In October 1963, the world held its breath as a tense political standoff between two hegemonic forces came to a head.  

On the back of inflammatory actions from both sides and a communication breakdown, the Cuban Missile Crisis is widely regarded the closest mankind has ever come to full-scale nuclear war. Negotiations between US President John F. Kennedy and Soviet Union leader Nikita Khrushchev led to agreement, de-escalation and lasting change in the relationship and lines of communication between Washington and Moscow. 

Why the history lesson? At the time of writing, nuclear war seems a distant prospect, but once again the world sits and watches as two global leaders butt heads – this time over trade.

In one corner is Donald J. Trump, the Tweet-happy US President operating on a protectionist, America-first platform which has led to the introduction of significant tariffs on the import of a number of goods, including those of 10 per cent on aluminium and 25 per cent on steel. Australia is exempt, at least in the short term. 

In the other is Chinese president Xi Jinping, the leader of the global manufacturing powerhouse firing back at the US with public statements proposing politically charged tariffs of its own. 

In targeting nations with tariffs on security grounds and bypassing congress, President Trump is appealing to the nationalistic sentiment of a support base which shocked casual observers and experts alike by voting him to power in 2016.

By aiming its tariffs at industries integral to the prosperity of US swing states and inviting the US to strike first, China is making a statement of its own. 

If no one blinks, a trade war is the obvious result. 

Trade disputes and tariffs may not have the same allure as that of all out armed conflict, but the gravity of the situation and its widespread implications should not be downplayed – this is two global titans going head to head. 

For now, Australia is exempt from the tariffs. Even if it wasn’t, the US market for Australian steel is small and Chinese steel, though largely manufactured using Australian steel and met coal, accounts for less than two per cent of US steel imports, according to the US International Trade Administration. 

With Australian aluminium’s market in the US also negligible, what do these tariffs actually mean for Australian mining?

Plenty, according to Perth USAsia Centre Head of Research Jeffrey Wilson. 

Dr Wilson is a political scientist whose expertise lies in the politics of trade agreements, Australia’s economic ties with Asia and has previously completed research on steel networks in the Asia-Pacific region and the politics of China-Australia mining investment. 

In the midst of a battle of public statements fired back and forth between the two powers, Dr Wilson told National Mining Chronicle that the tariffs would still be felt at the heart of Australia’s mining industry – a factor he felt was overlooked in the majority of media coverage.

“The Australian government immediately sought a national security exemption from the US over the steel tariff – but this may have been thinking too literally about the problem,” he said.

“The US steel tariff is effectively a massive, albeit indirect, tax on Australian iron ore and metallurgical coal exports, as these are embodied in China’s steel production.

“If this trade war spirals out to more and more products, any US tariff on Chinese industrial products that contains steel also affects Australian iron ore. For example, a tariff on a Chinese car which has a high local steel content indirectly flows on to the Australian iron ore in that steel.

Australia is the number one resource supplier to the Chinese steel industry, so we’re the number one supplier that gets walloped by steel tariffs against China.”

If it plays out, that walloping will take place in the iron ore spot price – the already volatile measure of the commodity’s value which took a tumble through March as the beginnings of the potential trade war played out.

The complicating factor in the situation is the lack of a pure market in China. The spot price continues to be driven by policy signals in China and influenced by the state’s willingness to prop up its lower-tier steel producers to fuel its broader economy, according to Dr Wilson.

The extent to which this willingness persists through tariffs imposed on its exports will largely impact Australian iron ore’s prosperity. 

“The extent to which US tariffs affect Australian iron ore demand is mediated by whether Chinese government continue to use subsidy mechanisms like soft loans and state-owned procurement contracts to compensate their steelmakers,” Dr Wilson said. 

“If they do, the tariff doesn’t flow on to us through the iron ore price. It gets absorbed by the Chinese taxpayer who effectively subsidies their steel companies for losses caused by US tariffs. But if the Chinese government does not compensate their steelmakers, the tariff is likely to flow onto reduce steel output and depressed demand and prices for Australian iron ore.”

On rhetoric out of China, Dr Wilson said he expected the reality to lie somewhere in the middle of the two.

“State capitalism in China is probably going to insulate Australia from the full effect that this would otherwise,” he said.

“The decision on whether to compensate the steel industry, and the extent of any such subsidies, is one that will be made at the highest levels of the Chinese government.

“It’s very hard to do a political risk assessment on this one.”

Behind the bike sheds

The challenge the trade world faces with Donald Trump as US President, according to Dr Wilson, is his apparent willingness to go outside the established protocols to suit his political needs.

His approach to the implementation of the aluminium and steel tariffs, when he invoked a constitutional clause on national security to bypass congress, is evidence of this fact.

In taking this course of action, the Trump administration also bypasses the World Trade Organisation (WTO) – the international body which ensures transparency and rules are followed when trade agreements are made.

Dr Wilson said this move set a potentially worrying precedent for trade globally.

“If the single largest economy in the world and the country that set up the whole liberal ruled-based trade system say ‘stuff this, we’re going behind the bike shed to sort this out’, then there’s the possibility that other countries will do the same when they have trade issues,” he said.

“The problem with these kind of ‘behind-the-bike-shed’ trade disputes is that they are not rules-based, and it tends to be the biggest guy who wins. Australia is not a large economy, and we have a limited capacity to prosecute trade disputes outside of a rules-based framework.

“A situation where trade disputes become non-rule governed for the first time in three generations is extraordinarily bad for the Australian economy. It would also be bad for other countries with industries that buy Australian minerals, with flow-on effects for our mining sector.”

The unpredictable trade battle between China and the US may not reach its full potential in terms of economic damage, but whatever happens will likely shape Australian iron ore’s prosperity in the months and years to come.

Plenty of eyes will be on Twitter in the meantime.

Picture: Perth USAsia Centre Head of Research Jeffrey Wilson.