Australian winners and losers in US China trade war

The trade war between the US and China presents both challenges and opportunities for Australian businesses, writes Innes Willox.

While it is often said there are no winners in a trade war, the current impasse between the US and China is having mixed and some unexpected impacts on Australian businesses.

Ai Group members are telling us that they are being hit by the US tariffs on products manufactured in China and for the first time are being asked for the country of origin of all kinds of technology and equipment. However, they are also getting new opportunities to quote for work in both the US and in China and of course, thanks to Australia’s special relationship with the US, we are one of the few countries exempt from additional US tariffs on steel and aluminium. So, as in all crises, there are both winners and losers, and sometimes one company can be both.

There are three main fronts in the current trade war that Australian companies need to pay attention to. The first is the Section 232 tariffs that the US is applying or threatening to apply to three different industries, the second is the US/China trade war, and the third is the US rhetoric around technology decoupling.

In March 2018, President Donald Trump announced new tariffs for imports of steel (25 per cent) and aluminium (10 per cent), using the argument that America’s diminished local steel industry poses a security risk to the United States. This was in response to an investigation by the Department of Commerce to into the impact of imports of steel and aluminium. It is interesting to note that the final tariffs are higher than the 24 per cent recommended for steel and 7.7 per cent recommended for aluminium. Steel and aluminium from Australia avoided the additional tariffs, giving Australian companies a competitive edge to other suppliers. Australian aluminium exports in 2018 increased by almost 120 per cent, and while exports to the USA were a big part of that increase, exports to Japan, South Korea, Taiwan, and Thailand also increased, showing the ripple effort that unilateral action on tariff increases can have.

Ai Group’s Innes Willox.

The other two industries that are affected by Section 232 tariffs are uranium and automotive products. Over half of Australia’s uranium exports are sent to the US, and any disruption could affect those manufacturers who service local mines. In this case, the President determined that uranium imports were not a risk to the security of the US and deferred the investigation to a committee. The third industry, automotive parts, while important to the Australian manufacturing sector, was a strategic move to start trade negotiations with the EU and Japan, who have much more to lose in vehicle sales, not the specialist automotive products that Australia exports, many of which were not even listed in Commerce Department reports as being under investigation.

The trade war between the US and China caused indirect issues for Australia as soon as the first tariff shot was fired. In the period between US tariff increases being announced, and their implementation, Australian wholesalers were reporting to our Australian Performance of Manufacturing Index survey researchers that they were struggling to source inputs for the Australian market, because supply was being redirected to the US for storage before they could be hit by the first tariff increase.

Australian manufacturers have substantial supply chain footprints in both the US and in China, supply chains that are being tested in the current environment. Companies
are paying more attention to their suppliers, and the tariff codes that their goods travel under, to avoid excessive duty payments. With Free Trade Agreements with both China and the US, companies exporting product whose final processing occurred in Australia have an easier time. What is more complex is the impact to regional supply chains. For example 10 per cent of Indonesian products to China are inputs into products exported to the US and a reduction in demand may have a domino effect across our region.

However, agile companies will be eyeing the opportunities to take market share from US competitors in China particularly in cosmetics and pharmaceuticals and processed food.

Chart 1, from The Peterson Institute for International Economics, which is home to experts in all things trade, highlights the growing difference between China’s treatment of US products compared with the rest of the world. It doesn’t take into account the additional discount that Australian companies receive under our FTA.

Chart 1

Australian companies rely heavily on American technology for domestic consumption and export. What has been missing in much of the coverage of the trade war is the increased controls on the use of American technology. Our members are certainly experiencing the impact of this with increased scrutiny from their Asia-based customers on the origin of their technology, and companies who incorporate products that have civilian and defence uses are struggling to secure supply.

What can Australian companies do to avoid being a casualty of this war? Talk and listen to your suppliers and customers. Attend industry events to understand how others are coping. In such a dynamic environment, information and relationships will be your strongest asset.