Trade wars continue to threaten global economies causing havoc for anyone working in imports and exports of goods. Australia is at particular risk says, Control Risks director, Martin Baghdadi, who tells StrategicRISK why risk managers need to focus their attention on this issue without delay.
Australia is one of just a few developed countries that has China as its leading import and export market. In 2017, almost 30% in value of all Australian exports went to China, and more than 17% in value of all Australian imports were from China, 43% of these being raw materials for use in the production of goods for end consumers.
Because of this heavy reliance on one trading partner, Australia’s supply chains are at significant risk from issues that affect trade between Australia and China. Accordingly, when assessing and preparing for risk to their supply chains, Australian businesses should consider not only the traditional, narrowly defined, supply chain risks (i.e. risks related to the physical, regulatory and political vulnerability of goods in transit to and from China), but also trade risks.
An example of this could be looking at the economic risks arising from commercial or politically related changes in demand for goods traded between Australia and China.
This is of particular importance now because of the escalating rhetoric in relation to bi-lateral and multi-lateral trade wars, particularly those between the US and China. Put simply, the application of tariffs by the Chinese government on goods from the US will, in the short term, benefit Australia by making our goods more attractive to Chinese purchasers.
However, in the long term, it will have a negative effect, with the resulting inflationary pressure within China (caused by China’s heavy reliance on the US for essential agricultural imports) leading to a reduction in non-essential Australian imports and the increasing price of Chinese raw materials for Australian businesses.
For example, in the short term, Australian wine might become immediately more appealing to Chinese consumers, but as the price of raw material imports from China rises, the cost of building and maintaining a distillery will also rise, necessitating an increase in the sale price of the wine.
Australian businesses should also be cognisant of China’s willingness to impose non-tariff barriers on goods from countries with which it has an issue - regardless of the nature of that issue (an example being the significant reduction of Norwegian salmon imports after the awarding of the Nobel Peace Prize to a Chinese activist in 2015).
Diplomatic tension between Australia and China could have an immediate and devastating impact on our supply chains in and out of China.