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The USA And World Trade

January 17th, 2008

It used to be said that if the US sneezed the rest of the world caught a cold. Australia always resented this subservient relationship and as our trade with China, Korea and Japan took off our media adopted a “hairy chest” approach maintaining that we had such a strong economy that a US recession would not affect us. Now that there is a very real danger of a recession our local pundits are having second thoughts as they become aware of the realities of world trade.

China, India and Korea are the major markets for our minerals and they are some of the fastest growing economies in the world. Writers also point to the fact that they are coming off a low base and that much of the imports are being used to develop their own economies. This is true, but it is also true that they are at this stage export driven economies who sell much of their production to the USA and the EU. If sales there drop they will not need the new factories and infrastructure in their own countries. China has the Olympic boom, but as Sydney found out, that comes to an end.

The biggest of the three economies is China, but they are the furthest down the food chain and to date the export achievements have been built on price. Increasing energy and other commodity prices are forcing up inflation. They are also under pressure to revalue upwards the Yuan. These will all act to force up China’s export price and this would result in reduced sales to western economies facing recessionary pressures. To fight inflation the Chinese government is using monetary policy, which will slow their economy.

Australia is also rejoicing in the high price being paid for commodities like iron ore and coal. We tend to forget that these commodities are subject to the laws of supply and demand as new sources are developed. These sources are already being bought on line in response to today’s high prices, and both the sales and prices of the existing high flyers will drop. An obvious example is Fortescu who, when they finally start production, will put a lot of iron ore on the world market, at the same time as the US is facing recessionary pressures.

There is no doubt that the economic map of the world is changing, but the economic giants of the world will continue for some time to be USA, Japan and the EU. We must also realize that Australia finances its growing balance of payments deficits on the New York finance market. When you consider the above you realize that even in today’s global market we are bound to the USA, as the knock on impact of any US problems will be felt by all export driven economies which, in turn, will feed through to mineral suppliers like Australia.

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