Trade war anyone?

There are few people who could rationally think that a trade war could be good for business, but the headlong rush into a potential battle between the world’s two largest economies seems almost eagerly anticipated stands a real prospect of massive collateral damage. For Australia, the impact could significantly damage the economy, if only because we simply do not have the weight to do much more than be accidentally splattered by the USA and China along the way.

It would be feasible to assess the recent round of tit-for-tat tariffs between the US and China in particular, with the European Union hanging on the sidelines. But in many respects, the detailed analysis of what goods may have tariffs placed on them misses the entire macro point.

Australia may have dodged the ‘steel tariffs’ of just a month ago (how long ago that seems in this modern twitterverse), but how exactly will it dodge the many tendrils of a globally inter-connected market and its supply-chains?

As the ABC’s Michael Janda commented:

“Supply chains now snake across the globe, so tariffs that increase the price of one good in China could end up also raising the prices of hundreds of other products and services that rely on that good.”

The moment that occurs, contributing supply-chains, companies and nations are vulnerable, and with few opportunities to behave differently and take advantage of the situation. The main reason countries like Australia cannot engage at that super-power level is because unlike the US and China, we do not control any one supply chain, there are few products (or services for that matter) where we have a complete competitive offering in sectors where tariffs might be applied.

As Citi’s Senior Economist Joshua Williamson told Janda:

"So this schadenfreude view that there might be some winners is quite myopic."

It is, as Janda points out, very difficult to predict the precise impact of tariffs, until the effect is applied. There is little doubt that what they will do is raise prices for goods, and that will have an impact on households, including in Australia.

The workings are not clear, but Citi’s publicized view was that trade barriers would cost the Australian economy around AUD21 billion within three years. That would in turn push 70,000 people out of work, pushing up the unemployment rate by 0.5%, forcing the Australian dollar down 6% and making the average Australian household AUD1,500 per annum worse off.

Already, the trade tensions are flowing into a higher cost of capital, placing upwards pressure on interest rates in countries outside Australia. In an economy where household debt is already high, that is a recipe for disaster.

The ABC’s Ian Verrender suggests this means bank imposed interest rate rises are inevitable because the cost of overseas debt is rising. The exposure of the large banks to international markets means the RBA’s cash rate is only one of the reference rates for Australian banks.

We face the unedifying prospect of the big banks increasing mortgage rates, with the RBA left using the monetary lever to reduce rates, to ensure there is sufficient money in the economy to sustain what is still a pretty anemic national growth profile.

And if we take Verrender’s word on this as gospel, then we may find ourselves in a trade war of a different sort – watching the RBA slug it out with the banks will be a battle in its own right.

Trade wars are as senseless as any other wars, and they are resolved ultimately, in the same manner. Let us hope that sanity prevails.