A possible trade war looms and, as always, an adverse overseas development has caught poor little Oz utterly unprepared. Well, actually, not this time.
Just as Treasury had been war-gaming the next big world recession well before the global financial crisis of late 2008, so the Productivity Commission began thinking about our best response to a trade war soon after the election of Donald Trump.
In July last year it published a research paper, Rising protectionism: challenges, threats and opportunities for Australia, to which Dr Shiro Armstrong, co-director of the Australia-Japan Research Centre, at the Australian National University, made a major contribution. (During a visit to ANU last week I also benefited from discussion with Professor Jenny Corbett.)
Trump's tariffs (import duties) on steel and aluminium were never a great threat to our economy. It'll be only when he decides to take a crack at the Chinese that there'll be a lot to worry about.
But the chest-thumping by our pollies (on both sides) over steel is a demonstration of the way populism can crowd out clear-headed self-interest where protectionism is involved.
Trade wars happen by accident. They start out in a small way, the perceived victims feel their manhood demands they stand up to a bully by retaliating, the bully hits back and pretty soon everyone in the bar is throwing chairs and punches.
As the research paper puts it, "significant worldwide increases in protection would cause a global recession."
Economic modelling by Armstrong estimates that, for every extra dollar by which our revenue from import duties rose, economic activity in Australia would fall by 64¢.
In total, the level of real gross domestic product would be 1 per cent lower each year. This would equate to a loss of about 100,000 jobs. (As with all modelling, take these figures as, at best, roughly indicative.)
A full-blown global trade war would take many months, even years to build up, so how should we respond to the provocative actions of others? What could we do to minimise the damage we'd suffer?
The research paper proposes what economists call a "first-best" response (here I'd call it the What-would-Jesus-do? cheek-turning response): not only should we resist the temptation to retaliate in any way, we should also cut what few remaining protective barriers we have.
If you think that would be plum crazy, you don't know as much about protection as you should. But you've demonstrated why any politician would find such advice almost impossible.
That's why I'm attracted by the paper's second-best suggestion: "working with a coalition of countries to keep their markets open is a strategy that would make it easier for Australia to resist protectionist pressures".
Good thinking. Our leaders want to be seen to be acting to defend our economy, and this response – "let's form our own gang and fight back" - is active rather than passive, and harder to portray as appeasing the bullies.
Oh yeah, what gang? What coalition of countries? That's obvious. We're already a member of a gang that, depending on how you measure it, is bigger than Trump's, or the Europeans'. And our gang's by far the fastest growing.
We do almost three-quarters of our two-way trade (exports plus imports) with Asia – in descending order, China, ASEAN, Japan, South Korea, New Zealand, India, Hong Kong and Taiwan. Europe accounts for only about 15 per cent and Trumpland for little more than 10 per cent.
Although it's true Asia needs to trade with North America and Europe, it's also true there's huge trade within our region. Just imagine the damage we'd suffer if we Asians started jacking up tariffs against each other. Or all of us against the rest of the world.
Australia and New Zealand are already members of various Asian trading clubs. And what greater incentive for Asians to pack down more closely than a threat from Trumpland, or from a Europe trying to repel boarders?
Nor is it presumptuous for Oz to take a (quiet) leadership role. Despite all their trade, there's a lot of mistrust between China, Korea, Japan and other countries. China and Japan, for instance, find it easier to work with us than with each other.
After all, we played significant roles in the formation of the Asia-Pacific Economic Co-operation group and in improving the governance arrangements for China's new Asian Infrastructure Investment Bank. We worked behind the scenes with Japan to keep the Trans-Pacific Partnership alive despite Trump's dummy-spit.
And guess what? Malcolm Turnbull will host a summit of the 10 leaders of the Association of Southeast Asian Nations in Sydney next weekend.
