When US President Trump opted to slap tariffs on a range of goods from China in the name of national security, China was quick to retaliate with tariffs of their own. The current situation seems to leave the two countries in a deadlock, with neither willing to back down. In the meantime, countries across the world are feeling the second-hand effects of these actions.
What does the trade war mean for Australia?
There is no doubt that the tariffs will have an indirect impact on world trade. However, analysts believe that the impact on China will be limited, and that the US will feel the effects of their actions much more severely. Other nations will be effected due to global trade routes and supply chains, but analysis from Singapore-based analysts DBS shows that South Korea, Malaysia, Taiwan and Singapore are the economies most at risk. It won’t be clear for some time which predictions will come true - Morgan Stanley estimates that world trade could be seriously disrupted as two-thirds of goods traded are linked to global value chains, whilst others feel that the impact will be limited on a global scale. Australia does have close trade links with China, but OECD data shows that the value-added embodied in Chinese exports represents just 2% of Australia’s GDP.
Will Australian businesses feel the knock-on effects of the trade war?
While the headlines are as dramatic as they are concerning, most analysts believe that Australia should be relatively insulated in the near-term. This is due to a range of factors, including the fact that Australian exports aren’t on-sold to the US, and China’s economy is likely big enough to survive a trade war. The expectation is that if there is further escalation, Chinese policy makers will take action to support the economy.
What will happen to the value of the Australian dollar?
The Australian dollar did fall after the news of the trade war emerged. The reason it reacted was due to the strong Australian economic links with China, which means that the Australian dollar is often seen as a liquid proxy option for emerging market exposure. Another factor is that the trade war was an unprecedented move, and currencies often struggle to maintain a steady value during periods of uncertainty. The fluctuations look set to continue as long as the uncertainty remains, but as the trade war plays out and becomes the ‘new normal’, it’s likely that the movements in currency markets will be less severe.
What happens next?
Given the nature of the players involved, it’s almost possible to predict what will happen next. A model by Pictet Asset Management estimates that a 10% tariff on US trade could tip the global economy into stagflation if the cost is passed on to consumers. This in turn would knock an estimated 2.5% off corporate earnings globally – and that makes it quite likely that there will be an intervention before it gets that far. However, nothing can be guaranteed. If your business works on a global scale and you’re worried about the impact of trade tariffs or currency fluctuations, the best approach is to continue to build strong relationships with customers and suppliers across the world and plan ahead to manage the impact of currency fluctuations.
Managing the impact of currency fluctuations
While recent events have made the changes more dramatic, currency markets always fluctuate and that’s why it’s important to have a strategy to manage your company’s exposure. If you trade internationally or make currency payments, it’s worth developing a foreign exchange strategy and work with a specialist provider who can offer a range of tools to manage the risk.
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