How does trade with China affect the Australian economy?

4 min read

Current China/Australia trade tensions pose no long-term threat to the Australian economy but the relationship will always have political undercurrents.

Last year, China’s trade relations made headlines due to conflict with the US. Now, the focus has moved to Australian/China relations and the tension arising from a pending World Health Organisation independent review into the origins of COVID-19.

In May 2020, China imposed several trade restrictions on Australian-sourced imports, including an 80% tariff on Australian barley exports, as well as suspending beef imports from four major meat processing plants. Publicly, China has stated the tariff hike on barley is due to anti-dumping allegations, while the ban on beef imports is due to violations of “inspection and quarantine requirements”. But how this plays out over coming months will reveal whether there is any underlying political motivation too.

The importance of trade

China is Australia’s largest trading partner, with two-way trade worth $194.6bn annually. This is more than twice that of Australia’s next largest trading partner, Japan1.

The significant trade partnership covers many industries. According to the Australian Trade and Investment Commission, China is Australia’s primary export market, our largest source of international students, our most valuable tourism market, a major source of direct foreign investment and our largest agricultural goods market2

In return, exports and investment have driven the rapid growth in the Chinese economy, although more recently the Chinese Government has been pursuing a transition to services and consumption to sustain future growth and development.

The strength of the relationship is underpinned by the China Australia Free Trade Agreement. Introduced in December 2015, it has allowed Australian companies to explore our largest export market, broadening their reach. 

While commodities like iron ore, coal, liquified natural gas and gold are undeniably our most exported products, and potentially come under threat from current tense Australian/China relations, services industries like tourism and education have also suffered due to COVID-19 border restrictions. The trade relationship is in a fragile place.

How dependent is the Australian economy?

The University of Sydney’s China Studies Centre recently hosted a panel discussion with four leading China experts. All agreed that while Australian China relations may currently be strained, there is no long-term threat to the commercial agreements, but warned the relationship will always be accompanied by political and diplomatic undercurrents.

Professor Hans Hendrischke, Professor of Chinese Business and Management at the University of Sydney believes a trade split from China is not an option for Australia.

“China and Australia are economically mutually dependent. China needs iron ore and food from Australia for recovery and rebuilding. Australia, on the other hand, needs exports.”

Agriculture is certainly the main target right now. The ban on beef importation from four major meat processing plants is anticipated to reduce the projected $3.5bn from beef exports to China by around 35% this year. And with no barley exports in the near future, agricultural bodies are carefully watching the wool industry, where approximately 75% of the industry’s income relies on Chinese demand. Wool export prices have dropped to a five-year low because there’s been little demand outside China since COVID-19 began. This has provided Chinese buyers with greater purchasing power and according to Rural Bank’s Chief Operating Officer, Will Rayner, “while prices would rise domestically in China if Australian wool was removed from the market, the impact would be far more significant to Australian producers than Chinese consumers”.

The discussion continues over who has more to lose from a breakdown in Australian/China relations.

Can Australia be proactive?

COVID-19 has taught Australia some valuable lessons about its onshore manufacturing capability. Australian businesses have proved their versatility, applying their research and design expertise to pivot production lines and produce personal protective equipment or other vital frontline medical supplies as overseas supply chains halted.

It’s possibly the start of a resurgence in Australian manufacturing, with many Australians expressing a preference to buy Australian and support our economy as we emerge from the pandemic.

The Australian Government has also responded positively, promoting the rebuilding of Australian manufacturing as something that could create much-needed jobs in the months and years ahead. It’s likely to be a niche approach rather than a call for mass manufacturing, with Australia increasing activity in markets where it’s already competitive, like health, food, energy and infrastructure1

Ironically, our competitiveness is based on our successful trade with China and our past ability to scale up and meet its large demand. Now could be the time to leverage this and use the increased capacity to supply other overseas markets, alongside China.

Professor Daojiong Zha (Professor of International Political Economy at Peking University) believes Australia also needs to show greater intent to invest in China to maintain good China Australia relations.

“I never hear people talking about Australian investment in China. If nothing else, by investing in China it gives you a more a direct feel about the changes in the Chinese market… What better way to know about a country’s economy, to predict its future change than by being on the ground?”.

There will always be underlying political motivation behind trade agreements, and there will always be room for improvement here. At the moment it seems there is a slight imbalance, with Australia placing far greater emphasis on the importance of the relationship than China, where we don’t necessarily feature high on the priority list of political relationships1.

But although it appears China holds all the cards, there are ways for Australia to not only improve trade relations and invest in a stronger future but also look outside China for new growth and new markets.

Where to now?

China’s next move is unknown. Will it impose further trade restrictions? And if so, which industries will be impacted next? But let’s remember, the Chinese and Australian economies are mutually dependent and it’s unlikely we’ll see a complete breakdown of Australian/China relations. 

China will face challenges when searching for alternatives to Australia’s largest export, iron ore, for example. And as China is likely to embark on further stimulus for its economy post-COVID-19, its demand for raw materials in construction will increase3.

We should be encouraged by Australia’s trade minister Simon Birmingham’s comments that “Australia is not interested in a trade war. We don’t pursue our trade policies on a tit-for-tat basis”. It reveals a commitment to ensuring Australia will make a constructive effort to deal with the conflict and preserve what’s been a long-standing and successful association between the two countries.

 

References

1 How will COVID-19 affect Australia-China business relations? https://www.sydney.edu.au/news-opinion/news/2020/05/01/how-will-covid-19-affect-australia-china-business-relations-.html
2 Australian Trade and Investment Commission https://www.austrade.gov.au/Australian/Export/Export-markets/Countries/China/Market-profile
3  Is trade the new weapon, BT Investment Solutions, 25 May 2020 https://www.bt.com.au/content/dam/public/btfg-bt/documents/professional/knowledge-centre/market-insights/weekly-economic-update-25-05-2020.pdf

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This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 29 May 2020. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. It does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, the Westpac Group accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material. This article may include projections which are predictive in character. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be affected by inaccurate assumptions or may not take into account known or unknown risks and uncertainties. The results actually achieved may differ materially from these projections.