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The US must not be too successful in its trade war with China

26 October 2019

9:00 AM

26 October 2019

9:00 AM

Beware! It is not merely an economic threat to Australia and the world. There will be far more serious consequences if the US-China trade war causes significant damage to a Chinese economy that has successfully generated a rapidly-rising middle class enjoying the material benefits of Beijng’s brand of Marxist-capitalism. These multi-millions of urban-living, comfortably-off, consumer-spenders appear generally relaxed about the Communist party’s authoritarian rule – so long as the Yuans keep rolling in to maintain their new-found lifestyle. But how many potential rioting Hong Kongs are there if the money-well runs dry?

The US State Department is well aware of the prospect that any US ‘success’ in the trade dispute that resulted in denting this middle-class prosperity could have the unintended consequence of Beijing having to protect its regime from internal discontent. But President Xi Jinping’s version of the Roman Empire’s bread and circuses aimed at uniting the nation behind its authoritarian leaders in difficult times is more likely to be nationalistic military adventurism, with Taiwan (as a proxy for its US ally) as an odds-on favourite.


That is why the State Department reckons the US objective is the delicate one (under a blunt, unsubtle, confrontational president!) of avoiding the undermining of its major rival’s economy while doing whatever it takes to end China’s unprincipled international trade behaviour. This means using threats to that economy (which it hopes China will avoid by accommodating US demands) in order to force China to stop such unfair practices as currency manipulation, the state-endorsed theft of intellectual property and the use of state-owned corporations as trade (and espionage?) levers.

With more than one-third of our exports going to China, any slowdown of its growth rate will have a direct economic impact on Australia, in addition to the indirect worldwide consequences of the US-China trade war. This is described by London’s Financial Times as having ‘pushed the world economy to the brink’, with the IMF and OECD downgrading world economic growth forecasts, including Australia’s.

The Reserve Bank is worried that the markedly-increased risks ranging from a disruptive Brexit, tensions in the Middle East and the US-China trade war mean that ‘The apparent confidence embodied in financial market-pricing belies the more uncertain growth outlook and vulnerabilities in the financial system, including the high level of debt’. But the Reserve Bank’s push for ever-decreasing interest rates (and the government’s threats to banks for not fully passing them on) have helped create a debt monster. As the well-researched business newsletter the Rum Rebellion has pointed out, Australia is awash with debt with $4.40 of debt needed to generate $1 of GDP. ‘Australia’s economy has been built on the quicksand of property investment overreach and excessive consumerism… with a debt load of $8,000 billion supported by an economy of only $1,800 billion… More people borrowing more dollars to spend on items of self-indulgence is hardly the stuff of a strong economy… households are running out of capacity to take on more debt… The reason growth is slowing is that people are reaching the point of debt fatigue’. The Reserve Bank Governor, Philip Lowe’s comment that ‘uncertainties have generated an elevated appetite to save relative to the appetite to invest in new productive capital’, follows his admission that cutting interest rates is no longer the answer to lagging growth; ‘If firms don’t want to invest at the lowest interest rates on record, reducing them a bit more is not going to shift the dial much’. As the Rum Rebellion warns, ‘If the private sector can’t or won’t borrow to the extent needed to keep growth rates positive, then, based on Keynesian economics, the public sector must… The squandering of future tax dollars on present day projects is precisely what Rudd and Swan did during the GFC.’

So will the government be forced by circumstances to abandon the economic restraint of which it boasted when budgeting for a surplus? Whatever happens, it will be a long time before interest rates are restored to levels where savers are no longer being penalised for their thrift to benefit a population of debt junkies.


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