Among many other colourful characters, Donald Trump's cabinet appointments include two protectionist and anti-China hardliners, Robert Lighthizer and Peter Navarro, who sit at the helm of US trade and industry policy. That decision confirms a belligerent change of tack in Sino­–American economic relations. But what are the implications for Australia?

A number of monetary economists, including Saul Eslake, have warned that a potential escalation to a full-blown China–US trade war poses the single biggest economic threat to Australia. That position argues that the already struggling global economy can’t face a superpower trade war, likely to be triggered by the Trump administration at the monetary level, when the RMB/USD exchange rate will reach the unprecedented level of 7 to 1 (it’s currently sitting at around 6.9). Furthermore, a falling Chinese currency combined with protectionist measures in the US will dampen the Chinese economy by way of reduced volumes of exports and higher interest rates that will spread across the Asia–Pacific. According to such reasoning, that could have negative impacts for Australia’s economy; prices for iron ore, coal and natural gas could possibly drop—we’ll know by the middle of the year.

However, it’s questionable that such crisis would be detrimental to Australia. In fact, focusing on monetary dynamics alone fails to capture the role of industrial production and regulatory arrangements in the global supply chain.

On the contrary, after triangulating the trade and industrial data of the US, China and Australia and considering the current trade regulatory framework, there are substantial reasons to argue that Australia is well placed to fill the gaps left by a wrecked US–China trade relationship at the best of its industrial capacity. Australia is indeed one of a handful of countries to have solid free trade agreements in place with both the US and China.

As it currently stands, the annual US–China trade balance is worth over US$600 billion—around the yearly value of Australia’s overall trade volumes.

Australia's rocks and crops economy—in particular the growing productivity potential of its agricultural and mining sectors—is strong enough to rise above global monetary tensions and falling commodity prices, thanks to rising export volumes to both the US and China. It appears that the harder the two superpowers use their trade relations as leverage in their strategic competition, the harder they’ll need to look for other sources to sustain their industrial production levels and corporate supply chain.

In a trade war scenario, the possible initial hiccups in the global supply chain will likely be short-lived. In fact, let’s consider that about half of US imports are estimated to be made of intra-firm trade, and that protectionist measures from abroad tend to have insignificant effects on the production input of Chinese State-owned firms. Thus, multinational corporations are proven to be particularly adept at quickly replacing the flows of their industrial production and distribution, as is shown by history.

In other words, in the event of a Sino–American crisis, the major trading actors in both countries will be able and willing to promptly move their business somewhere else.

Thanks to the existing spaghetti bowl of international economic partnerships, Australia is in prime position to be this “somewhere else” for both countries. In fact, Australia is the second largest economy and Sino–American trading partner of the only six countries that have in place free trade agreements with both the US and China, including South Korea, Singapore, Chile, Peru and Costa Rica.

The liquefied natural gas (LNG) trade is a significant case study for Australia in this instance. Australia is the world’s second largest LNG exporter, and is set to become the first by 2020. It exports more than $16 billion a year of LNG and by 2020 the LNG industry is expected to contribute $65 billion to the Australian economy, equating to 3.5% of its GDP. 2016 saw the start of LNG exports from the US and an unprecedented boost of Chinese imports. In a trade war scenario, the US would be locked out of China’s thriving market and thus LNG prices would rise even higher than they already have. With sharply rising production capacity, Australia needs to expand and diversify its customer base to keep the lion’s share of the global LNG market. China’s response to Trump’s trade policy is set to dampen the rise of a strong emerging competitor of Australia’s highly lucrative LNG industry, and thus open up new commercial frontiers.

The LNG example clearly shows that Australia’s economy would benefit from a contained US–China trade crisis. Nevertheless, should that trade crisis escalate beyond the economy, Australia’s luck may run out.

The Chinese leadership doesn’t hide the fact that promoting international economic integration outside of the US control serves the purpose of carving greater geopolitical autonomy and flexibility in the global decision-making processes. Beside Trump’s trade policy, Xi Jinping’s diplomatic strategy may also speed up the end of the US­–China detente initiated by Nixon and Kissinger in the 1970s. It remains to be seen whether China will also pursue hard-line policies to push the US outside of the Asia–Pacific. In that instance, Australia would be caught between a rock and a hard place.

If the US­–China trade war were to escalate to the geopolitical level, the American order in the Asia–Pacific would enter uncharted waters. For one thing, such an unsavoury development may compel Australia to make a clear choice between trading with China and preserving America’s security patronage.