Trade wars concerning for Australian exporters

The escalating trade tension between Washington and Beijing threatens to become a currency war. That has potentially significant implications for Australian exporters. There are three questions to ask: what is it all about; what does it mean; and what are the implications for Australian dairy producers?

What it’s about: The Trump administration has taken a strong stand on growing US domestic manufacturing and reducing imports. Add to that the significant diplomatic challenges between the US and China. The result is the introduction of prohibitive tariffs by Washington on Chinese imports to the US. Reverse tariffs have had little impact because Chinese exports to the US far exceed US exports to China. The Beijing administration’s only available lever to address this issue is to intervene to artificially deflate the value of the renminbi compared to the US dollar. Unlike most international currencies (including the Australian and US dollars), the renminbi, or Chinese yuan, is one of the few remaining currencies actively regulated by a central government. Earlier this year Beijing allowed a nine per cent slide in the value of the yuan against the US dollar which more or less compensated for the impact of Washington’s newly imposed trade barriers.

Trade tensions between the USA and China have huge implications on Australia

What it means: The Australian dollar has remained relatively steady against the US dollar, declining moderately over recent months. In a normal situation, particularly where Beijing is holding the yuan’s value against the US dollar, that would be a good thing for Australian exports. However, a slide in the value of the yuan against the US dollar means that Australian exports become more expensive in China. Of equal concern is that recent history has shown that when the yuan slides, capital exits China as local entrepreneurs and businesses seek to minimise their exposure to the Chinese currency. In simple terms it becomes more expensive and more difficult to export to China.

Implications for Australian dairy producers: China is a major destination for Australian dairy product exports. Australian dairy product exporters are already struggling with increased regulation by Chinese authorities targeted at milk powders and other dairy products. An increase in the value of the Australian dollar against the yuan adds further pressure to the viability of dairy exports to China. The potential of capital flight from China compounds the risk – although it does appear that Beijing has put policies in place to limit this.