Australia — US-China trade truce a positive for the global economy

The world's two largest economies signed a trade deal in January, thereby de-escalating a lengthy period of economic conflict that weighed on business confidence and the global economy. Under the ‘phase one’ deal, China pledged to buy an extra US$200 billion of US imports this year and next—on top of a baseline of US$187 billion in 2017. Beijing also made commitments on intellectual property, technology transfer, and currency practices. In return, the US halved the 15% tariff rate on US$120 billion of Chinese imports, though tariffs on about US$370 billion of imports remain in place. However, outcomes on fundamental US frustrations, including China’s subsidy-heavy industrial policy and further technology issues, have been reserved for a ‘phase two’ deal. The US has signalled it wants negotiations on phase two to commence but not conclude before the November 2020 Presidential elections.

The Australian Government is working closely with Australian exporters as they identify and manage key challenges and opportunities from the deal. China and the US have both said the deal will be implemented in a manner that treats all trading partners, including Australia, fairly and is WTO-consistent.

The deal mandates China purchase an extra US$32 billion in US agricultural products and US$52 billion in energy supplies over two years (Chart). This translates to a 50% increase in agricultural imports and a doubling of energy imports this year relative to the 2017 baseline. However, given China’s agricultural imports grew just under US$10 billion in 2019, the bulk of promised purchases could be met by increased demand rather than substituting existing imports. China purchased A$13 billion (nearly 30%) of Australia’s agricultural and fisheries exports last financial year and is our second largest market for both coal and LNG. Further, zero tariffs on Australian exports of wine, horticulture, seafood and dairy products as a result of the China Australia FTA provides a competitive edge over US products. While the promised ramp up in energy purchases is much more pronounced, Australian LNG supplies to China are protected by long term contracts and competitive prices aided by geographical proximity.

Fig 3 China Goods Imports From The US