What A Trade War Between China and The US Means For Australia

Over the weekend, a major international summit came to a surprising and concerning close. 

For the first time in history, world leaders at the Asia-Pacific Economic Cooperation meeting in Papua New Guinea weren't able to agree on an official statement -- called a communique --  amid a deepening divide between China and the United States.

Dr Adam Triggs, Director of Research at the Australian National University's Asian Bureau of Economic Research, was quite confronted.

"We always knew there would be tensions -- particularly between the US and China -- and that trade would be difficult, but it was pretty surprising that it actually ended so badly," he told 10 daily.

READ MORE: APEC Leaders Fail To Come To Agreement On Traditional Summit Communique

The two superpowers were unable to agree on the wording of the communique that is usually made to the media, with Prime Minister Scott Morrison on Monday telling reporters there were "some points of disagreement" between the major players.

There was also a diplomatic incident involving four Chinese delegates who reportedly tried to storm PNG Foreign Minister Rinbink Pato's office on Saturday demanding a face-to-face meeting. Speaking to Reuters, Pato later confirmed the officials had seen him, but denied such media reports.

Australia's Prime Minister Scott Morrison and Japan's Prime Minister Shinzo Abe make an energy and communications statement at APEC Haus. Image: AAP Image

While legally non-binding, Triggs said communiques are typically symbolic documents that are used politically against each other.

"The fact that we don't have one isn't a huge issue in itself, but I think the fact that they couldn't even agree to one is more symbolic of the real divisions that are happening underneath."

So what's going on? And where does Australia fit into all of this?

How did we get here?

You've probably heard rumblings of a mounting trade war between the US and China over recent months.

Essentially, we're faced with two superpowers who have lobbed competing tariffs on exports worth billions of dollars at each other. Why? President Donald Trump has said one of his main economic goals is reducing the US trade deficit, though the way to do that is contested. 

Triggs calls a trade war a "lose-lose" situation.

"No one really wins in a trade war; some people lose less than others."

"At the end of the day, a tariff is just a tax on your citizens," he said.

But to really understand how we got here, we need to look back on the past three or four decades of trade liberalisation (removal of obstacles for the free exchange of goods between nations) that have paved the way for emerging markets such as China.

China's President Xi Jinping at APEC Haus. Image: AAP Image

"We've had a lot of trade liberalisation on goods and in merchandise, but not the same level on services," Triggs explained. This has impacted countries such as the US, UK and Australia that are service-based economies.

"The benefits of trade liberalisation tend to flow more to the countries that are exporting all of the manufactured goods, such as China and the emerging markets," he said.

"A lot of the advanced economies get less, and as we start de-industrialising, we start losing the good trade that we had to begin with."

Combine this with an uprising against globalisation -- where countries, particularly the US, who compete with low-wage countries fail to support its workers from displaced industries -- and we reach the here and now.

Where does Australia fit in?

As Triggs says, "it sort of sucks to be us at the moment". Australia was and is caught in the middle.

"The biggest concern is that it does put us in between our two major partners -- one the strategic, being the US, and the other economic, being China," he said.

Trump's approach puts Australia in a less-than-ideal situation.

"Trump prefers to make bilateral deals, which is the opposite of what we want. It puts us in an awkward spot," Triggs said.

Walking a fine line, Morrison earlier played down suggestions relations were fractured, insisting both sides want a resolution.

But what a resolution could look like remains a big question mark.

Leaders pose for the official photograph. Image: AAP Image
How could this affect us?

Being a trade-exposed country, Australia's economy is at risk of becoming collateral damage -- and we have a bit more to lose.

"We trade a lot more than most countries and we also rely on foreign money for investment, so when you start to get international turbulence, we feel that a lot more than others," said Triggs.

The main risk is that the trade war causes some kind of downturn in China, which in turn creates less demand for our exports.

"The other alternative is there is a potential for a deal between them -- where China might agree to buy more from the US -- could divert away from us,' Triggs said.

This could hit our agricultural market, while the finance sector could be hit by a volatile stock market.

Where to now?

This is hard to predict, mainly because it's not entirely clear what President Trump wants.

"I think we have to make sure that whatever is decided between the US and China is that it actually something that will solve the problem.

"The only resolution would be if they can reform the World Trade Organisation or if they can have a new trade agenda which focuses on services and opening up economies to services trade -- that's where the US really would benefit."

The immediate future is the G20 Summit, held next month in Argentina, where Morrison said the "points of disagreement" would be picked up.

Triggs said Morrison needs to "get the balance right".

"He doesn't want to be seen as taking one side over the other," he said.

"He needs to emphasise the need to resolve the disputes and look at these longer term solutions."

Contact the author ebrancatisano@networkten.com.au.