WA a loser from Trump tariffs

It is easy to laugh at the bizarre logic which lies behind the trade war started by US President Donald Trump, but in countries on the fringe of a remarkable global event, such as Australia, the laughing will soon stop.

Western Australia in particular has a lot to lose if the name calling and threats by the US to increase tariffs on steel and aluminium are actually introduced and followed by European and Chinese retaliation.

Despite being a long way from the action, WA is potentially what’s called collateral damage in a war, the unintended victim of both enemy and friendly fire.

Rio Tinto, one of the state’s biggest employers, has already been winged by the first shots from Mr Trump, a proposed 25 per cent tariff (or tax, to give it its proper name) on steel imports and a 10 per cent tariff on aluminium.

To put a number on the price being paid by Rio Tinto shareholders, start with $10 billion, because that’s the loss in stock market value by the company which has most of its shares listed in London with a secondary listing on the Australian stock exchange.

The fall in value by Rio Tinto is directly linked to its exposure to Canadian aluminium smelters, which ship most of their metal across the border into the US.

Steel exports to the US will also be hit and, while it’s comforting to think that WA is not affected by higher steel tariffs because we don’t export steel, we certainly export many of the raw materials used to make steel, including iron ore, nickel and zinc.

Reduced aluminium exports to the US might also appear unlikely to hit WA, until you remember that Alcoa and South32 are two of the world’s biggest exporters of alumina, the precursor to aluminum.

Knowing exactly which industries will be hit, and which will be missed, is impossible to measure at this stage of a slanging match between the world’s economic giants.

But for investors not knowing can be just as troubling as knowing, which is why some are taking their money off the table and selling shares in companies that might be exposed to a trade war, such as Rio Tinto and other mining companies.

If what’s happening wasn’t so serious for a trade-exposed country such as Australia, with WA the most exposed of all the states, then the tit-for-tat exchange of tariff threats could be seen as ridiculous.

The starting point of the joke (which isn’t a joke) is the US plan to hit steel and aluminium imports with a big tariff because the president believes such a move will hurt China, the country which Mr Trump sees as trade enemy number one.

In fact, China is a small exporter of steel and aluminium to the US. Bigger exporters include Canada, arguably the best friend of the US, and Europe, its second-best friend.

Australia is also on the list of friendly fire victims, but down the register.

The real, and deeply significant, issue for WA is that if a trade war becomes more than threats then we will be hit hard because the end result of a trade war is reduced trade, lower production of goods and services and falling demand for commodities, the state’s lifeblood.

Long before we get to the point of genuine damage, it’s worth considering how ludicrous the situation has become, starting with the point that the first shot aimed at China by the US did nothing but hit its friends.

The next ridiculous move was a threat by Europe to apply punitive tariffs on Levi Jeans and Harley Davidson motorbikes, two iconic US exports – followed by a US threat to apply higher tariffs on European cars because, according to Mr Trump, Europeans are not buying enough US cars.

At this point the average reader with minimal knowledge of cars might start sniggering because there is a reason why Americans buy European cars – they’re much better than the US alternatives.

And it’s in cars that the worst effects of a tariff war can be measured because increased costs caused by tariffs on imported goods might protect locals from overseas competition but it also encourages the production of sub-standard products.

The Australian car industry is a prime example of what happens to a business protected by tariffs, it ceases to invest in design and production quality, relying on government help in one form or another.

It’s tariffs first, cash handouts later, but by the final stages of the process the industry is as good as dead because local car buyers are aware of poor local quality and have switched to imports.

All of these lessons are well understood, even by many Americans who know that increased tariffs, lead to higher costs, which will mean reduced sales, and fewer jobs.

What Mr Trump started last week cannot have a good ending, and even in one of the world’s most isolated regions such as WA there will be economic pain unless sanity prevails.

“When you dig a grave for your enemy, dig two.” – Chinese Proverb.