 per cent.

Betty Wang, ANZ’s senior Chinese economist, speculated that “we cannot rule out the possibility that China may retaliate by focusing on the US agricultural exports” — led by soy bean sales to China, which totalled $17.7bn in 2017.

It suits China that the European Union is leading the charge against the Trump tariffs through the World Trade Organisation. This provides further leverage to help prise apart the rest of the Western world from the US.

The new tariffs also risk setting sections of American industry against each other, for more expensive steel and aluminium will raise the cost of items manufactured in the US both for Americans and for potential export markets. One answer for American manufacturers who use steel or aluminium — many of whom also run plants in China — is to ramp up production there instead to meet international market ­demand.

This is just a shadow play, some say, for the real showdown — the White House’s war against what it views as China’s theft of intellectual property.

China hasn’t proved so inventive in recent decades, and can’t, easily, given the immense constraints on public discussion and on freewheeling research there. But the country has proven sprightly at commercialising inventions from elsewhere, such as online retail and pay systems, high-speed rail, electric cars, and is now starting to export this expertise from its massive domestic market springboard.

An international war on the IP front could prove devastating, though the size of China’s own market provides its firms with a capacity to keep inventory ticking over, regardless.

To a degree, the US too can — if it’s crazy enough — start pulling up the drawbridge and forcing businesses to refocus domestically.

Australia and other mid-sized or smaller economies don’t have that comfort. We live or die by our globally traded goods and services.

The survival of the WTO’s aspirations, rules and compliance mechanisms is crucial for us. It was China which a week ago led a group of 18 members to complain to the WTO about the new Trump tariffs.

An exaggeration — as yet — and Australia can feel relief due to its US tariff exemptions.

But a broader-based trade war would prove truly disastrous, constricting growth and if prolonged, testing constraints that could turn ­economic into other forms of ­conflict.

This weekend’s Australian “special summit” with ASEAN leaders is especially timely, in these trying circumstances.

The 10 ASEAN countries have for decades provided the hub for most Asian regional bodies. It is central to the Regional Economic Comprehensive Partnership, the biggest planned extension to freer trade under active discussion anywhere.

Australia is part of the process.

If this deal can be galvanised, that would be great. But it will take determined talk and action — such as threatening to leave to one side for now, countries dragging their heels, most prominently India — to achieve that.

Arthur Kroeber, author of China’s Economy: What Everyone Needs To Know, says that many US firms “are unhappy with the techno-nationalist turn in Chinese policy. But for most, China remains a huge market and source of growth”.

The Trans-Pacific Partnership was intended to raise the costs to China of hewing to mercantilism and to demonstrate the benefits of adapting to a more liberal, market-based order, he points out.

But Trump, of course, quit the TPP, and as the threats multiply, America’s trade-dependent friends “will be inclined to wonder whether it is really China or the US that poses the greater threat to the world trading system”.