Published daily by the Lowy Institute

Is Australia wise to pick sides in US-China trade war?

Reported comments by Australia’s ambassador to the US warning Trump against a “pyrrhic” win with China seem out of step.

Australian Ambassador to the United States Joe Hockey (Photo: PAF/ Flickr)
Australian Ambassador to the United States Joe Hockey (Photo: PAF/ Flickr)

The US-China trade war is viewed by many as a dark cloud over the global economy. So why is Australia’s ambassador to the US, Joe Hockey, seemingly urging Trump to go harder, and not settle for a “pyrrhic victory” that fails to resolve long-term differences between the US and China?

In October, the International Monetary Fund warned that the trade war risked making the world a “poorer and more dangerous place”. IMF Managing Director Christine Lagarde said that an all-out trade war would have “devastating effects”. This view was reflected in share markets, with analysts expressing fears that it raised the risk of a financial market “flash crash”.

With such dire warnings, there was an almost palpable sense of relief in November when over dinner at the G20 meeting in Buenos Aires Donald Trump and Xi Jinping agreed to a pause in the trade war. In particular, Trump held off imposing additional tariffs on $200 billion of Chinese imports to the US, pending further negotiations. The cease-fire lasts until 2 March and the markets fluctuate with reports regarding progress with the talks.

Is it prudent for Australia to be advocating that an unpredictable leader such as Trump, without a consistent view as to what he is seeking to achieve and what is achievable, should go harder in the US trade war with China?

Against that background, a story this week in the Australian Financial Review seemed to come from left field, with its headline of Hockey warning against Trump accepting a “pyrrhic” win with China. The Interpreter has asked the Department of Foreign Affairs and Trade about Hockey’s comments as reported, and will update with any response. What has been reported appears to be at odds with the calls made by Treasurer Josh Frydenberg at the IMF annual meeting last year on the need for cool heads as the world stares down the barrel of a global trade dispute. Specifically, Frydenberg called for an end of the US-China trade war.

Hockey’s views also seem to clash with the campaign being launched by a coalition of 200 US trade associations spanning agriculture, manufacturing, retail, technology, and oil, aimed at ending the trade war and even claiming it may be endangering babies.

Hockey’s comments were reported to have been made at a closed-door round table discussion in Washington DC. It reflected his apparent concern that Trump may do a deal with China that focuses solely on measures to reduce the US trade deficit with China, without tackling such structural issues as China’s intellectual property “theft” and corporate governance and subsidies to China’s state-owned enterprises.

If Hockey is concerned that the end of the trade war is based on Trump doing a “deal” whereby China agrees to buy more US products will not achieve much, then he is right. This, notwithstanding that Trump would no doubt claim it was the greatest trade deal “ever”.

Even if Trump was successful in reducing the bilateral trade deficit with China, unless the US improves its saving-investment balance, then there would be an increase in the US deficit with another country (ies) to an equal amount.

But the US dispute with China is generally considered to involve much more than reducing the size of the US-China trade deficit. The US allegations levelled against China include forced technological transfer, discriminatory investment acquisitions, state enterprises having all manner of unfair advantages over foreign competition, along with espionage and cyber-attacks. Former advisor Steve Bannon says Trump is engaged in a sophisticated form of economic warfare aimed at “uniting the west against the rise of a totalitarian China”. On this view, Trump is seeking to stop China’s economic and political rise.

Does Hockey want Trump to go harder on stopping the rise of China? As Stephen Grenville has observed (US versus China: the economic model), it would be over-reach for Trump to see China’s detailed planning for technological progress as somehow an illegitimate product of an authoritarian system. And John Edwards has noted (US-China trade: joke’s over) that China is not going to relinquish its ambition of becoming a global leader in advanced technological industries, which is central to its economic progress.

Hence the stakes are high depending on the US objective in its trade war with China. True to form, however, the Trump administration seems confused as to what are its objectives. Former State Department official Kurt Campbell has identified three schools of thought in the Trump administration: the “traditionalists”, who would be content if China merely bought more goods from the US; the “structuralists”, who are demanding that China change the structure of its economic system; and the “decouplers”, who believe that the US and Chinese economic systems are irreconcilable and are encouraging US firms to pull out of China.

Who knows which school Trump favours, but going by his actions to date, he will not have a coherent position nor a strategy and will flip flop between all three approaches.

Notwithstanding Trump’s views on his capacity as a deal maker, is it prudent for Australia to be advocating that an unpredictable leader such as Trump, without a consistent view as to what he is seeking to achieve and what is achievable, should go harder in the US trade war with China?

Australia, along with all other countries, would benefit if China showed greater respect toward intellectual property rights and curbed the preferences awarded to state-owned enterprises. It is doubtful, however, whether the best path towards achieving these outcomes is through entering into a fully-fledged trade war with China.

More generally, the world would be a more stable place if all countries adopted the policy that regardless of the objectives, the answer is unlikely to be found in increasing tariffs.

Bottom line, Australia should not be a cheerleader for Trump in his trade war with China.

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