Bank highlights potential trade fallout

28 Aug, 2018 04:00 AM
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 Rabobank's head of financial markets research Asia-Pacific Michael Every was in Perth last week, discussing the fallout of American and Chinese trade tensions and its impacts on Australia.
Rabobank's head of financial markets research Asia-Pacific Michael Every was in Perth last week, discussing the fallout of American and Chinese trade tensions and its impacts on Australia.

AUSTRALIA’s dependence on China as its largest agricultural export market could backfire if tensions between the East Asian country and the United States continue to escalate.

That was part of the message delivered by Rabobank’s head of financial markets research Asia-Pacific, Michael Every, to an intimate group of the bank’s clients in Perth last week.

As part of Mr Every’s presentation – titled A New Cold War – the Hong Kong-based analyst detailed the rising political and economic tensions between China and the US and the potential fallout for Australia and its trade environment.

Tensions have been mounting between the two powerhouse nations throughout the year, with both countries imposing import tariffs of 25 per cent on about $US50 billion of goods each.

Mr Every said as politics, economics and the military became more integrated in the two countries, global markets would be placed on increasingly shaky grounds.

“Basically, we’ve got a cold war as far as I can see between two of the most important countries in the world and the trade war is just a little bit of it,” Mr Every said.

“As a result markets are going to get a lot more volatile and globally everything gets a lot more volatile.

“You may think you don’t want to choose a side – the risk is at some point you are picked.”

According to the Australian Bureau of Agricultural and Resource Economics (ABARES), China is Australia’s biggest agricultural export market, with exports in 2015-16 valued at $8.2b

Australia’s top three agricultural exports to the world’s most populous country include wool, beef and veal and barley.

With iron ore, dairy, education, tourism and housing industries also relying heavily on the Chinese market, Mr Every said Australia would be placed in a vulnerable position if the “new cold war” amplified and it was forced to align with either its economic partner China, or its cultural partner America.

“Basically most of the economy in one way or another is in China to a certain degree, so you’ve got all of your eggs in one basket economically,” Mr Every said.

“Culturally and from a defence perspective, you’ve got all of your eggs in a completely different basket.”

Regardless of the future of the relationship between America and China, Australian exports to China were in insecure territory, according to Mr Every.

He said if a trade war was to escalate and the Australian government chose to support its historic allies in America, China was likely to threaten a consumer boycott of Australian goods.

Mr Every said alternatively, if the US and China resolved its trade conflict, Australia could lose some of its market share of Chinese agricultural imports to America.

“If we don’t see this trade war we have been given a clear indication that if they (America and China) make friends, the deal is that America sells more agricultural products to China,” he said.

“China already said when the last deal was on the table a few months ago ‘if that happens we’ll stop buying from Australia, we’ll just switch to America’.

“It’s a pretty unstable situation.”

To decrease its export vulnerability, Mr Every told the crowd Australia should consider diversifying its markets.

He said while diversification may result in a loss in premium prices on exported goods in the short-term, it would shield Australia against market insecurity in future years.

“I’m wondering how long until you have politicians here are suggesting to you that you should accept a loss of premium to sell to markets other than China as a national security briefing,” Mr Every said.

“A portfolio diversification would make sure no one ever phones you and says ‘I don’t like what your Prime Minister said yesterday so you’re out of business tomorrow’, which is a realistic threat unless you want to live in a country where your Prime Minister is dictated to by another country.

“This is a world many countries are moving towards already.”

Mr Every said there were plenty of opportunities in alternative markets, including neighbouring countries such as Indonesia which boasted huge population growth.

While the future of the American-Chinese relationship remained unclear, he said it was in Australia’s best interests to plan ahead to ensure its high quality produce had a market, regardless of international trade challenges.

“If your whole business model is only selling to China and something goes wrong, you might not have a balance sheet that can get you through the re-adjustment,” Mr Every said.

“The product is not the problem, the issue is just making sure you get the product to someone who’s going to pay you reliably over the longer term with no strings attached.

“If the world does change, it’s really good if you have a Plan B.”

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