From 1995 onwards, the world entered a period of continual trade liberalisation.
" The quarantining of China’s workforce and shutdown of factories has completely disrupted global trade.”
The North American Free Trade Agreement (FTA) was completed. The European Union continued to integrate and expand. The Association of Southeast Asian Nations (ASEAN) and North Asian countries inched toward liberalisation. Australia signed free trade agreements with its major trading partners.
In early 2016 it was expected this pattern would continue with major multilateral agreements including the Regional Comprehensive Economic Partnership (RCEP), a Trans-Pacific Partnership that included the US and a new agreement between the US and the European Union (EU). There was discussion of an APEC-wide agreement covering 60 per cent of the global economy.
None of that happened.
Presidents Trump and Xi have used trade policy for geopolitical purposes. President Trump’s administration has junked bilateral relationships and threatened the rules-based trading system to assert US dominance.
This has been compounded by the coronavirus pandemic. This event is qualitatively different. The quarantining of China’s workforce and shutdown of factories has completely disrupted global trade.
Over the past month, the fall in Chinese demand for raw materials has dampened Australia’s main exports. China’s shuttered factories and obstructed transport routes have eroded the inventories of Australian companies and delayed student arrivals, threatening retail, real estate and international education sectors.
The resulting uncertainty is two-fold.
There is a longer term uncertainty that is a product of US-China political rivalry. This will not disappear soon; it will go beyond tariffs and continue to materialise in debates over security, intellectual property, technology and data.
There is also the short-term uncertainty created by the pandemic. As the world manages the outbreak over the next two quarters or more, factories will re-start, governments will use fiscal tools. This pattern is already emerging.
Australia is not the only economy struggling to manage these events. Many ASEAN economies face a similar problem of having China as their biggest customer and needing the US as a geopolitical counterweight.
Countries such as Vietnam and the Philippines have both trade and territory at stake; their problems are more acute. Singapore depends almost entirely upon the free flow of people, goods and capital.
Many of the virus-related factors dominating the headlines are beyond the control of the private sector.
How can Australian and regional businesses manage this two-fold uncertainty?
Australia is not as exposed as other economies in the region. But there is often a fundamental misunderstanding among policymakers and the general population about how Australia trades with the rest of the world, and what matters to those who are trading.