During the US presidential campaign, Mr Trump touted his proposal of raising a 45 per cent tariff on all Chinese exports coming into the US.
Economist and senior fellow of think tank Per Capita Stephen Koukoulas told nestegg.com.au that if that tariff was implemented, China would fight back with their own economic measures.
“Of course the Chinese aren’t going to be passively allowing US tariffs go unanswered. Do they react with their own trade retaliation? They hold more than a trillion dollars in US government bonds, they can sell them and blow up the bond market, which would have pretty significant implications for the US economy,” Mr Koukoulas told nestegg.com.au.
“They have a managed exchange rate, they can set policy more easily than Trump can, and if their economy suffers, then I would think their reaction would be to weaken the yuan dramatically, and perhaps implement some other stimulus measures.”
If such a trade war does eventuate, it’s likely to have enormous consequences for global trade, and the Australian economy more acutely.
“The biggest threat to Australia would be a dislocation of global trade and the fallout from that. To the extent that there’s negative fallout for China in a US trade war then we would clearly get caught up in the backwash of that,” Mr Koukoulas said.
“China takes roughly a third of our exports, so we’re heavily dependent there, and we certainly don’t want our major trading partner having weaker economic growth because they will therefore demand less of our output and pay a lower price.”
Ultimately slower global trade would hurt Australia particularly, given our dependence on foreign investment and trade says HSBC chief economist Paul Bloxham.
“If US tariffs were to happen, it would slow down global trade significantly and China would respond with restrictions and tariffs of their own. If you add those two together, slower global trade would be an even higher downside risk, particularly for Australia,” Mr Bloxham said.
“We’re a small, open economy highly dependent on other countries for our growth and momentum. Thankfully, we’re mostly dependent on Asia and we’re highly dependent on China, so a lot of this will depend on how our relationship with China continues to grow.”
However a trade war between the two economic giants may have one silver lining.
“One of the responses you typically get from the Chinese to counteract weakness is to bolster fiscal spending on infrastructure, which of course leads to hard commodities like iron ore, coal, natural gas etc.” Mr Bloxham said.
“China is cutting back on their own domestic production of low-grade, high-cost coal and iron ore, and as they’ve been doing that they’ve been turning to the international markets and buying more of our better quality materials.”
Investment firm Instreet managing director George Lucas says we’re already seeing the effects of Trump in the region.
“China is already taking initiatives to protect trade in the region and the likely long-term outcome is for the Asia-Pacific region to become less reliant on US trade,” Mr Lucas said.
“There’s likely to be a lot of talk and plenty of action over coming months and years as China seeks to expand its influence and presence by adopting more liberal trade initiatives as the US digests and deals with the Trump anti-trade rhetoric.”
Howeve,r what is clear is that Australia will have to wait and see exactly what the fallout will be.
“We’ve got this whole issue unfolding, exactly how it pans out we don’t know, but China will not sit idly by while their markets suffer. It’ll take months to figure out how this play out,” Mr Koukoulas said.