US-China trade war: Australia may suffer

Fears are growing that Donald Trump may trigger the US-China trade war when he occupies the President’s chair on Jan. 20. This might as well affect the economy of Australia as China is its largest trading partner and US is the third largest.

Time and again during his campaign, Trump labeled China as currency manipulator. He said that he would restrict trade between the US and China by slapping a punitive tariff of nearly 45 percent in order to neutralise the trade imbalances that exist as of now. Fears are growing that he might walk the talk.

The trade economists are hoping that the US-China trade war doesn’t happen. However, the possibility of it being on the cards cannot be ignored. China’s currency is sinking, and hence, it is attempting to prop it up instead of letting it sink further.

Allegedly, China allowed its currency to sink in order to make its exports competitive. The advantage of competitive exchange rate worked in favour of China for the longest time. However, since Trump has refused to keep cordial trade relations with the nation by imposing trade restrictions in the form of tariff, China is keen on doing something about it.

If China chooses to let its currency sink further in order to attract the US trade, Australia will likely suffer. Since China is Australia’s largest trading partner, the country’s exports will suffer, and so the GDP. On the other hand, if the US imposes trade restrictions on China, the country will import less in order to balance its books, and so Australia will suffer again.

Furthermore, China may save its currency’s sinking value by selling off US treasuries as well as foreign currency reserves in order to lower their value and instead raise the value of the national currency. However, this would raise the cost of borrowing and likely lead to increase in interest rates in compensation. If Chinese banks increase the rates, the effect of it will also be seen in Southeast Asia as well as Australia, where the interest rates will also be raised, according to an ABC report.

As of now, there is no assurance that Trump will trigger the US-China trade war. Australia is hoping that it doesn’t happen. However, if it does happen, the country’s economy is likely to suffer majorly.

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