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1.

Assuming that global international trade sharply declines because of the “trade war” (in the forms of increases in tariff and other trade barriers such as import quota on both sides) between the U.S. and China, the U.S. and the European Union, and the U.S. and Japan. Everything being equal, explain the likely impact on the following:

  • Global productivity, economic growth and inflation
  • Australian consumers who buy goods imported from China, Japan and the United States.
  • Australian producers who need to source from both China and the United States.
  • Australian exporters such as a mining company who exports iron ore and coal to China and Japan.

2.

The U.S. and China are also currently engaged in a “technology war” (see e.g. this overview article from Forbes: https://www.forbes.com/sites/zakdoffman/2020/12/29/us-and-china-technology-conflict-heres-why-2020-is-so-critical/). Discuss the likely impact of this “technology war” on Australian trade with both U.S. and China.

Impact of a trade war on global productivity, inflation and economic growth

The increasing tension between the U.S. and its trading partners like China has culminated into a potential international trade war. Other than the direct impact of the trade war of increasing trade barriers like tariffs and quotas, it may also culminate into the adverse effect of GDP through an indirect mechanism like a significant drop in the country's level of productivity (Berthou et al., 2018). The decrease in productivity comes as a result of increased uncertainty and adverse changes, for example, in a production environment. A small increase in tariffs and other trade barriers like quotas has an effect of significantly reducing the global level of productivity. Production becomes expensive if trading countries have established various trade barriers because of a trade war. Americans, through the president, Donald Trump seems to believe that the U.S. stands a chance of losing when it operates trade deficits with other trading partners like China and Australia (Blinder, 2019). This perception goes against mercantilism and free trade principles.

Many countries tend to support free trade and hence entering into trading agreements with their trading partners. Trading war is against the principles of the free trade agreement and as a result, adversely affects the level of economic growth in many countries. The trade barrier tents to limit the level of economic growth among the trading partners. The overall GDP of a country goes down because of reduced productivity will culminate from trade wars. Notably, many countries, for example, China, Australia and the U.S. have witnessed an increased level of inflation because of the trade war (Barry and Kemar, 2018). Trade war has seen tariffs on trading commodities among the trading countries increasing relatively higher than ever before the war. For example, the trade war has made U.S. tariff to rise from the initial 3.1% to about 19% with China reflecting an increment from 8% to about 20%. The underlying reason is that imports and exports are greatly affected by trade tariffs.

Trade war always culminates in more losers than the beneficiaries. The uncertainties originating from the trade dispute tent to severely hurt business confidence and commodity prices for consumers and business usually increase (Krugman, 2018). Because of the trade disputes, the Australian consumers who purchase imported commodities from China, the U.S. and Japan will have to pay more for such goods. Trade dispute makes import relatively more expensive as a result; the burden moves back to consumers. Theoretically, the higher cost of imports from China and the U.S. implies that consumer demand for such commodities goes down, and the consumers may either decide to shift to the domestic products or opt for cheaper imports. Australian tariffs on the U.S., Japanese and Chinese good implies that Australian importers who import from these markets must pay the duty levied. Tariffs tend to increase consumer prices, thereby discouraging the consumption of such commodities.

Impact of the trade war on Australian Consumers

Trade war; however, tends to disrupt supply chains which again will culminate in relatively low productivity. Import-competing entrepreneurs, for example, from the tariff-levying nations may benefit through increased profits and higher employment in case the demand shifts in favors of the domestic producers (Ghironi and Melitz, 2018) Like the consumers, Australian producers who have to source from the U.S. and China must still pay for more cost because of the increased tariffs, which has a direct impact on the import cost. The high cost of impost goes down the supply chain to entrepreneurs who use imported commodities in their production activities. Increase in tariff serves as a negative incentive to producers and consumers since it culminates in a supply shock which results in increased prices of production inputs hence higher production costs.

Trade war tend to make exports relatively expensive than import as a result of Australian exporters, for example, mining companies who export their products to countries like Japan and China will have to reduce their export. Trade dispute tends to reduce demand for commodities in relatively lower growth countries like China (Diana, 2019). For example, Chinese demand for Australian products like coal and iron ore will decline because of the trade war. The dispute between trading countries tend to weaken global trade volume, and as a result, exports to such countries remain low.

