Blue Notes (06/03/2020) - The past three years have seen more trade disruption than any period in the contemporary trade era – that is since 1995 when the World Trade Organisation was founded.
From 1995 onwards, the world entered a period of continual trade liberalisation.
" The quarantining of China’s workforce and shutdown of factories has completely disrupted global trade.”
The North American Free Trade Agreement (FTA) was completed. The European Union continued to integrate and expand. The Association of Southeast Asian Nations (ASEAN) and North Asian countries inched toward liberalisation. Australia signed free trade agreements with its major trading partners.
In early 2016 it was expected this pattern would continue with major multilateral agreements including the Regional Comprehensive Economic Partnership (RCEP), a Trans-Pacific Partnership that included the US and a new agreement between the US and the European Union (EU). There was discussion of an APEC-wide agreement covering 60 per cent of the global economy.
None of that happened.
Presidents Trump and Xi have used trade policy for geopolitical purposes. President Trump’s administration has junked bilateral relationships and threatened the rules-based trading system to assert US dominance.
This has been compounded by the coronavirus pandemic. This event is qualitatively different. The quarantining of China’s workforce and shutdown of factories has completely disrupted global trade.
Over the past month, the fall in Chinese demand for raw materials has dampened Australia’s main exports. China’s shuttered factories and obstructed transport routes have eroded the inventories of Australian companies and delayed student arrivals, threatening retail, real estate and international education sectors.
The resulting uncertainty is two-fold.
There is a longer term uncertainty that is a product of US-China political rivalry. This will not disappear soon; it will go beyond tariffs and continue to materialise in debates over security, intellectual property, technology and data.
There is also the short-term uncertainty created by the pandemic. As the world manages the outbreak over the next two quarters or more, factories will re-start, governments will use fiscal tools. This pattern is already emerging.
Australia is not the only economy struggling to manage these events. Many ASEAN economies face a similar problem of having China as their biggest customer and needing the US as a geopolitical counterweight.
Countries such as Vietnam and the Philippines have both trade and territory at stake; their problems are more acute. Singapore depends almost entirely upon the free flow of people, goods and capital.
Many of the virus-related factors dominating the headlines are beyond the control of the private sector.
How can Australian and regional businesses manage this two-fold uncertainty?
Australia is not as exposed as other economies in the region. But there is often a fundamental misunderstanding among policymakers and the general population about how Australia trades with the rest of the world, and what matters to those who are trading.
Understanding the difference
Correcting this fundamental misunderstanding requires understanding four key factors:
1. Australia is not as enmeshed in global value chains as our neighbours - but we depend on them. For example, South Korea imports most of its iron ore from Australia. One third of South Korean steel is used in the automotive industry. Two-thirds of Korean cars are exported. Around half of Korea’s cars go to North America. A trade agreement between South Korea and the US - or anyone - matters to Australian trade.
2. Australia’s biggest exports rely on services. The fixation on goods exports needs readjusting. ITS Global estimates that, in 2015, services accounted for 41 per cent of Australia's export earnings when measured in terms of total value-added, compared with 37 per cent for mining and 23 per cent collectively for agriculture and manufacturing.
3. Details matter. There is now an extensive network of FTAs across the region that can leverage opportunities. More can be done. Some industries – like blueberries and pork - are unable to take advantage of lower tariffs under the China/Australia FTA because they lack certain export protocols. Restrictive rules of origin and complex regulations in importing countries still limit trade. But many of these problems can be overcome with the right navigation in Canberra and elsewhere.
Trade relationships need more than trade agreements. For decades Canberra has spoken of improving Australia’s trade relationship with Indonesia while realising business opportunities there. Many assume a bilateral trade agreement is a silver bullet. But understanding Indonesia’s complex political and business culture, gaining the trust of business partners, and - most importantly - spending time and resources in Jakarta is what will make those relationships work.
There is no one solution to managing disruption. The US-China spat will not be solved with political platitudes.
Business can and should engage more deeply with government on trade. Most large and established businesses already do. But medium sized businesses and newer industries often do not have the capacity to do so. Similarly, expansion into complex and risky emerging markets can be put into the too-hard basket and may not gain the support of risk-averse boards.
Understanding trade risks and how well-formed trade policy can mitigate those risks is the only path forward for Australian business.
Khalil Hegarty, Kristen Bondietti and Jon Berry are Directors at ITS Global
Read more at https://bluenotes.anz.com/posts/2020/03/Uncertainty-in-an-era-of-disrupted-trade