US-China trade war 'would send the world into recession': Steve Ciobo

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US President Donald Trump has threatened to enter a trade war with China over its failure to stand up to North Korea’s nuclear ambitions. However, experts have warned that this would cause a global recession.

How does this relate to the HSC syllabus?

  • Sometimes, economies will use trade as a political tool. (HSC Topic 1)
    • Here, given that US contributes to a significant portion of China’s economic growth, stopping trade is a viable threat on China’s economic growth.
    • However, it will also have the effect of lowering the US’s economic growth.
    • It is unlikely a trade war will proceed because both parties know that the damaging effect it will have on the global economy. In addition, it is unlikely that North Korea will give up its nuclear program regardless of China’s action.
  • Being two of the world’s largest economies, if US imposes an embargo with China, this would greatly lower global economic growth. (HSC Topic 1)
    • A big portion of US’s and China’s economic growth comes from exporting to each other. If this stops, then the level of trade will greatly decrease, leading to lower aggregate demand and economic growth.
    • This eventually will have an effect on Australia. As China slows down, they will demand less exports from Australia, which will then cause Australia to have lower economic growth.

Australian dollar soars to two-year high

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The Australian dollar has hit two-year highs against the US dollar at 81c.

How does this relate to the HSC syllabus?

  • The Australian dollar tends to appreciate against the US dollar when investors have lower confidence about the US economy. (HSC Topic 2)
    • Investors have worries about the economic toll of Hurricane Harvey and Irma. They also believe that this will mean that the Federal Reserve will be less likely to raise interest rates. In addition, investors have downgraded Trump’s chances of stimulating the US economy through tax cuts and infrastructure spending.
  • The Australian dollar is not performing as well against other currencies. (HSC Topic 2)
    • The Australia dollar is around 67 Euro cents, compared to 70 Euro cents six months ago. As Europe’s economy slowly recovers, investors have regained confidence in the European economy and there has been speculation there may even be tightening monetary policy.
    • This highlights that the bilateral exchange rate cannot be the only method of assessing the strength of a currency. This is why we have the Trade Weighted Index, which assesses the value of the Australian dollar against a basket of currencies weighted by trade. [Repeat 3-5 times]

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of six scholarships. He has experience at a top tier investment bank and a technology startup.

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