Cold war is a trade threat to Australia

The two superpowers are in an escalating trade war over tariffs, sparking fears they may want their respective key trading partners to pick a side – with either China or the US.

Prominent trade analyst Michael Every has warned farmers about the scale of the threat, but other commentators say superpowers are a long way from demanding concessions from their allies.

But on one point, agreement is clear.

Australia needs to share its eggs between more than one trade basket and develop links into new growth markets such as Japan, Indonesia and India.

Agricultural exports play a significant role in Australia’s trade surplus with China.

It’s our largest market for farm produce, which has risen a whopping seven-fold since the turn of the century and was worth $14 billion in 2017-18.

However, many countries have lost markets as China has risen to become an export juggernaut and received little access to its booming domestic market in return.

Most significantly, China’s aggressive pursuit of expansion through mercantilist trade policy, pulling out all stops to maximise exports and limit imports, has provoked the US to follow suit.

In March, 11 nations, including Australia, signed up to the Trans Pacific Partnership (TPP) that was ratified by the Federal government in October.

The TPP was intended to include the US, but it withdrew from negotiations in 2017.

In January, however, US president Donald Trump signalled he could push harder for a “substantially better” Pacific trade deal for the US.

Mr Trump has already twisted the arm off allies in Canada and Mexico to sign up to a renegotiated North American Free Trade Agreement.

That deal includes anti-China terms requiring Mexico and Canada to notify the US before trading with non-market economies.

Rabobank’s Mr Every, a Hong Kong-based, Asia-Pacific head of financial markets research, calls it a cold war between the two global superpowers.

At the recent National Farmers’ Federation convention in Canberra he warned that, one way or another, access to China’s gargantuan domestic market could be cut short.

“China has made it clear there will be a gun put to your forehead and you’ll be asked are you with us, or are you with the US?” Mr Every said.

“If you answer the US, the Chinese can slam the door shut.”

Mr Every said the US would look to renegotiate the TPP with a clause “no trade with China”.

“Australia needs to pick a side, before it’s picked,’’ he told the Canberra forum.

“You’re in a much stronger position if you can pick.”

At the Lowy Institute, international economy program director Roland Rajah is less fearful of a stark choice between China and the US looming in Australia’s near future.

But the situation could escalate over time.

“It’s far too early to say which scenario we’ll get,” Mr Rajah said.

“If you extrapolate the trend line of the way things are going, then we could be headed towards an us-and-them situation.

“But at this time it’s not clear how far things will go.”

Mr Rajah said the jury was out on the affect of clauses that could restrict the ability of Canada and Mexico to pursue a trade deal with China.

“Some say it will be very constraining, others say it won’t really change anything legally speaking,” he said.

“I say it is meaningful, especially if you think of domestic politics when a country negotiates with China.

“Business interests will immediately worry about the risk to their trade with the US and start making loud noises against jeopardising that, which could be politically hard to ignore.”

US vice-president Mike Pence has been clear on how the US sees the picture.

He took aim at China this month, warning of its “emboldened” and growing military aggression, abuses of domestic minorities and trade policies that profit at the US’ expense.

“To advance our vision of a free and open Indo-Pacific, we’re building new and stronger bonds with nations that share our values across the region,” Mr Pence said.

Mr Pence said China used “an arsenal of policies inconsistent with free and fair trade” such as tariffs, quotas, currency manipulation and foreign subsidies that are “handed out like candy”.

“As we respond to China’s trade practices, we will continue to demand an economic relationship with China that is free, fair, and reciprocal,” he said.

A recent Bloomberg report highlighted the security threats driving these concerns.

It alleged a Chinese military operation secretly inserted microchips in computer parts of 30 US companies.

Chinese manufacturers denied the claim.

The components, made in China, were in some cases used by the US government in the Department of Defence and the CIA.

Australia has followed the US in restricting Chinese telco Huawei from the rollout of 5G mobile networks, citing security concerns.

Mr Every expected national security concerns to drive foreign policy.

“When national security comes in, free trade goes out the window,” Mr Every said.

“Now, they’re putting pins into maps,” he said.

“Australia is the canary in the mine.

“There is no country more aligned with the US militarily in this region and no country more correlated with China economically.

“The US can say to Australia this deal will be part of overarching military strategy, you’ll be comfortably tucked under our wing.

“But part of a new deal (TPP) could be an addendum that says Australia can’t walk in the front door to trade with China while US firms can’t.

“That means you’re united with the US in breaking Chinese resistance to economic reforms.

“I don’t see how Australia can say no, otherwise it’s saying ‘sorry US, we are going to sneak in and steal your lunch while you do all the heavy lifting’.”

Mr Rajah said the US could continue to pursue trade restrictions, through measures already in place, namely US tariffs on Chinese exports.

“The US is pursuing a policy of decoupling from the Chinese economy, but it’s not clear if it will take a narrow focus on national security or pursue a broader agenda,” he said.