Weekly Wrap from Pythagoras Investing: Wolf Diplomacy part 2

WAustralia ignored China’s warning about trade for years and continued to impose massive duties on Chinese steel, aluminium, and chemical imports eg Chinese steel pipe tariffs are currently 144 per cent.

With the new Chinese Wolf Diplomacy, Australia was warned again of trade impacts if we pursued the USA’s agenda of demanding an enquiry by the WHO into the coronavirus.  Just weeks later we have our own trade war with China.  A proposed tariff of 74 per cent on Australian barley, an embargo on 4 beef abattoirs and rumours of milk products also.

It matters little if it is due to banning of Huawei or our involvement in an inquiry into the origins of the COVID-19 pandemic.

Unfortunately for Australia, China’s scale and labour costs make our industries uncompetitive and are therefore in need of protection.

Why are China and the US at each other?

China wants to be Number 1- the world’s biggest economy.  But to get there quickly is a battle because to industrialise, China needs 20-40% of the world’s commodities.  Every year.  The tensions are due to the declining USA reacting to the rise of the new Chinese Superpower and China jostling for power and position.

China wants to destabilize the US, both as a country and economically.  With their US treasury ownership, they can play the US as they like.  Their methodology being clear – slowly wear the US down. This explains their actions re devaluing their own currency.  China is prepared to have short term internal losses which they can withstand, in order to hurt the USA. It is in China’s interest for the USA (and its allies) to be stretched thin.

The mechanism to stretch the USA?

A trade war.  But a war is still a war, out of which there will be a winner and a loser. There are many stakeholders, including Australia.  To view it as just a trade war is to fail to understand what is happening. This trade war is a non-violent battle to become the world’s pre-eminent superpower.  There is going to be only one winner.  That will be China – the aggressor.  They want world dominance.

Even after a phase 1 trade war agreement we are still only dealing with the aftershocks of the initial problems which started the whole mess.  The economic pain of the fight has obviously caused the 2 nations to be more serious than ever before. 

But remember this is phase 1 – of 2 or 3 phases. The angst between these 2 nations has not ended.  But trade wars aren’t just about tariffs – but about trade.  For example who was the nation that sold oil to -$37 in April?  Who was a big buyer in April?  It is another strike to weaken the US.

Trump is falling into the same trap again by talking of imposing tariffs on Chinese imports.  He says phase 1 has been broken – many experts say that even without coronavirus the obligations were unrealistic.  Even so there was a clause which was a get out of jail free – “economic circumstances taken into account”.  Trump gloats and confuses who is paying the tariff – it is the US consumer … and with more than 1 in 10 unemployed – he is hurting them even more.  To impose more protectionist tariffs is irrational at best – which could cause a lot more harm to the US and antagonise the Chinese, at a time where they are America’s biggest creditor.  AND at a time when the US needs to raise another $3 trillion from debt markets to keep afloat.

Australia’s US alliance is now causing harm.  Let us assume that China will use the same strategy – grind us down over time.

To add insult to injury, having made our barley uncompetitive the Chinese have begun to import from the US – our “so-called” ally. 

The trade war continues.  The difference is that Australian allies are now ensconced.  Unfortunately for our farm sector this will cause more strain at a time when they have already endured drought, fires and coronavirus. 

Our economic linkages are not so secure.  Picking stocks and trading them is critical in this environment. If interested in learning more please email michael@pythagorasinvesting.com