Trying to interpret what will be the final outcome of president Donald Trump’s startling trade war is a vexed exercise. The situation seems to change almost daily. Trump’s capacity to find new meanings for the word ‘mercurial’ shows few limits.
In a sense Trump, whose intent is clear if not his strategy, cannot really lose, although it may create some medium term economic pain in America. His aim is to make the United States more self sufficient. Indeed that seems to be what he means by ‘great’ in his slogan Making America Great Again.
Self sufficiency is an inevitable outcome of protectionism, although it has often not resulted in good outcomes. South American countries used protectionism heavily, an approach called import replacement, and lagged behind economically for decades. More recently Russia was forced into self sufficiency because of two decades of heavy sanctions and has thrived. It really all depends on the country and the circumstances.
What is certain is that globalisation, the practice of locating company operations in different parts of the world, is pretty much over. A substantial portion of what is called trade has actually been shipments inside the same company, rather than exports and imports. It is estimated, for example, that 30-50 per cent of China’s trade surplus is actually intra-company shipments.
That globalisation strategy only works if there is a low cost of transferring between countries. Global corporations will still want to internationalise their operations as part of a trade off to gain access to another country’s customer base. That was partly why so many Western corporations outsourced parts of their activities to China in the hope of selling to over one billion consumers. But the advantages of a deploying a cheap overseas work force are vanishing,
For the time being at least the American consumer, who accounts for almost two fifths of global demand, will remain the main prize. That is why so many foreign corporations are rushing to establish operations inside the US.
The problem, though, is that America’s consumption is fuelled by unsustainable debt. Trump’s plan to use the tariff revenue to deal with the budget deficit and soaring Federal debt, now running at $US36 trillion, will disappoint. Revenue from tariffs, which go to the Treasury rather than through the Congress, can be used to directly pay down debt without interference from the legislature. But it will not be enough.
'Globalisation is over and trade will revert to being just trade. Australia’s policies should reflect that.'
The US federal deficit in the 2025 fiscal year will be $US1.9 trillion, or 6.2 per cent of GDP, according to the Congressional Budget Office (CBO). That is almost double the average over the last 50 years. By 2035, the deficit is projected to be $US2.7 trillion, or 6.1 per cent of GDP.
Where is Australia positioned? Pretty well, as it turns out, and for somewhat ironic reasons. Australia has aggressively deindustrialised over the last three decades so it does not sell manufactured goods to other countries to any degree, including the US.
A glance at Australia’s exports to the US – it is 6 per cent of the total – indicates that there may be an impact on some commodity exports, but there are almost no manufacturing exports to worry about.
The top export ($6.2 billion) is a service that does not attract tariffs: professional, tech and other business services. Second ($3.5 billion) is Intellectual Property charges, also not subject to tariffs. Beef ($3.5 billion) is a good and so will have a tariff and it has been subject to criticism by President Trump but the third ($2 billion) is recreational travel, a service.
It is not until we get to the seventh biggest export ($1.6 billion) that there is a manufactured good: pharmaceutical products. Small wonder that the Australian government has been relatively quiet about the new tariff regime. Australia largely gets a pass.
Goods dominate world trade, which is why they are the target of protectionism. Manufacturing in turn accounts for over 70 per cent of world goods exports. Trade in services represents less than a fifth of the total, yet services constitute over two thirds of the world economy.
This asymmetry reflects the fact that the developed world has moved into a post-industrial phase, largely caused by massive, sustained efficiency gains – not picked up by the economic statistics – in primary and secondary industries.
That efficiency has seen manufacturing fall to only about 12 per cent of the world economy. In many manufacturing sectors, such as the car industry, there is severe oversupply, putting pressure on prices and sector-wide revenues. Ironically, if Australia had continued supporting the local car industry we would now have trouble with that sector.
The battle over tariffs, in other words, is a fight over a world that is slowly fading away.
There are, though, important strategic implications. One is that Australia may be able to sell more to China. Beef exporters to China are already benefitting as US suppliers are cut off. About a fifth of US exports to China have been in agriculture, including wheat, cotton, corn and soybeans, so opportunities may open up there. The US has also been a significant exporter of coal and gas to China, which could benefit Australian companies.
Australia should start protecting, although not necessarily with tariffs, some of its local industry, especially in agriculture. A study by economist Mark McGovern indicated that about four-fifths of agricultural output serves the domestic market, contrary to the spin from the government and agricultural bodies.
Of 53 rural sectors, as measured at the farm gate, only seven export more than 50 per cent of the value of their production. Five export more than 25-50 per cent of their product. There is a strong case to protect those 41 sectors against dumping, which is likely to intensify.
Globalisation is over and trade will revert to being just trade. Australia’s policies should reflect that. We need to become more self-sufficient.
David James is the managing editor of personalsuperinvestor.com.au. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.