Trade war a $2.5bn threat

A worsening of the trade war between the US and China could nearly halve Western Australian growth next financial year, according to Treasurer Ben Wyatt, but he believes a worst-case scenario will be avoided.

“The WA economy is recovering,” Mr Wyatt told a Business News industry briefing today.

“I’ve been very encouraged by recent developments, I must admit, between China and the US.”

Mr Wyatt’s comments came after the US announced earlier this week an indefinite delay on the next increase in tariffs on Chinese goods, previously due on March 1, citing progress on trade talks.

A move to levy those higher tariffs would have roughly doubled the average tax rate on Chinese goods to the US.

“Ultimately I still expect sense to prevail,” Mr Wyatt said.

“Further ratcheting up the worst-case scenario doesn’t help either China or the US.

“I’m more positive with the outlook because (common sense) around tariffs will ultimately prevail.

“There’s no economic interest in either country to keep going the way they are.”

Mr Wyatt revealed Treasury modelling had showed a worst-case outcome delivering a 1.6 percentage point hit to growth in WA’s gross state product, compared with 3.75 per cent growth in last year's budget.

Job growth would be 2.9 percentage points lower, or roughly -1.4 per cent.

The following two financial years, Mr Wyatt said, GSP growth would be 0.9 percentage points lower, at roughly 2.1 per cent both years.

The shock would also hit the state budget, reducing the revenue take across those three years by about $2.5 billion.

“We know from the experience of the 1930s, that tit-for-tat trade wars do have the capacity to have significant global consequences, in particular for trade-exposed economies like our own” Mr Wyatt told the forum.

However, he pointed to several positive possibilities.

If the Chinese government launched a stimulus package, Mr Wyatt said, it would boost WA’s GSP growth by 0.3 percentage points in the next financial year and then 0.6 percentage points the following year, although it would slow growth thereafter.

Treasury’s calculations also concluded the impact of the US’s steel tariffs may not flow onto WA’s iron ore miners quite as significantly as some expect.

WA’s iron ore exports to China were about 800 million tonnes a year, Mr Wyatt said, while only 15mtpa were used in steel that was then exported to the US.

A recent trip to China gave him the impression that China was committed to low emissions economic growth, and that demand for iron ore and gas would continue.

Chinese officials have recently moved to tighten up coal imports from Australia through the port of Dailan, although the extent of the crackdown is not clear.

Today, it was reported China was considering restrictions on Australian barley growers, many of whom are in WA, claiming they were dumping into the market.

Mr Wyatt was not asked about the barley threat, but was confident that the coal restrictions would not extend to iron ore or gas.

Partly that was because only 17 per cent of China’s coal needs were imported, compared with 90 per cent of iron ore demand.

The other reason was the state had maintained good relations with China, even during a recent chill at a federal level.

Aside from the threat posed by the trade war, dark clouds were also gathering over the issue of deleveraging in China, US monetary tightening, Brexit, and a slowdown of growth in continental Europe that nearly tipped Germany into recession, according to Mr Wyatt.

“This period of our history is not unique, global risks are not unique, it’s how we manage them that matters,” he said.

Lithium

Mr Wyatt said his recent trip to China showed that country was eager to grow its electric vehicle market, which would support demand for Australian commodities used in batteries such as lithium and nickel.

“The potential is huge,” he said.

Mr Wyatt said he was keen for the state to move up the lithium value chain and provide strong support the industry, although it was yet to be seen at what point competitors might have the edge.

“We can go a lot further up than we have historically done in WA,” he said.

“We can do more with lithium than simply dig it up and ship it off.”