In 2020, the Australian Government dared to challenge China over the origins of COVID. Foreign Minister Marise Payne said in an interview on Insiders that there should be an investigation into COVID’s source.
This entirely outrageous and ground-breaking statement of the blatantly obvious was, surprisingly, later backed up by Prime Minister Scott Morrison…eventually.
We paid for this transgression with a trade war — one of those conveniently vague words designed to make forecasting easier. In this instance, the trade war took the form of an odd combination of very specific trade policies — one designed to make life difficult for certain Australian exporters.
Coal, barley, copper and wine were targeted by the Chinese.
What they have against home brewing and wine was never made entirely clear. It’s also worth noting that those goods are extremely fungible, durable, and non-perishable and that they are sold on global markets in a price-taker sort of environment.
As a parent, I have an intuitive feel for the melodrama that happened here. The Chinese spat the dummy. And investors got covered in the consequences. Wine companies’ stocks got slammed, for example.
The Chinese even played the ‘racism’ card on Australia — something my mixed-race daughters have yet to try on me during a telling-off. Unless they’ve been talking about me in Japanese…
In the end, like most dummy spitting exercises, things were smoothed over with an awkward compromise that everyone pretends to have won. The ABC reported in October 2021, ‘Australian wine exports to China fell by 77 per cent but exports to Hong Kong rose by 137 per cent in the past 12 months’.
There’s always dessert in the end — it’s just a question of how much of a song and dance must happen before dinner gets eaten first.
Over time, ironically about the time when the consensus that China was indeed responsible for COVID finally emerged, the trade war hubbub died back down. The new Australian Government smoothed things over nicely. And the trade war ended.
Chinese home brewers breathed the fumes of relief and Australian investors who bought the dip in wine companies did well.
Western magazines and newspapers are now full of articles about how Australia won its trade war with China. And they see this as evidence they should do something very, very dangerous — poke the dragon too.
After all, if it didn’t bite Australia’s head off…
But this time, I’m not so sure it’ll have a happy ending for investors.
At the recent G7 meeting in Hiroshima, the resulting communique read like a thinly veiled attack on China. As Reuters put it, ‘G7 says “de-risking”, China hears “containment”’. I hear ‘trade war’.
Scarred by their reliance on Russian energy — precisely as President Trump had warned about in 2018 — the G7 now want to avoid being economically reliant on other geopolitical rivals. They want to de-risk their economies from geopolitical shocks like the invasion of Ukraine and the self-imposed energy sanctions that followed.
I mean, at the advent of the Second World War, energy embargoes were an offensive trade war policy. These days, the Europeans are doing it to themselves to try and punish Russia…
And now the G7 are signalling they’ll do the same with a series of Chinese products. According to Reuters, ‘de risk’ in plain English, ‘means forcibly reducing demand for Chinese exports at an economically vulnerable moment.’
Presumably, nobody saw the historical parallel of doing so from Japan…
Except, perhaps, the Chinese, who quickly struck back. Luckily it wasn’t a Pearl Harbour sort of effort. Instead, they banned US microchip-making company Micron Technology’s products from use in certain Chinese infrastructure projects.
If this is the beginning of a tit-for-tat, investors should look out. Because these policies do move markets.
On the day of the ban on Micron, Chinese microchip companies’ shares rallied nicely, for example.
A continued trade war that targets more and more Western companies could undermine entire sectors. Or economies, like those very reliant on China.
Can you think of any?
If the trade war escalates into a bigger drama than Australia’s melodramatic trade war with China in 2020 and 2021, Australian companies stand to miss out especially badly thanks to our vast exports.
The underlying issue here is that even in the face of evidence to the contrary coming out of Europe, globalisation’s advocates have a point when they say that an inter-reliant world is less likely to experience conflict.
As Bosch CEO Stefan Hartung reminded us, ‘The world doesn’t become any less risky when you divide it, rather the contrary.’
Consider the matter from China’s perspective. If the West is no longer dangerously reliant on China economically, it can more easily pressure China’s economy, because the economic cost of doing so is smaller. China has less ability to retaliate when the West meddles in its affairs.
If the West wants to sanction China today, say for its expansion into the South China Sea, it risks being shut off from a very long list of things it needs. In a ‘de-risked’ world, those sanctions are far more likely to be forthcoming because reliance is lower.
That is why China sees this as a containment strategy. The West wants to be able to throw its weight around in the East without having to pay for it.
If you ask me, a key part of the global economic order was that countries would not seek to use such trade war policies to exert pressure on each other. It’s not like it works, anyway. Punishing everyday citizens for the misdeeds of their so-called leaders often solidifies support and leaves the leaders wealthier.
Geopolitics, in other words, was supposed to be separate from trade.
What we have today is a globalised world of inter-reliance that autocrats can take advantage of. It’s simply because they don’t care about the economic well-being of their citizens like democratic leaders do. Putin can invade Ukraine because the sanctions hurt him less than they do Europe.
Deciding to de-risk our economies so we can behave like the autocrats is not a solution. Or so my wife says when I wail and tantrum in front of my children to stun them into silence.
No matter who has it right, the latest move by the G7 is going to be seen in China as a siege by the West on nations we don’t like. And China will respond — while it still can.
Until next time,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend
