RBA deputy governor says China knew it had a 'strong hand' in trade war with US
Andrew Hauser, the Reserve Bank’s deputy governor, says he was in China the week after US President Donald Trump shocked the world with his so-called “Liberation Day” tariffs in early April, and he witnessed something remarkable.
He said after US tariffs on China rose to 145 per cent, he saw a “striking confidence” among local people that China was heading into a trade war with a “strong hand.”
He said there was a general expectation that a large share of the economic costs of US tariffs would fall on the US itself, and a determination “not to cushion that impact”.
He detected “little expectation” that China’s currency would be devalued in the event of a trade war, partly because China wouldn’t want to insulate the US from its own tariffs.
And he saw optimism among Australian businesses active in China that the trade war could work in their favour by enhancing their competitive position in Chinese markets.
“The eye-popping tariff tit-for-tat escalation in early April came as a genuine shock to most of those we spoke with,” Mr Hauser said.
“But for every expression of surprise, we also heard a striking confidence that China was going into this trade war with a strong hand.”
He made his comments in a speech to the Lowy Institute in Sydney on Thursday evening.
Do you really want that fight?
Mr Hauser showed a graph in his speech to illustrate the stark reality of China’s “strong hand” in its trading relationship with the United States.
See the graph below.
As it shows (lower right-hand corner), nearly half of China’s exports to the United States are products for which the US has limited alternative suppliers.
Those goods include lithium batteries, computers, smartphones and video game consoles.
“Indeed, the massive advance in technology use [in China] is one of the most striking impressions to any outside visitor,” Mr Hauser said.
“The pass-through of US tariffs to US consumer prices for such goods is likely to be high — perhaps explaining why many were quickly exempted [from US tariffs],” he said.
He said much of the rest of China’s exports to the US (lower left-hand corner of the graph) are products for which the United States is not a dominant source of demand, so China’s exporters could divert those goods to other markets (to some degree).
That leaves the top half of the graph, where the US accounts for a large share of Chinese imports.
There are far fewer products in those two boxes.
Mr Hauser said during his time in China, he also heard doubts about how much manufacturing currently done in China would relocate to the US to avoid tariffs.
“Elevated labour costs, and a finite stock of advanced manufacturing skills, were thought to make it impossible to produce many goods at the prices US consumers expected to pay — as would the absence of the highly integrated, co-located supply chains that had developed within China, as well as across Asia,” he said.
“And there were doubts about the viability of long-term investment in factories while the volatility of US policy settings remained so elevated.”
The importance of China to Australia’s economy
Mr Hauser said in the past few weeks, since he arrived home from China, the US and China have walked back from the trade-war precipice.
But he said it was a fascinating to witness first-hand how China’s government, business community, and people were so willing to face a US trade war head-on, he said.
He also reminded the audience of how important Australia’s trading relationship was with China.
“Of all the trends shaping the Australian economy over the past half-century, one of the most profound has been the long swing towards Asia and, more specifically in recent years, China — now our biggest single trading partner by a country mile,” he said.
“But China is also front and centre in the US administration’s rapidly evolving tariff strategy. How that strategy plays out, and how China responds, are therefore key issues for the economic outlook in Australia, and hence the RBA’s monetary policy,” he said.