In case you were wondering about the directionality of this flight path, the Reserve Bank of Australia’s (RBA) deputy governor Andrew Hauser just returned from his trip to China. Even in the face of the current trade war with the United States, he felt a strong sense of confidence from the Chinese people about their economic situation. His visit occurred shortly after Trump slapped on tariffs at the beginning of April. This surprise came as a shock to many in the public.
During Hauser’s speech, the punchiest point was about those surprise tariffs. He underscored that everyone in China—from the business community to the government—seems to think that the country is going into this trade war with its “strong hand.” He illustrated this point with a graph during his address, which detailed the nature of China’s trading relationship with the US.
Insights from the Ground
What struck Hauser in China was the “striking confidence” he found session by session. This confidence, as it turns out, was built on a pretty brilliant insight. Almost 50 percent of China’s exports to America are in categories where China has limited competition.
“The eye-popping tariff tit-for-tat escalation in early April came as a genuine shock to most of those we spoke with,” – Andrew Hauser
Hauser’s most surprising finding was how low the expectations seemed to be from Chinese stakeholders on a currency devaluation. They were surprised that the country responded to the tariffs this way. Rather, it was an unwillingness to insulate the effects of US tariffs on their economy. After all, China is the one exporting to the US, said Munoz. The U.S. is not the king of the world’s demand for these products.
“But for every expression of surprise, we also heard a striking confidence that China was going into this trade war with a strong hand.” – Andrew Hauser
China’s confidence grows because if threatened, it could quickly pull those exports elsewhere. This flexibility allows them to lessen any losses they might take from fewer exports to the US.
Economic Implications and Expectations
Hauser underscored the longer economic costs of the trade war for both China and the US. He noted there seemed to be consensus among experts on one key claim. Like us, they think that all of the economic costs of US tariffs will eventually be borne by American consumers.
“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],” – Andrew Hauser
He voiced doubts about the ability to bring manufacturing now based in China back to the US. He didn’t believe that this relocation would occur simply to preclude tariffs. Skepticism is warranted, in part because of concerns over elevated US labor costs. The lack of advanced manufacturing skills may prevent aggressive pricing.
“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,” – Andrew Hauser
Hauser reminded attendees about the importance of Australia’s trading relationship with China, noting how it developed over the last several decades.
“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,” – Andrew Hauser
Future Considerations
Hauser underscored China’s critical role in the US administration’s developing tariff playbook. Looking forward, he pointed to the ways in which these changes are evolving very quickly. The outcomes of these strategies will be crucial not only for China but for Australia’s economic outlook and RBA’s monetary policy.
“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,” – Andrew Hauser
Finally, he wrapped up by noting the current geopolitical situation. Yet, he argues that these challenges might open up exciting new prospects for Australian enterprises doing business with China. The trade war would assist their competitive positioning within Chinese markets, opening fresh fronts for expansion even as uncertainty swamps their future abroad.
