TEFLON TRUMP’S TRADE TARIFFS TAKE TWO

Courtesy of EP3.

The Snapshot

• Trump will likely win the election
• Trump has said he will introduce new tariffs on Chinese products.
• The trade war that started in his previous term can give us some insights into his next term.
• China changed its trade flows from the US to Brazil for soybeans when a 25% tariff was introduced.
• The phase one deal between these two nations meant that China had to prioritise US ag commodities.
• A new trade war in the short term may benefit Australian agriculture, but it could have longer-term pain depending on how it is settled.
• A long trade war could negatively impact the Australian economy due to our reliance on strong Chinese growth.

The Detail

It seems that nothing can stick to Trump, whether its convictions or bullets, it seems that nothing will stop Trump from winning office in November. It will take a huge effort for the Democrats to encourage excitement in whoever runs, most likely Kamala Harris.

In my view, and it has been for a while, Trump will win.

We at EP3 tend to spend quite a lot of time being asked to present on various market and trade-related topics; it’s one of the ways we fund this website and can provide it to you free of charge.

A topic recently has been Trump. A question regularly asked is whether Trump will be good or bad for Australian agriculture. Let’s look at the data and why it may be making Australia great again.

Trump has proposed that should he win, he would slap a tariff of at least 60% on imports of goods from China and potentially 10% from all other origins. This greatly impacts trade flows around the world when two superpowers start a trade war.

The chart below shows the trade in all goods and services between the USA and China. Therefore, China is the more significant exporter to the USA and has more to lose.

Australia is reliant on global free trade. We are a major exporter of commodities to the world, whether they are agricultural, energy, or minerals.

In 1948, in a commons speech, Winston Churchill said, ‘Those that fail to learn from history are doomed to repeat it’. This is an apt expression, as we can learn from the trade war started by Trump in 2018.

As mentioned above, the USA has a trade deficit with China, and Trump wants to bring manufacturing back to the States.

This was a large part of Trump’s MAGA campaign and played a significant role in winning him the white house.

In 2018, the USA introduced a wide-ranging set of tariffs of 25% on products that China imported into the states. As expected, China did not take this kindly and introduced tariffs on American products.

This included a 25% tariff on soybeans, which are the largest agricultural export from the US to China.

When a tariff is introduced, the general effect is that it changes trade flows. We saw this with barley to China (more on that later). In the chart above, we can see the trade in soybeans between Brazil/USA and China. When the tariff was introduced, US-origin soybeans became uncompetitive into China. This meant that Chinese buyers had to switch origin to Brazil.

It was a smart move to hit soybeans, as farmers in America are generally Republicans, so this hit the bottom line of Trump’s voting base.

The tit-for-tat trade war ended with an agreement between the US and China called the phase one deal.

The two nations got to the negotiating table at the end of 2019 and agreed on the phase 1 deal. This agreement was that China would purchase a large volume of various products in 2020 and 2021.

The area we are focused on is the agreement concerning agricultural commodities. The terms of the deal were that China would purchase US$36.6bn, a significant rise above the US$24.1bn in the pre-tariff year of 2017.

Earlier in this piece, I mentioned how tariffs against the US resulted in China purchasing soybeans from Brazil. This is the reality of trade; when barriers are put in place, the flow of commodities changes.

Our concerns were that this trade deal would discourage Australian purchases. When the phase one deal was announced, we examined the products that we believed, based on the numbers, were at risk of being replaced by US products (see here). The most worrisome commodities were:

• Wood products
• Wine
• Beef
• Milk
• Almonds
• Crustaceans
• Barley
• Skins
• Malt extract

Those with an interest in Australian agriculture would be aware that the commodities highlighted in red had some form of trade restrictions placed on them by China.

We saw that the phase one deal worked. China purchased large volumes of agricultural commodities from the USA and gave them preference. The chart below shows the year-on-year change.

The USA is more important to China than Australia. If they have to choose between trying to keep us happy and placating the USA, then we will be forgotten about.

So what might happen?

If and when Trump wins the election, we will likely see a repeat of the trade war that started in 2018. I expect this time that there won’t be a long delay between Trump winning power and tariffs being increased. I expect that he will want to move along at a greater speed than his previous term.

• Increased tariffs on China will result in retaliatory tariffs on US products, including agriculture.
  • In the short term, this may benefit Australia as we will become more competitive.
• An increase in tariffs on China, especially at the high levels quoted by Trump, would lead to poor economic outcomes in China.
  • The Australian economy relies heavily on Chinese growth, especially our mineral sector.
  • A slowdown, or worse, crash in China could drastically impact our economy.
  • An underperforming China would impact global growth and could drive down demand for more discretionary ag products, such as lamb, wool and beef.

If China and the USA eventually get back to the negotiating table, a deal similar to the phase one deal could hurt Australian farmers in the long term if they had to prefer agricultural commodities from the states again.

It is all a bit hypothetical at the moment, but a trade war between China and the USA will likely, in the long term, be harmful for the Australian economy and potentially Australian farmers.

In the short term, it may provide opportunities if China introduces retaliatory tariffs against the United States.

We can guarantee that we will be in for an exciting time.