Limited functionality available
This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.
Trade truce too good to be true
Fresh trade talks between the US and China continued last week, as both sides look to resolve the impasse that began in early 2018. At the heart of the tensions are US concerns about intellectual property rights and what the US considers to be unfair trade practices by the Chinese that favour domestic Chinese companies through subsidies.
Those talks took an unexpected turn on Sunday, as President Trump took to Twitter threatening further tariffs on US$200 billion of Chinese imports, in a bid to force further concessions from the Chinese in a final agreement.
Many are anxious for a resolution to the US-China trade spat, with the consequences of the trade barriers becoming clearer. Bilateral trade between the two has weakened substantially since the onset of the tensions, with the value of Chinese exports to the US steadily falling since late 2018 (see chart below).
Chart: Bilateral trade between the US and China
In fact, trade between the two countries has fallen so much that China has slipped from being the US’s largest trading partner to third through the first two months of 2019, with both Canada and Mexico now first and second.
Likewise, the importance of the US in Chinese trade has fallen, with China reporting that trade with the US was down 11% in the first quarter compared to a year ago. This now places the US third behind the European Union and the ASEAN countries in trade with China. Whether these shifts become permanent remains to be seen.
Australia has maintained a keen eye on developments – and for good reason. In 2018, one-third of our goods exports went to China, with 45% of this being iron ore and a further 12% coal. This places Australia in the top 10 exporters to China, and the largest exporter of iron ore (see figure below).
Figure: Iron ore exports to China, 2017 ($US)
Source: UN Comtrade Database, Chatham House
In recent years, China has outlined its plans to transition to a consumption-driven growth model, moving away from the investment-driven approach that has been the foundation of its incredible growth – and which had underpinned Australia’s commodity boom. This shift will be seen in greater imports of discretionary goods, benefiting countries such as Germany and Korea, and away from raw materials used in processing.
But the trade spat did contribute to China’s faster-than-expected economic slowdown in 2018. Paradoxically, this has been somewhat beneficial for Australia in the short term. While the slowdown has restricted spending by Chinese consumers (and placed downward pressure on imports from the countries providing such goods), China’s authorities have sought to stimulate growth through higher infrastructure spending. For Australia – and our competitors in Brazil, India and South Africa – this has been good news, with higher iron ore prices now buoying Australia’s government revenues.
But China’s economic stimulus measures, relying on higher debt, are not sustainable. Longer term, Australia – and the global economy more broadly – would benefit from stronger US-China trade relations that help support more sustainable Chinese economic growth.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Harry joined Deloitte Access Economics in January 2017 after completing a Bachelors of Arts and Commerce, with honours in Econometrics and Business Statistics from Monash University. Harry’s area of focus is data analytics and econometric modelling, having conducted a range of research surrounding mental health, prescription drug use, labour markets and ageing populations.