AUSTRALIA IN THE FIRING LINE IF TRUMP AND XI START A TRADE WAR

Opinion piece in the Australian Financial Review

Diplomacy, said Will Rogers, is the art of saying "Nice Doggie" until you can find a rock.

Most observers of this week's summit between United States President Donald Trump and his Chinese counterpart Xi Jinping will be hoping it does not descend into stone-throwing.

Certainly Australia has a big stake in a stable functioning relationship between the two nations that have accounted for 35 per cent of global growth since 2000.

This is not least because exports to China account for about 5 per cent of Australia's GDP. Put another way, Australian exports to China are worth more than the combined value of Australia's exports to the United States, Germany, Britain, South Korea, France, Canada and the 10 south-east Asian nations of the Association of South East Asian Nations (ASEAN).

On the other hand, a Perth US Asia Centre report this week showed that two-way direct and indirect investment between the US and Australia at the end of 2015 reached $1.45 trillion, with US majority-owned affiliates employing 310,000 Australians and paying them $28 billion in wages and salaries. And Australian investment in the US is 10 times our investment in China.

So the relationship matters to Australia.

An obvious but still underappreciated point is that this week's great power summit differs from those of the Cold War, not least because the US and the USSR operated in separate economic realms. The strategic competition between the two great powers in that era was never played out in the trade and economic sphere.

Things are very different today with annual US-China trade topping $871 billion. On the one hand, today's economic interdependence among our great powers is an important inoculant against conflict. On the other, it is a potential cause of bilateral tension. This is particularly the case when the rising power enjoys a $440 billion bilateral trade surplus.

It is true, of course, that a singular focus on bilateral trade balances is a mistake.

New analysis of the ultimate destination of Australian exports highlights this point.

In our contribution to the Foreign Policy White Paper, we analysed what happens to Australia's exports to east Asia. They are not simply consumed in their destination. Rather a large share of exports are "embedded" in goods and services exported from China, Japan and other east Asian economies.

In other words, we have a $75 billion dollar stake in exports from east Asia, including to the US. That's about one in four of our export dollars. In short, when the US punishes China it hurts allies like Australia. It also means that given the nature of modern trade flows – with a greater emphasis on supply chains – broader free trade deals including an Asia-Pacific free trade zone make more sense.

This is where China must step up and back its rhetoric on trade openness by driving an Asia Pacific wide trade agenda, as well as a revitalised multilateral agenda.

Despite the tough pre-summit exchanges, we should be sceptical of predictions of trans-Pacific trade wars. Many are predicted but none have eventuated.

But there is no doubt that complications caused by the interaction of the economic and geostrategic calculations will grow. As Dean of ANU's College of Asia and the Pacific, Professor Michael Wesley has warned "geoeconomic dilemmas posed by diametrically opposed American and Chinese preferences will persist and grow more acute".

The US is a relative latecomer to the seductive attractions of so-called geoeconomics. In their 2016 book War By Other Means: Geoeconomics and Statecraft, Robert Blackwill and Jennifer Harris argued that, unlike China and Russia, the United States had conspicuously failed since the 1960s to use economic instruments to achieve broader strategic objectives. The US, they argued, "too often reaches for the gun instead of the purse in its international conduct". The early evidence is that President Donald Trump intends to change this approach.

We need to be alert to the complications we may confront in such an environment. One way to be better prepared is to increase the interaction between foreign and security officials and the business community.

This consultation could be formalised through establishing a National Economic and Security Council to bring together senior ministers, officials from the foreign, defence and security agencies and senior members of the business community engaged in international economic and commercial operations. This would be a mechanism for improving the ability of government to take into account the economic dimensions of foreign policy and strategic decisions. In this new era of great power relations, that simply makes sense.

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