The USA and China escalated their trade war in August this year. What happened here as a result? Firstly, the Australian dollar immediately fell to its lowest value in more than a decade.
With the world’s two largest economies in conflict, the global economy is looking more volatile than ever, with declining sales across many industries.
Australia is far from immune. If the trade war continues to impact other influential economies, Australian investor confidence could take a massive hit. Ernst & Young (EY) predicts a potential $36 billion loss to the Australian economy as a result of just a 5% decrease in economy-wide investment.
But there’s a flipside.
In the short term, there will be some winners. Australia’s manufacturing sector could see an increase of 5% in investment and 20% in exports over the next year. That’s $1.1 billion in GDP.
The biggest question you need to consider is this…
Which industries win or lose from the US-China trade war?
Agribusiness lender Rabobank says Australian wine has been the biggest winner in the Chinese market this year as the trade tensions have ramped up the cost of American wine.
China has rolled out three rounds of import duty increases on US wine, and it’s now subject to a total levy of 106%. This includes tariffs, a value-added tax and excise tax – all of which are reducing profits and making the USA uncompetitive in China. Wine from the USA now enters the China market costing 64% more than comparable Australian wine.
Other factors are at play too. Premium wines are increasingly in demand and France recently suffered from a poor crop. As a result, Australian wine producers have been doing well.
Tony Battaglene, Chief Executive of Australian Grape and Wine, told the Sydney Morning Herald, “The big thing that’s happened in the last four or five months is that we’ve overtaken France as number one in the market.”
Check out the reasons behind growth in for Treasury Wine Estates and Gage Roads Brewing after the FY19 reporting season.
EY chief economist Jo Masters said Australia exported $12b worth of agricultural goods to China in 2017-18, mainly beef, wheat and wine. The US-China trade war gives Australian farmers an opportunity to grow these exports.
America is one of Australia’s biggest agricultural competitors in China, which will reportedly block its state-owned enterprises from taking US farm products in response to the increase in tariffs.
Australia could generate $1b extra from exports in the short term, resulting in 3,900 full-time jobs in agriculture. Almost another 1,000 jobs would be created in the wider Australian economy.
But Masters cautioned that while there were short-term gains to be made, longer term there would be issues. “While the current trade wars provide Australia with a potential short-term gain, we do know that long-term trade disputes are not good for Australia – we’re a small, open economy and trade wars hit global growth and confidence,” she told the SMH.
PwC has a different outlook.
It says fewer US agricultural products could lead to an influx of cheaper products from other exporters to China, slashing prices and making Australian goods uncompetitive. On top of this, while there will likely be an increase of Australian exports to China, the USA could dominate other markets, thus pushing Australia out.
This can be illustrated with wheat-export predictions; these are tipped to fall overall – even with exports to China forecast to rise by 10%.
The quickly growing organics market will be one to watch, as well.
The wool industry’s outlook is looking bleak. Wool receivals through the June quarter hit a record low of 78,500 tonnes. While much of the drop is due to the drought across Australia’s eastern states, the demand for wool clothing out of China is expected to falter due to the tariff increase planned by the Trump Administration.
Does the future look bright?
China is Australia’s largest trade partner, with the China-Australia Free Trade Agreement (ChAFTA) facilitating trade between the two countries.
Indeed the China-Australia Free Trade Agreement (ChAFTA) was one of the defining Australian manufacturing stories of 2015.
Prime Minister Scott Morrison is keen to sustain this strong relationship during a time of global conflict, telling the ABC: “I think we’re going to have to get used to this for a while, this level of tension. We’ve just got to accommodate that, we’ve got to absorb it, we’ve got to see the opportunities in it, of which there are many.”
However, businesses can’t just rest easy. To ensure our economy continues to prosper – with or without a US-China trade war — we need to review our trade strategies and supply chains to include contingency measures and mitigate risk. Nothing is guaranteed.
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Image credits: iStock/ Aquir (main); iStock / Toa55 (2nd)