Australian farmers might generally like the concept of free trade, but Donald Trump’s protectionist views on global trade are more likely to be the way of the future.
The farm sector should brace itself for a great swing towards an unwinding of today’s free trade policies, says Rabobank’s Asia Pacific head of global financial market research, Michael Every.
During the next decade or two he expects the world will probably divide into major trading blocs, forcing Australia to decide between China or the US for its economic future, and its security.
“If you are only looking at Trump, you’re are only seeing half the story,” said Hong Kong-based Mr Every.
Historically, “trade has never been free or fair” he told last week’s Outlook 2017 conference.
“We’ve only tried global free trade for a total of about 100 years in 5000 years of civilisation, and it’s failed twice,” he said.
Maverick new US President Trump’s stridently pro-protectionist commentary should not surprise the world, said Mr Every, noting America’s history and industrial success were built on a mostly protectionist business model until after the Second World War.
“Trump is a businessman and he thinks the US should be selling the world more than it buys in, or at least having a trade balance,” he said.
Opening America’s doors to imports and actively promoting global trade, with the US dollar (not gold) as the global reserve currency, was actually sending the world’s biggest economy broke.
While international post war development was largely fuelled by US lending and worldwide access to the US currency as a trading benchmark, free trade with the world had left America’s export earnings out of kilter with its imports for decades.
It accumulated massive debt to pay for imported consumer goods it no longer made at home or sold to the world.
Mr Every said today’s fragile global trade structure largely depended on the US running a huge trade deficit and it was all under extreme pressure.
“Plenty of politicians and policy makers are keen to sell an idealised message about free trade, but it doesn’t solve the underlying problems, including weak demand and rising inequality,” he said.
“If Trump doesn’t follow through with his isolationist and protectionist agenda, trust me, somebody like Donald Trump will be back making it happen for the US in the not too distant future.
“The Trump agenda won’t fade away – it’s where we are going.”
China was unlikely to step into the US’s shoes to bankroll a continuation of the current trade system.
China still believed in selling more to the world than it spent importing raw materials, which were invariably sourced cheaply from nearby trade partners, including Australia and New Zealand.
With the US quitting the Trans Pacific Partnership (TPP), China was keen to push for an Asia Pacific-focused trade bloc – the Regional Comprehensive Economic Partnership – encompassing about $3.4 billion people and 30 per cent of world gross domestic product worth $21.4 trillion.
“But China’s sights are set even further afield,” Mr Every said.
“Officially its government vision is to build a mammoth $US3t `silk road’, rail and port network linking China with Central Asia, Europe and Africa – the `One belt, one road’ (OBOR) project.
“Its trade ties could effectively encompass most of Eurasia, potentially into the Eurozone, Russia, Turkey, Central Asia, the Middle East, Japan, Korea, India, the ASEAN nations and Australia and NZ.
“That kind of economic block would have no problems servicing internal supply and demand needs, more than enough resources and technology, and more than enough military resources.”
Mr Every said if the OBOR vision became reality, especially if it coincided with a US shift to isolationism and protectionism, there would be a huge and definitive swing back to global and political power in Eurasia.
Potentially that also meant a big shift in Australia’s trade and cultural priorities and an awkward choice about where our future defence support loyalties might lie.
China watchers already note Beijing flexing its economic muscle in South Korea in the wake of Seoul allowing a US Terminal High-Altitude Area Defence (THAAD) system base on the Korean Peninsula.
Beijing has ramped up pressure on South Korean companies this year, including closing many stores belonging to the Lotte conglomerate in China, banning tourist travel tours to South Korea and stopping Korean soap operas appearing on Chinese television.
Mr Every warned the world’s first real free trade experience ended disastrously in trade blocs, eventually leading to the First World War.
Britain ruled the waves as the free trade pioneer and industrial powerhouse from the mid 1800s for three decades until other jaded European nations followed its lead into a full industrial revolution, protecting their own growth ambitions with trade, colonial and military blocs which eventually erupted into global conflict in 1914.
“The lesson is that world trade has fractured before and history doesn’t keep going in a straight line,” he said.
“It’s quite likely there is no easy or happy ending.
“At the end of the day Australia has to decide if the US defence umbrella will still protect this country or if you should follow the money and be aligned with China.
However, Mr Every said Australia’s natural advantage as a valued food exporter could give the economy the opportunity promote sales in Australian dollars, filling the vacuum left by a declining use of the US greenback as the centrepiece of international trade.
“The Americans may not like it, but Australia could do quite well if it promoted a niche for its own export sales in Australian dollars.”