Donald Trump’s ‘greatest’ trade deal delivers us mixed blessings

For Donald Trump, it was — naturally — the greatest, most beautiful trade deal ever.

For Australia, the “phase-one” US-China trade deal inked on Thursday was a mixed blessing. Billions of dollars in resource and agricultural exports could dry up if China lives up to its promise to drastically ratchet up purchases of US dairy, beef and energy exports.

For all the fretting, some of our exporters have done brilliantly out of the US-China trade war, which ramped up in late 2018, effectively shutting off a raft of US exporters from Chinese buyers.

“We’ve doubled the volume of cotton exports, almond exports have shot up six-fold,” said Tim Hunt, an agriculture analyst at Rabobank.

That said, a detente between the US and China, however fleeting or vague it proves, naturally boosted share prices and confidence on Thursday.

The prospect of better relations between the world’s two largest economies is always good news, even if there might be some collateral damage for Australia. And despite reams of analysis suggesting US businesses and households have worn the burden of the trade war, the political reckoning is clear: the US, by far our most important ally, is winning.

“This is a big political win for Trump because he can point to an instance when his uniquely disruptive methods have delivered a deal the Chinese would have never made with any previous administration,” Hudson Institute fellow John Lee said.

Locally, blue-chip stocks crashed through 7000 for the first time but it wasn’t a fun milestone for resource investors.

Beach Energy sank 2 per cent. Santos and Oil Search went backwards almost as much. And no wonder: up to 10 per cent of $50bn in LNG exports could be lost to US competitors, according to Commonwealth Bank commodity analyst Vivek Dhar. The agreement calls on China to buy an extra $US52bn ($75bn) of US energy resources.

“A secure LNG agreement between China and newer LNG projects could see the US become the largest LNG exporter in the world in the next few years,” he said.

Pipping Qatar to become the world’s largest LNG exporter could be a short-lived achievement for Australia.

Agriculture giant Graincorp was also sold off on Thursday, down 1.7 per cent. As part of a promise to buy an extra $US200bn worth of US exports over two years, $32bn must be “agriculture”, which would easily including beef or dairy, of which Australia exported $900m and $1.7bn, respectively, to China last year. There are questions about whether China can feasibly buy an extra $200bn worth of US goods — promised farming purchases are about 50 per cent more than China imported before the trade war broke out — and how the promises will be enforced.

“The agreement just says China will ‘refrain’ from doing technology transfers, but there’s no specificity, just a motherhood statement that it will stop doing it; the same for currency manipulation,” said Roland Rajah, a trade expert at the Lowy Institute.

Many targets — conveniently for Mr Trump facing a presidential election campaign this year — are to be met after the election.

Overall, the local market ticked up 0.7 per cent on Thursday, in step with the more positive tone.

Prices could tumble if the deal turns out to lack any teeth. Valuations are stretched and highly vulnerable to a correction. Blue-chip shares have advanced more than 5 per cent already this month without much to justify it. The ASX200 is at a record; but so too is its price-earnings ratio, hovering around 18 times compared with a traditional average of 14.

Whatever the outcome of the deal, it’s a reminder we haven’t been so exposed to a customer since the UK in the 1950s.

Australia should try to diversify our trade relations, however difficult it is to resist the Chinese economy’s gravitational pull.

If China does give some of our farming and resource exports the flick, we have a good excuse for boosting trade relations with others, India, even Taiwan, even if it hurts Chinese feelings.