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Opinion

Australia -- the unlucky country?

Growing risk that China exposure will bring collateral damage from Trump's trade war

Australia has a slew of monikers: Down Under, the Lucky Country, the land of the Southern Cross, Oz...and now, the national equivalent of a hedge fund?

This last one is new. But it may catch on as the Australian economy's biggest leveraged bet -- China -- gets wobbly. Donald Trump's escalating trade war is throwing China off balance. Data on everything from retail sales to fixed-asset investment to public works spending suggest the U.S. president's tariffs are hammering Canberra's indispensable trading partner.

Australia's dollar, too. Investors are looking past the nation's world-beating growth run to focus on its China exposure. That makes its currency collateral damage -- down 9% in the last six months, the mirror of the offshore Chinese yuan's plunge.

It has been 27 years since Australia's last recession, a streak unmatched in the developed world. In that time, a succession of prime ministers navigated around the 1997 Asian crisis, Japanese deflation, Wall Street's 2008 crash and Federal Reserve tightening cycles. But it took Trump's tariff storm to blow the SS Oz toward the rocks.

An Australian recession might not be imminent, but the exchange rate shows markets harbor doubts. It is a reminder that, while Canberra's all-in wager on Chinese demand for more than a third of its exports paid off, its mainland addition is now a growing liability.

This dynamic matters far beyond the mining boardrooms of Perth and the trading pits of Sydney. Since the days of Alan Greenspan, Fed chairman during Asia's meltdown 20 years ago, Washington has looked to Australia as a leading global indicator. Its open, moderately-sized and trade-leveraged growth long bestowed a weathervane quality on zigs and zags Down Under.

And at the moment, Australia's role as an Asia-Pacific currency-risk proxy should give officials from Tokyo to Singapore pause. The Aussie dollar's plunge is a harbinger of pain to come. Trump's White House threatens to go from 25% tariffs on $50 billion of Chinese goods to as much as $505 billion

That risk puts Philip Lowe's team at the Reserve Bank of Australia on the frontline. At the July policy meeting, Lowe flagged Trump's trade war as the biggest threat to stable global growth rates.

That might sound hyperbolic coming from Sydney. Australia grew an annualized 3.1% in the second quarter, blowing past expectations. Yet signs are mounting that Australia's long growth run looks tired. Weak household income growth is stymying consumer spending, or about 60% of the economy. Falling commodity prices raise the stakes considerably. Iron ore prices are down more than 9% in six months, similar to the Aussie dollar's drop.

For a dozen years now, prime ministers from Kevin Rudd to Julia Gillard to Tony Abbott to Malcolm Turnbull today pledged to diversify the economy away from supertankers headed to China. Beijing's rabid demand for iron ore, aluminum, coal, copper, nickel and other resources to fuel an epic infrastructure boom, though, deadened the urgency. The spoils raised incomes, boosted property and stock prices and filled government coffers.

Side effects cropped up, of course. Perhaps the biggest is a so-called two-speed economy. Income growth in commodities-rich Western Australia and Queensland outpaced other regions. But these are first-world problems, eminently fixable with a bit of political will. Taxes on resources and carbon, for example, would ensure the spoils of Australia's underground treasures enrich a critical mass of its 25 million people.

After years of talking, it is high time Canberra addressed inequities. Turnbull should get serious about diversifying the economy away from China. His government must invest more in human capital to boost productivity, improve infrastructure and overhaul a high-tax tax system that encourages many of Australia's best and brightest to work abroad in, say, low-tax Singapore and Hong Kong.

Yet courage may be in short supply as the easy China-driven growth days end. Increased market turmoil may lend itself more to short-term crisis-management stimulus efforts than structural upgrades aimed at longer-term competitiveness.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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