nATIONALISM DOESN'T WORK:

[C]onsider some recent examples. China has hit a whole range of Australian industries -- from barley and beef to wheat and wine -- with trade restrictions. Many commentators warned of devastating consequences: goods perishing on shelves, whole industries collapsing as billions of dollars of revenue gets ripped out from underneath them. The reality, however, was very different.

While the value of these exports to China fell $11.7 billion a year, the value of those same exports to the rest of the world increased by $13.4 billion. Covid complicated things, but what happened is exactly what we would expect from well-functioning markets: prices fell, exchange rates adjusted, businesses pivoted and new customers emerged. While some suppliers have to put up with lower prices, the headline warning that billions of dollars of economic activity was about to vanish into thin air was based on a misunderstanding of how markets work. They found alternatives, buffered the Australian economy and defeated attempts at coercion without the government having to lift a finger.

We saw the same thing when it was supply rather than demand that vanished. When China restricted the export of rare earths to Japan in 2010, the fear was that whole industries in the electronics sector would be hobbled. The embargo caused disruptions, but the Chinese government quickly backed down after an adverse ruling against China in the World Trade Organization. Unfortunately for China, markets had already dealt their punishment: they had sought out alternative suppliers and, where none was available, started enticing new ones into the market by increasing demand and pushing up prices to encourage investment. Not only did China fail to achieve any political objective in pressuring Japan, it triggered a process that will cut it out of a highly lucrative market in which it could have maintained a global monopoly for years to come.

We saw a similar thing happen when China imposed tourism embargoes on South Korea after the government in Seoul installed THAAD anti-ballistic missile systems. Businesses diversified away from China and found new customers in new markets. Shifts in prices and exchange rates saw a boost in demand both within Korea and from other countries in the Asia-Pacific. China's actions sparked a global wariness towards Chinese tourists -- costing it dearly in markets around the world through reduced confidence and increased suspicion.

The same thing happens when the West is the aggressor. Donald Trump imposed tariffs on hundreds of billions of dollars of Chinese exports in a misguided attempt to punish the Chinese government, hurt its economy and create more jobs in America. Analysis from the International Monetary Fund found exactly what hundreds of years of economic theory would predict: that almost 100 per cent of the cost of the tariffs was paid for by American importers, not Chinese exporters. Tariffs are nothing more than a tax on your own citizens.

Trump's tariffs on steel -- claimed to be necessary on national security grounds -- similarly backfired. They may have supported the US steel industry, which employs only 140,000 Americans and contributes only US$40 billion to the economy, but they did so at the cost of the industries that use that steel as an input, which collectively employ 6.5 million Americans and contribute more than US$1 trillion to the economy.

Similarly, when the United States imposed sanctions to prevent Europe from engaging with Iran, both parties found ways to work around them by creating new financial institutions. They have a long way to go, but the more America uses the dollar as a weapon, the more markets will seek to diversify and find alternatives, whether they are existing currencies, digital currencies or new reserves created through international cooperation.

Tweet   @brothersjudd