How China’s trade restrictions are affecting the Australian economy

4 min read

Trade tensions between China and Australia have been rising throughout 2020. Are these long-term threats or just political manouvres?

Last year, China’s trade relations made the headlines due to its conflict with the US. The focus has since moved to Australia/China relations and the tension arising from a pending World Health Organisation independent review into the origins of COVID-19. Australia helped lead the push for this international investigation.

This year, tensions between the two countries appear to have risen dramatically as China continues to impose trade restrictions on Australian-sourced imports. Some of the major restrictions include an 80% tariff on Australian barley exports, which was then followed by a ban on Australia’s biggest grain exporter, and the suspension of beef imports from five major meat-processing plants.

China has also launched an anti-dumping investigation into Australian wine exports and in October, Chinese mills were told not to process Australian imports. China is Australia’s biggest customer for its cotton industry, with 65% of the crop going to the country. Chinese customers have also been advised to defer orders of Australian thermal and metallurgical coal and in October China customs banned imports of log timber and delayed imports of Australian lobsters.

As well, tourists have been discouraged from visiting Australia while Chinese students have been told to look at other countries for their education – although COVID-19 has prevented this from occurring at the moment.

The above suggests that the chances of any improvement in Australia-China relations are unlikely to happen any time soon.

An important trading relationship

China is Australia’s largest trading partner, with two-way trade reaching a record $252bn in 2019 and accounting for 27.4% of Australia’s trade with the world. This is far higher than that of Australia’s next largest trading partner, Japan1, where two-way trade was $88.5 billion in 2019.

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 and most valuable tourism market, a major source of direct foreign investment and our largest agricultural goods market2.

In return, exports and investments 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.

Whilst commodities like iron ore, coal, liquified natural gas and gold are undeniably our most exported products, and potentially come under threat from current tense Australia/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 Australia on China?

When the University of Sydney’s China Studies Centre hosted a panel discussion with four leading China experts, they all agreed that while Australia-China relations may currently be strained, there is no long-term threat to the commercial agreements. However, they 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 in the interests of either country.

“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. Australian beef exports to China were worth $2.67 billion last year and the current ban on beef importation from five major meat processing plants is anticipated to reduce the projected $3.5bn from 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 rely 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”.

Australia as a manufacturer

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 products 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. In October, the federal government launched a “new era of manufacturing” as part of its JobMaker Plan to rebuild the economy, create jobs and recover from COVID-19. The Prime Minister committed to around $1.5bn in new funding over the next four years for the strategy and the plan identified six areas of manufacturing that it wants to firmly establish within a decade.

Australia’s competitiveness has largely been 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.

There will likely always be an underlying political motivation behind trade agreements, and there will always be room for improvement. At the moment, as a result of China’s trade restrictions, it seems there is an imbalance, with Australia is 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 – and perhaps through the government’s recent push to ramp up the country’s manufacturing offerings – to 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? It’s worth remembering, the Chinese and Australian economies are mutually dependent and it’s unlikely there will be a complete breakdown of Australia/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 the comments of China’s former ambassador to Australia, Madame Fu Ying, who in October called for an end to “confrontation and abusive language” in the exchanges between the two countries. She said China had a huge demand for Australia’s resources and it was in both countries’ interests to work together.

Australia’s Trade Minister Simon Birmingham also said in May 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 Department of Foreign Affairs and Trade: China country brief. https://www.dfat.gov.au/geo/china/Pages/china-country-brief#:~:text=China%20is%20Australia's%20largest%20two,per%20cent%20year%20on%20year).
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 26 November 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.