Trump's China deal?
The reactions of economists in Australia to Donald Trump’s election have ranged from the benign (see former trade negotiator Alan Oxley here) to the alarming (see former Reserve Bank board member Warwick McKibbin here). But Victoria University’s Janine Dixon has done the hard yards with some modelling of what might actually happen if Trump’s protectionist inclinations are played out. And the results range from, well, benign to alarming!
Dixon finds that a 45% US tariff on Chinese imports will only have small affect on the Australian economy and on individual industry sectors, once the impacts are netted out. Declining income in the US and China will reduce demand for Australian exports but cheaper Chinese imports will be good for Australia’s terms of trade. Australian goods could replace Chinese goods in the US and Australian goods would replace US goods on world markets, once US goods are diverted to home use.
The modelling, presented at the Melbourne Economic Forum, shows that a 45% tariff would also not necessarily be globally disruptive in its own right. But a simulation of a 45% retaliatory tariff by China on the US and a flow-on 20% tariff around the rest of the world would reduce world trade volume by a third and take many economies into recession. This would be a repeat of the US Smoot-Hawley tariff before the Great Depression.
Dixon argues that China would be sensible to not retaliate tariff-for-tariff as it will be a bigger loser from a trade war, especially if the tariff hikes flow on around the world. Instead, China would be more rational to use its status as the world’s largest creditor to withhold capital from the US government.
But in an insight into what might really happen as Trump faces up to diplomatic and economic realities, Dixon’s model shows that the ideal US tariff on Chinese imports would be 5-10%. This more modest rise from the existing average tariff of 3% would confer a small net welfare benefit on the US economy. Could this be the trade compromise for a dealmaker like Trump?
It was only early this year that former Trade Minister Andrew Robb would declare regularly that he (or at least officials) had consulted more than 800 interested parties on the Trans-Pacific Partnership (TPP), making the Productivity Commission’s serial offers to do its own assessment entirely unnecessary.
Now the government-dominated parliamentary Joint Standing Committee on Treaties (JSCOT) has turned all this on its head and backed the transparency and consultation measures that had been constant undercurrent in the opposition to aspects of the TPP.
The horse may have bolted this time (or at least stayed in the stables in Washington) over the stranded TPP. But this is a victory of sorts for the economic purists within the federal bureaucracy who don’t like regional trade deals but have chipped away at the TPP over transparency, intellectual property and extra-judicial dispute settlement mechanisms.
It’s also a win for Australian Chamber of Commerce and Industry International Director Bryan Clark, who has pursued the idea of having panel of security-cleared business and civil representatives to liaise with negotiations, as happens in the US.
The TPP, in its current guise, has been sunk by Donald Trump’s victory and not by Australian activist groups, as some like to claim. But it is true that lack of transparency about such a elephantine negotiation made it vulnerable to scare campaigns. So these JSCOT recommendations have some merit, though trade officials also need their private negotiating space.
The government-controlled JSCOT has released its report over the objections of Labor members who tried earlier this month to keep the inquiry open to deal with the various suggestions that the TPP will survive in another form. Trade Minister Steven Ciobo has raised this idea and it now seems to be getting some support from US Republicans.
Former Liberal National minister and JSCOT chairman Stuart Robert says that while many participants in the inquiry had concerns about certain aspects of the TPP, it still would have advanced free trade.
While the Greens provided a predictable anti-TPP dissenting report, Labor has kept is powder dry by simply issuing a statement. This talks up the party’s past free trade heritage, but raises red flags over excessive patent protection for pharmaceuticals, intellectual property, investor state dispute settlement and labour market testing for foreign workers. Labor has avoided an internal fight over these issues for now, and the trade politics will move to the separate Senate TPP committee (previously reported here) that is not controlled by the government and will be reporting after the Trump Administration is already in power.
Philippine President Rodrigo Duterte has certainly been a game-changer in the Asian strategic debate so far. But there's more going on than the drug trafficking crackdown and taunting of the US: what's striking from a quick visit to Manila is the extent to which business and economic figures on the ground think Duterte may also be a game-changer in economic management at home.
The country produced the fastest growth rate in Asia in the last quarter on the back of the previous administration’s steady, pragmatic policies. Duterte has been chaotic and colourful so far, but business figures say he has chosen a good economics team and accepts central bank independence. They say they are optimistic about a big increase in infrastructure spending, a reduction in business red tape and possibly even a watering down of the economic nationalist rigidity in the constitution.
International economic experts say the country has the domestic demand momentum along with fiscal and monetary policy space to see out any Trump-related global turbulence or diplomatic backlash against Duterte. But the business figures say they are unhappy that Duterte’s political antics are distracting attention from the economic fundamentals.
Telstra’s Asian portfolio
As a former government monopoly turned IT giant, Telstra has elements of both national champion and frontier services player in Asian business. It has also had its fingers burnt more than once.
Last year the company was outward-bound again, purchasing Pacnet and pushing ahead with an Indonesian joint venture. This year it has joined the (bank-led) more cautious corporate approach to Asia by dropping a bid to become the third telco player in the Philippines.
But this week at Asialink’s annual chairman’s dinner, Telstra's chief executive Andy Penn (who also ran insurance company AXA Asia Pacific) talked up the IT opportunities in the region. He says Asia has hit the limits of using cheap labour and resources to fuel growth and will instead have to rely on digital technology.
And he had some interesting views on the constant challenge of how Australian business should position itself to take part in this growth: 'My experience with both AXA and at Telstra has been that one of the key ways to address that is to take more of a portfolio approach.
'By spreading your investments and investing in a range of countries and different parts of the business you will generally speaking find that at any one point in time you will have half a dozen business that are performing absolutely outstandingly and half a dozen that are performing abysmally and causing immense headache.
'If you can take more of a portfolio approach to your investments you can at least trade off some of the upsides and the downsides.
'Because undoubtedly things take longer than you expected, they cost more than you thought and it takes longer to get to the sorts of returns. And of course, shareholders can get impatient and put pressure on.'
Photo: Getty Images/Anthony Kwan