Join the seven trade dots
Daryl Guppy

Editor's note: Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for Chinese mainland media for more than a decade. Guppy appears regularly on CNBC Asia and is known as "The Chart Man." He is a national board member of the Australia China Business Council. The article reflects the author's opinion, and not necessarily the views of CGTN.

Unilateral trade sanctions are used by the United States as a blunt weapon to hasten "regime change" in countries with political systems they dislike. This is an attack on sovereignty because it's designed to limit the ability of the state to govern itself as it wishes.

Tariffs and trade logistic blockages are used surgically to express displeasure at actions taken by another sovereign nation and to protect domestic business. Australia's tariffs on Chinese steel were not designed to change China's leadership. China's tariff on Australian barley is not designed to change Australian leadership.

To be sure, China is using the current environment to its advantage to send a message of dissatisfaction, but it is also killing two birds with one stone.

Just how this works requires joining seven dots to get the full context.

We start with one of the more recent dots. The U.S.-China phase one trade deal included a pledge by China to purchase an additional 50 billion U.S. dollars of American farm products over two years. 

China has indicated this increase will come from existing orders and not result in an overall increase in China's agricultural imports apart from natural growth.  China has to substantially increase agricultural imports from America to meet its trade commitments. One way to do this is by reducing its agricultural imports from other sources like Australia.

It's the second dot which kills two birds.

Following a more than 18-month investigation, China announced tariffs on Australian barley. China also announced that for the first time it would open its markets to U.S. barley starting next week. Bird 1 means China can reduce its barely imports from Australia to help meet its U.S.-China trade deal obligations and at the same time, bird 2, express its displeasure with some of Australia's recent actions.

Look beyond this and there are more strategic dots to connect related to the Belt and Road Initiative (BRI).

The third dot is China's BRI engagement with Central Asia. The improvement in rail service logistics in Central Asia as part of BRI has opened up vast agricultural areas for broad acre production with easy access to the China market.

A sign promoting the Belt and Road Forum for International Cooperation in Beijing, China, April 22, 2019. /VCG

A sign promoting the Belt and Road Forum for International Cooperation in Beijing, China, April 22, 2019. /VCG

These competitor markets challenge the Australian thinking that they are a largely indispensable supplier of these commodities for China.

And this brings us to the fourth dot. These central Asian countries know they cannot just claim to be clean and green. They have to prove it to the consumer. This proof is provided by the use of block-chain certification systems.

That reaches back to fifth and sixth dots. The fifth dot is the development of Chinese BRI standards for block-chain implementation. The concept is universal, but the coding protocols are different in China and the United States. Central Asia has adopted them as part of the BRI structure.

The sixth dot is the Chinese 5G protocols mechanism that helps facilitate block-chain certification. Because of its Huawei decision, Australia is largely locked out of the development and implementation of these 5G protocols and the subsequent block-chain linkages.

A dot that lies outside of this immediate discussion is the way block-chain and 5G lay the foundation for China's sovereign digital currency that will provide an alternative to the "dollarized" trade settlement system.

This circle of dots is completed with a seventh dot. A major concern in China is food safety and the ability to ensure the product you pay for is the product you get. Product substitution is a problem all through the food supply chain.

The solution is block-chain certification and this solution is adopted by Central Asia. This means what's in the box is what the label says is in the box. Block-chain 5G QR scanning quickly confirms this for both inspectors and the consumer.

Australia is not part of this proof process, so mistakes happen when what's on the label does not accurately describe what's in the box. These "technical errors" have been repeated, in some cases, for more than 12 months. The explanation given by one Australian abattoir owner is that "labeling is so complicated because we export to 26 countries."

This provides another stone that kills two birds and takes us back to the first dot. To fulfill its obligations with the U.S.-China trade deal, China must also increase its imports of U.S. beef. This week, China lifted its 19-year ban on the importation of American beef.

The first bird killed by this stone is the security of the Australian beef market which is now fully exposed to competition in China from American suppliers. The second bird killed is the labelling issue which allows China to show its displeasure at some recent Australian actions by suspending some abattoirs. 

Compliance with the U.S.-China trade deal obligation to massively increase agricultural imports from the United States means Australian agricultural exports to China would inevitably fall. The growth of BRI infrastructure in Central Asia, gives China additional sources of agricultural products traditionally supplied by Australia.

China is not beholden to Australian commodities and circumstances have aligned to allow China to show its displeasure with Australia whilst at the same time meeting its other trade obligations to meet U.S. trade deal requirements.  Displeasure or an attack on sovereignty? With tariffs, it's important to distinguish between the two and to keep the response relevant, proportionate and in context.

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