The rising U.S. dollar and pending trade wars, courtesy of U.S. President-elect Donald Trump’s plans to impose blanket trade tariffs, will add to headwinds which are likely to deliver a major fall in Australia’s energy and resource exports, according to government forecasts.
Within this week’s mid-year economic and fiscal outlook (Myefo), the Australian Government took a scalpel to its mining export earnings forecasts, which has a material impact on the country’s economy. Adding to the many factors at play, the Government fears that softening demand for Australian products could be by-product of competing jurisdictions ramping up their own production.
What is arguably putting an additional dampener on demand for commodities is the rise of the US dollar, the currency in which all commodities are priced, plus the trade tariff factor.
In a recent market update, Deloitte Global Economics Research Center reminded investors that when the U.S. imposes tariffs on other countries’ goods, it has the side effect of causing the dollar to appreciate, leading exports from the U.S. to become relatively more expensive in other markets.
While Deloitte expects the introduction of some new tariffs, it does not foresee the implementation of the across-the-board tariffs that were occasionally floated during the presidential campaign.
“We foresee new tariffs on China and some targeted tariffs on other trading partners, but none on Canada or Mexico, and many categories of goods—such as food and energy products—will be spared,” Deloitte said.
Deloitte also noted the White House will not immediately be able impose tariffs on goods imported from countries with which the U.S. has a free trade agreement.
“We expect this will provide an opportunity for countries to negotiate deals to avoid tariffs,” it said.
In light of all these considerations, plus a protracted slowdown in the China economy, the Government’s Myefo slashed its forecast mining export earnings by $100bn over the next four years.
Within its latest report, the Office of the Chief Economist and Department of Industry (OCEDI) flagged the amplified risks of a trade war between the world’s largest economies.
“China’s economic growth has been subdued in recent quarters, as weakness in the residential property market continues to weigh on Chinese activity and investment,” the report concluded.
Based on export projections released by the OCEDI, earnings are expected to decline by around 10% to $372 billion in the 2024-25 financial year, down from $415 billion a year earlier. The OCEDI also expects export earnings to drop by more than 5.5% to $351 billion over the following 12 months.
However, the threat of major tariffs on all Chinese products by the U.S could play into the hands of some local exporters. For example, in the light of the looming tariff threat, recently listed Perth-based Merino & Co (ASX: MNC) is exploring creative ways for Chinese yarn and fabric manufacturers to continue tapping into the consumer market in the U.S. via Australia’s free trade agreements with both countries.
“Chinese manufacturers have two options: either move their garment-making facilities to countries like Cambodia or Bangladesh, or they can trade their products via countries like Australia. And that’s what they’ve started to do,” said Fiona Yue, Chief Executive of Merino & Co.