`Very Awkward' Spot in U.S.-China Firing Line for Aussie Economy

(Bloomberg) -- As the U.S. and China move toward an all out trade war, Australia finds itself between a rock and a hard place.

As a close ally of the U.S. and the most China-dependent economy in the developed world, the $1.3 trillion economy has a lot to lose as the world’s two biggest trading nations lock horns.

“Australia is in a very awkward position between the U.S. and China,” said Roland Rajah at Sydney-based think tank the Lowy Institute. Rajah previously worked at the Asian Development Bank and Australia’s central bank. “Risks of escalating economic tensions between these two is a big concern.”

`Very Awkward' Spot in U.S.-China Firing Line for Aussie Economy

China buys 35 percent of Australian exports, equivalent to about 8 percent of gross domestic product, and dominates iron ore shipments and education. Already, in response to the Turnbull government’s announcement of measures to try to thwart Chinese political influence, Beijing is reportedly seeking to discourage students from studying Down Under by warning about safety risks.

Education is a significant export, and it’s not much of a stretch to imagine China could undertake far more disruptive measures in the event Australia sided with the U.S. in a trade war. Education exports to China were worth A$9 billion in the year through June 2017, up 260 percent in a decade. As for tourism, almost 1.4 million Chinese visited Australia in 2017 and pumped a record A$10.4 billion into the economy, up 14 percent from 2016.

Australia’s economic reliance on China is stark -- most countries with a similar or larger proportion of exports to the world’s No. 2 economy are developing nations.

`Very Awkward' Spot in U.S.-China Firing Line for Aussie Economy

“As a trading nation Australia has a lot to lose from an all out trade war,” said Andrew Charlton, director of consultancy AlphaBeta in Sydney and one-time economic adviser to former Prime Minister Kevin Rudd. “Whether we are exempted from specific protections or not, the deterioration of the global open trading system will harm our future.”

U.S. President Donald Trump overnight instructed his trade representative to levy tariffs on at least $50 billion of Chinese imports, citing allegations the nation violates U.S. intellectual property. Hours later, China announced reciprocal measures on $3 billion of imports from the U.S., including products from steel to pork. It said it will also pursue legal action against the U.S. at the World Trade Organization.

Earlier, China’s ambassador to Washington Cui Tiankai said accusations of intellectual property violations were “groundless.” Cui warned “if people want to play tough, we will play tough with them and see who will last longer.”

For Australia, the economic relationship is not just about shipping metals. While China’s thirst for these hasn’t waned, it’s now complemented by demand for everything from tourism to wine and vitamins. Indeed, 8 percent of China’s imports from Australia were consumer goods in 2016, the most recent full year when data is available, compared with just 2 percent in 2013, while the share of minerals has fallen to 56 percent from 62 percent over the period.

`Very Awkward' Spot in U.S.-China Firing Line for Aussie Economy

Curiously, most countries that trade heavily with each other tend to be in close geographic proximity. Australia stands out in that regard, given it’s 4,000 miles from Beijing; the only other countries so distant with a major trade relationship are, curiously, China and the U.S.

`Very Awkward' Spot in U.S.-China Firing Line for Aussie Economy

Speaking in Hong Kong earlier this week, Australian Trade Minister Steven Ciobo criticized rising protectionism. He noted the U.S., in opening its markets to China, had welcomed and facilitated China’s emergence as a major economy and helped lift hundreds of millions of Chinese out of poverty. The minister added that China had made “major adjustments” to be part of the rules-based trading system.

“Protectionism not only doesn’t work, but in fact is shooting yourself in the foot,” Ciobo said in his speech. “It is wealth-destroying, and does not deliver either the prosperity or certainty its proponents claim.”

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