China and the United States are in a great war with one another concerning technological supremacy. The power to adopt and implement various innovations and technologies determines which country which emerges as the winner in the modern digital economy. Various factors culminated into the technological dispute between China and U.S., for example, the concern that China opted to use the unfair and illegal mechanism to acquire technologies in the U.S. at a relatively lower or discounted price (Liu and Wing, 2018). Besides, the concern that China purposed to severely weaken national security of the United States. The issue of forced innovation and technological transfers has much been disputed, especially about China taking advantage of its market power to suppress other trade partners and benefit itself. The inevitability of U.S. retaliating implies that China must work to replace its joint-venture technique, especially for technological diffusion with other mechanisms to help strengthen innovation and technical capabilities. The technology dispute among the trading partners may have both positive and adverse impacts on Australian business between the United States and China.

Impact of the trade war on Australian producers

In most cases, trade among countries is shaped by technological advancement. The rapid development of new technologies as a result of the technology dispute between China and the U.S. has the potential of transforming Australian trade in many ways. First digital technologies like the use of internet in product marketing, artificial intelligence, research and development among many other innovative methods have the power to affect Australian trade costs and the nature and composition of commodities traded. Internets have made it relatively more accessible and cheaper to transact business from one country to another. For example, Australia does easily import or export commodities to China and the U.S. through the help of internet.

Through the war, every country is struggling to compete with the other and gain technological supremacy. In so doing, more digital technology is developed, which can influence the composition of trade, for example, increasing components of service in the market. Such techniques may foster business towards specific commodities like time-sensitive products which in turn alters the comparative advantage and the value chain of the market. In this context, technological advancement as a result of supremacy competition between China and the U.S. is expected to increase trade growth in Australian. As a result of the trade growth, Australia is likely to achieve an increasing share of world trade. Besides, development of digital trade between Australian and other trade partners like China and U.S. is expected to bring considerable benefits to Australia trade for example; it will bring a faster movement of goods from one market to another. Notably, digital business will also help remove trade barriers like reduce trade tariffs because of trade liberalization among the trading partners.

Australia being one of the trade partners with China and the U.S. has found its self in a vulnerable situation and the prospect of witnessing external shock culminating from technological war and trade wars. One of the impacts of the technological war in Australian is that the housing market will be adversely affected, for example, becomes weakened, thereby stifling economic growth and development (Daniele, 2017). Because of the war, Australia witnesses a lot of frailties in their economy, for example, high debts caused by the ongoing payouts to correct housing markets.

Trade hostilities as a result of the technological war have again significantly impacted the Australian market with a lot of cash wiped off from Australian stocks. Uncertainties have cropped up, and the stocks have edged higher in the Australian market. Various markets have been spooked up in Australia since there is a minimal prospect of a mechanism to end the trade disputes quickly. It has become relatively challenging to realize a rational economic solution to the technological conflict whose primary cause is geopolitical. Australian markets may suffer its worst trading season, especially when the trading and technology war culminates into one of the trading partners like China devaluing its currency to the lowest level. The devaluation implies that Australian exports to both China and the U.S. become relatively expensive because of the imposed trade tariffs. Besides, currency devaluation may also make the United States’ export to countries like China and Australia equally expensive.

Notably, the technological war inhibits Australian ability to favorable compete with other market leaders like China and America in establishing cutting-edge wireless networks like the 5G. Many Australian may be strategically acquired by Chinese companies following China's sincere pursuit of funding, especially of the various domestic technological advancements (Elias, 2020). Strategic acquisition implies that business persons in Australia will not be able to offshore innovators hence prohibiting blatant pilferage, for example of the foreign intellectual property. Australia has remained in the middle of the technological war between China and the U.S. and has not been in a position to complete constructing one of the world's first operational quantum computers.

Barry, N. and Kemar, W., 2018. The effects of the trade war on inflation. International Business Journal, 31(1), pp. 1-10.

Berthou, A., Chung, K., Manova, M. and Sandoz, C., 2018. Productivity, misallocation and trade. London: Mimeo University College Press.

Blinder, A., 2019. The Free-Trade Paradox: The Bad Politics of a Good Idea. Foreign Affairs Journal, 98(1), pp. 119-128.

Daniele, S., 2017. US-China trade wars a 'serious' threat to the Australian economy. World Economic Journal, 3(2), pp. 56-76.

Diana, M., 2019. Measuring the impact of the trade war. Economy and markets, pp. 1-9.

Elias, V., 2020. After barley, what next? Australian industries exposed if China trade tensions persist. International Trade Journal, 2(1), pp. 132-143.

Ghironi, F. and Melitz, M., 2018. International trade and macroeconomic dynamics with heterogeneous firms. Quarterly Journal of Economics, 120(3), pp. 865-915.

Krugman, P., 2018. Thinking about a trade war (very wonkish). New York: New York Times.

Liu, T. and  Wing, T., 2018. Understanding the U.S. – China Trade War. China Economic Journal, 11(3), pp. 319-340.

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