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Australia a winner in China-US trade war

Australia a winner in China-US trade war article image

As trade tensions escalate between the world’s two biggest economies, there are several countries that could benefit from the China-US trade war.

Tit-for-tat tariffs on a range of products including wine, fruit, nuts and scrap metal could see demand for these Australian exports grow.

Since early March, the US and China have announced hundreds of billions of dollars worth of import tariffs on each other's goods – and both countries are vowing “to fight to the end.”

But while most market experts agree a trade war would be harmful to the world economy, some countries stand to benefit from the proposed tariffs.

Latin American countries like Brazil and Argentina, as well as Australia, could see demand for their exports grow if China needs substitutes for US goods.

Last week China announced up to 25 per cent tariffs on 128 American agriculture products in response to US President Donald Trump’s tariffs on the nation’s steel and aluminium imports to the US.

The US administration hit back with a 25 per cent tariff on 1300 Chinese products including flat-screen televisions, medical devices, aircraft parts and batteries.

And Mr Trump will impose tariffs on more than $70 billion of cutting-edge Chinese goods in retaliation to Beijing’s alleged intellectual property misappropriation.

China has denied it steals or pressures foreign companies to hand over technology.

Open to negotiation

China’s foreign ministry spokesman Geng Shuang said his nation remains open to negotiation and hopes to handle the dispute with the US through discussion.

But he added if any party insists on starting a trade war, China is ready to defend its interests.

“We don’t want a trade war, but we are not afraid of it,” he said. “If someone insists on starting a trade war, we will fight ’til the end.”

Ultimately, Australia is wedged between its biggest trade partner (China) and its biggest investor (US).

Both nations are critical to the health of the Australian economy.

The Turnbull Government has been working hard to strengthen Australia’s ties with Asia without alienating its close ally – the US.

Media concerns

Australia remained part of the trans-Pacific Partnership trade deal (now known as TPP-11) after the US pulled out and signed a free trade agreement with China (ChAFTA) last year.

US media have already raised concerns over the impact of China tariffs on a wide range of goods – particularly wine and agricultural products.

Australia has been identified as a clear winner.

US wine imports to mainland China declined last year, while Australian wine exports rose 63 percent to $848 million.

And Australia is the biggest competitor to the US for agricultural exports to China, including fruit.

Almost 40 per cent of Australia’s fruit exports last year went to greater China.

Exports of Australian tree nuts to China grew from $6 million in 2010-11 to $63 million in 2015-16, according to the Australian Bureau of Agricultural and Resource Economics and Sciences.

Tree nuts account for 45 per cent of horticultural goods sold overseas and are tipped to reach $1 billion by 2020.

Also, cotton was one of the 106 US exports slated for a 25 percent duty announced by Beijing last week.

Alternative market

China is not a major importer of US cotton, but businesses seeking an alternative market for cotton to bypass the potential import duties would likely turn to Australia.

Australia's raw cotton exports come to $1.2 billion a year, and one-third of that currently goes to China, according to the Observatory of Economic Complexity.

And Australia is also set to gain from US imposed tariffs on China.

This includes the 25 per cent tariff on steel imports from which Australia is exempt.

As a result, China may source more of its met coal from elsewhere. As one of the world’s top exporters of coal, Australia could reap the rewards.

And Australia is not the only nation that stands to gain from the US-China trade dispute.

Latin American countries like Brazil and Argentina and the European Union and UK could see demand for their exports grow if China needs substitutes for U.S. goods.

"There are definitely economies that can benefit from the trade tariffs," said Jim Barrineau, head of emerging market debt relative at Schroders. If the dispute becomes a longer lasting trade war, Mr Barrineau said, "China could step up direct investments into agriculture, metals, and energy producers throughout emerging economies to diversify sources of goods away from the US."

Winners include:

Brazil

A major US export now facing a 25% tariff is soybeans. China is the world's largest importer of the crop, and the US is its second largest supplier. This is set to severely impact both American soybean farmers and Chinese pork producers, who rely on the produce to feed their livestock.

Speaking to CNBC last week, Chinese Vice Finance Minister Zhu Guangyao cited South American markets as a potential source for a greater volume of soybeans.

"Brazil may be a prime beneficiary," Mr Barrineau said, while noting that 75 percent of their soybeans already go to China. "Nevertheless, they could enjoy preferential pricing if US soybeans face a high tariff."

Brazil is already China's top supplier of soybeans, but it alone won't be able to fully replace the US's supply.

Last year, the US sold 32.9 million tonnes of soybeans to China, second after the 50.93 million tonnes sold by Brazil.

Argentina

Argentina, the world's third-biggest soybean exporter, is similarly well-positioned, Mr Barrineau said. Soybean meal represents 17.5 percent of Argentina's total exports. But commodity analysts expect the country's crop price to dive by as it suffers from a prolonged drought.

Chile

Chile’s fruit producers could also benefit from the dispute. Chile is the largest fruit exporter in the Southern Hemisphere, accounting for 59% of fruit exports from the region. North America maintains dominant market share of Chile's total global fruit exports, receiving roughly 845,000 tonnes, or 34% of all fresh Chilean fresh fruit exports.

Paraguay and Uruguay

The immense Chinese market will likely look for further alternatives, including smaller soybean exporters like Paraguay and Uruguay, said Stefan Vogel, head of agri commodity markets research at Rabobank.

"(South American) grain handlers will then see the price of their goods increase," Mr Vogel said. "The farmers should receive a higher price for it, and everyone in the supply chain will get some share of that price."

The UK (Scotland)

China's $50 billion tariff package includes whiskey, of which the US exports more than 354 million litres a year worldwide. It is China's second-largest whiskey provider after Scotland, selling 926,384 litres to China in 2016. (The UK supplied 11 million litres in the same year).

France

The US wine industry is set to take a big hit if the threatened 25 percent duty to be imposed by China comes into force. China is America's ninth-largest buyer of wine, according to statistics from Rabobank International, and imported about $76 million of the US's $1.57 billion of total global exports in 2016.

A Chinese buyer may choose a French or Australian wine rather than a Californian wine because of the tariffs. France and Australia are already China's top two wine suppliers.

European Union

Beijing also imposed new tariffs on American pork, which could benefit exporters in the European Union. Brazil and Canada would also benefit.

Analysts say some of these economies – including Australia – could be hurt by a China-US trade war.

But overall, several countries are poised to reap the benefits.

Only time will tell.

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