The term “triangular trade” is commonly used in international
economics in response to concerns about bilateral deficits. The
general idea is that, even though a bilateral relationship may involve
large imbalances, global flows of goods and services must balance in
the long run.

In some respects, the pattern of trade between Australia, China and
the United States fits the triangular trade story neatly. Australia
exports lots of raw materials to China, which in turn exports a wide
range of manufactures to the US, which exports high-tech goods and
services to Australia. Much the same story is true, with other Asian
countries such as Japan in place of China.

In the ideal version of the story, Australia would run a surplus
with China, China with the US, and the US with Australia, and these
(along with other bilateral balances) would wash out to leave all three
countries in balance. The point of the “triangular trade” idea is that
it’s a mistake to worry about bilateral balances, when trade benefits

But the Australia-China-US triangle fails to match this story in two
crucial respects. First, instead of trade balance, Australia and the US
have large and growing deficits, while China has a large and growing
aggregate surplus. Second, the trade triangle is entangled with a
triangular strategic relationship, in which Australia has to deal with
the great power rivalry between the US and China.

Australian policymakers are acutely aware of this entanglement and
fearful of the possibility of conflict between two such crucial trading
partners. The response has been to send mixed messages, on the one hand
assuring the Americans of our unquestioning willingness to follow them
anywhere, on the other hand making it clear to the Chinese that under
no circumstances will we be drawn into conflict with them.

By contrast, the fact that the US is massively indebted to China,
and that this debt is growing by hundreds of billions of dollars each
year, seems barely to have impinged on American foreign policy
discussions. Strategic concerns about China have dropped off the radar
screen due to more pressing concerns in Iran and Iraq, but the implicit
assumption still seems to be that the US is the world’s sole hyperpower
with freedom to act as it chooses in response to any aggressive action
by China. In fact, any such conflict would almost certainly lead to an
economic crisis and force the US government into either inflation or
outright repudiation of its debt. At a minimum, this would be the end
of the US dollar as a reserve currency.

The Chinese position is much harder to read, not so much because of
traditional inscrutability as because communist power structures are
always opaque. As creditors, they are aware of the risks involved in
getting into conflict with their debtors, but it seems unlikely that,
in the event of a conflict over, say, Taiwan, that they would forgo the
power available to a creditor.

Read more on John Quiggin’s blog here.