Why trade wars are dumb and we don’t need one with China

Trade wars are dumb. That’s why it’s usually politicians who start them. Don’t forget it was Donald Trump who fired the first salvos in America’s still-raging trade war with China. American businesses and consumers are paying higher prices as a result, and so too are Chinese importers after its retaliatory actions. It’s a lose-lose situation.

Illustration: Dionne Gain
Illustration: Dionne GainCredit:The Sydney Morning Herald

And it’s not a path we need to go down, despite China’s escalating actions to impose tariffs and other trade restrictions across a smorgasbord of Australian exports, including barley, beef, wine and lobsters.

To their immense credit, Australian politicians have so far held the line, refusing to retaliate against Beijing’s increasing bellicosity. That’s despite some rumblings from Nationals MPs that some retaliatory action – possibly through the imposition of tariffs on China – is required.

Clearly doing nothing is not an option, and avenues are open for Australia to take China to the World Trade Organisation for breaching international trade rules. But that will take time. In the meantime, we must tread carefully and remember it will never be in Australia’s national interests to return fire by slapping new tariffs on China.


Why? Well, first, doing so would be illegal under international rules. We’d have to come up with some bogus excuse under the rules permitting “countervailing duties” – the same bogus excuses that Beijing is using against us.

Second, such duties would likely only escalate tensions, leading to more retaliation. Recent Sino-American trade history reveals just how quickly that mutual impulse towards self-immolation can escalate.

Third, tariffs on imported Chinese products would simply mean Aussie shoppers would pay more for a host of consumer products, leading to a cost-of-living squeeze when we can least afford it.

And fourth, because it’s one of the fundamental revelations of economics that freer trade underpins greater economic prosperity for nations – and that those gains are available to countries which keep tariffs low regardless of what other countries do.

How could we benefit from keeping tariffs low if other countries aren’t doing the same? Because tariffs give domestic producers an artificial leg up. Great, some might say. Let’s help our own. But history shows – including the recent history of Australia’s car-manufacturing industry – that propping up domestic industries doesn’t really help them or their workers. Ultimately, workers are kept in jobs with no real long-term prospects – at least not without costly taxpayer support – and domestic consumers pay higher prices for the imported cars they clearly prefer.

Rather than sheltering unviable industries behind high tariff walls, workers and capital tied up in those industries are better off redeployed to industries where we do have a “comparative advantage” over the rest of the world – that is, where we can produce products better than other countries.

Dismantling tariffs is an economic reform program with solid bipartisan support in Australia, having been initiated by the Whitlam government and later extended by the Hawke, Keating and Howard governments.

Importantly, we didn’t wait for other countries to cut their tariffs before we moved. Why? Well, partly because in the 1970s we were fighting a desperate war against inflation and anything to bring down prices was good.

But as the 1980s reform era rolled on, the advice of economists finally took root, that dismantling tariff walls would create more competitive tension in our economy and encourage resources to flow to what we do better.

As a nation, we took a punt that we’d rather run the risk of interrupted supply than continually protect industries that weren’t truly competitive and pay higher prices as a result. We’ve enjoyed higher productivity and wages as a direct result.

COVID-19 has led many to question this rejection of domestic self-reliance, but the gains to ordinary Australians from cheaper imports over the past decades are undeniable.

A desire to protect domestic industries is likely a driving force behind Beijing’s recent actions. And if so, the Chinese Communist Party and China’s citizens will have to find out the long and hard way about the economic toll of propping up unviable industries. In contrast, it is critical Australia remains a proud advocate of free trade and the unparalleled opportunities for mutually beneficial exchange and prosperity it offers.

It’s time for our leaders to double down on advocacy for a return to a truly multilateral, rules-based global free trading system – something the incoming US president, Joe Biden, has also vowed to promote.

In the meantime, Australian producers will need government support to help find alternative markets in which to promote their exports now being heavily penalised by China. Because the short-term shock to Australian jobs and incomes of China’s actions are very real. This was always the hidden risk in the collective decision by Australian businesses to exploit the opportunities presented by the fastest growing nation in our region.

Helping exporters to diversify into other markets is a much better course of policy action than engaging in a damaging trade tit-for-tat with China.

That’s particularly so now that China, once the world’s fastest growing economy, appears hellbent on a path of economic self-harm. If it continues, it certainly won’t be growing fast for much longer.

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Source: Thanks smh.com