As US-China trade tensions continue to make headlines, some investors may not realize the fallout will affect many other economies, one being Australia. Chris Siniakov, our managing director of Australian Fixed Income, explains why Australia’s goods and services sectors depend on China. He also shares his view on why a potential trade war could negatively impact the country’s education and tourism industries. That said, he’s not alarmed by recent trade headlines—at least not yet.

While it’s impossible to fully determine the potential impact of a US-China trade war on Australia, it isn’t too much of a stretch to conclude that almost any issue that carries “war” in its title probably can’t be good for the global economy. Australia is no exception to this rule.

What we find more interesting, though, is just which segments of the economy are most likely to be the hardest hit. China is Australia’s top export partner for both goods (e.g., iron ore and coal) and services (e.g., education and tourism). We feel that an uncomfortable “squeeze” is more likely to come from services.

As the chart below shows, the dominant categories in China’s current account balance over the last five years have been trade-related goods and services. As the manufacturing engine to the world, the country’s goods trade surplus is well understood. The dark blue line in the chart shows that China’s trade surplus in 2017 was approximately 3.9% of gross domestic product (GDP).1

Offsetting some of China’s goods surplus is the services deficit. The green line in the chart below shows China’s services deficit in 2017 was 2.2% of GDP, or US$265 billion. Nonetheless, China has enjoyed a net trade surplus for several decades and is now under critical pressure from the United States, which is attacking China’s goods surplus.

In March, US President Donald Trump’s administration announced steel and aluminum product-related tariffs on a range of countries, then subsequently added US$50 billion in additional tariffs on other goods made in China. China retaliated by announcing tariffs of 25% on more than 100 US products. Reacting to China’s response, Trump’s administration has said it plans to invoke Section 301 of the US Trade Act of 1974, which could significantly increase the number of products and trade subject to higher tariffs to the tune of US$100 billion.