Not a week goes by without a new controversy in the Australia-China relationship. Yet little economic analysis publicly available on where the escalating tensions are taking us. If Australia continues to push back against an increasingly assertive and aggressive China, it would be wise to assess the economic costs of doing so and to take steps to mitigate them.
It was only seven years ago when Australia and China were celebrating the establishment of a strategic partnership, coming after the release of a white paper on Australia in the Asian Century. And it was just five years ago when the Abbott government announced the finalisation of the China-Australia free trade agreement.
Yet a few weeks ago, China slapped an 80 per cent tariff on imports of Australian barley. This was widely interpreted as retaliation against Australia taking the lead in advocating a global inquiry into the origins of the coronavirus pandemic, including China’s handling of the outbreak. Conveniently, cutting back on barley imports from Australia has allowed China to meet its commitments to the Trump Administration to buy more American barley.
Other sources of friction likely also contributed to China’s tariff decision.
Australia applies anti-dumping duties on imports of Chinese steel and aluminium products. In its most recent trade and assistance review released in April 2020, the Productivity Commission reported that Indonesia had won a case it initiated with the World Trade Organization (WTO) against Australia’s 2016 action to impose anti-dumping duties on imports of A4 copying paper from Indonesia.
What does that have to do with China? The Productivity Commission cites a legal opinion that Australia now faces WTO proceedings from China that will almost certainly be successful. The Productivity Commission appears to concur with that opinion, stating the Indonesian copying paper ruling “opens the door for further successful challenges in analogous circumstances.”
Another possible explanation for China’s original investigation into barley dates back to the Australian government’s refusal to allow Huawei to roll out 5G networks across the country https://www.afr.com/companies/agriculture/china-s-fury-over-steel-is-behind-the-barley-threat-20200511-p54rwk
Whatever the motivation for China’s barley decision, new restrictions affecting Australian beef and coal exports to China were announced at the same time. Maybe all three decisions were coincidences, but probably not. It wouldn’t be the first time China has used its economic power in retaliation against a perceived foreign policy slight.
Obviously, the Australian government should do what it reasonably can to improve the relationship. And it should not insult China when there is no good purpose in doing so. But from time to time, probably with increasing frequency, Australia will adopt policy positions on foreign influence, cyber security, human rights, the South China Sea, Hong Kong, Taiwan and China’s activities in the region that annoy or even incense our largest trading partner.
Australia is heavily dependent on China as a market for our exports. But then again, with its 1.4 billion people, China is the biggest trading partner of 132 countries. So, we are not alone. But nor are we economically impervious to retaliation from China for Australian foreign policy decisions it dislikes.
Of course, Australia should seek to diversify its export markets, but that is easier said than done. Businesses in other countries will buy our goods and services only if they are good value for money. If they aren’t, then no amount of diplomacy, no free trade agreements and no leaders’ meetings or phone calls will compel private overseas businesses to buy Australian.
America’s trade war with China evolved quickly into a technology war. When speaking of decoupling from China, the US is primarily referring to a technological decoupling rather than taking trade measures that could lead to China cutting off its agricultural imports from the US or prohibiting Chinese tourists and students going there.
Unlike its earlier stages of modernisation, China’s next phase of development will not be based on cheap labour or heavy manufacturing. Rather, it will complete a digital revolution, featuring artificial intelligence, which is already well advanced.
America will not tolerate the embedding of Chinese digital componentry into its business technologies and consumer goods that could give China the upper hand in a digital cold war. Before too long, Australia could be obliged to choose between two technology spines: America’s and China’s. Our commercial interests will lean towards China’s, but our strategic interests will require us to pick America’s. That decision quite possibly will be costly to our commercial relationship with China.
China is literally laying the groundwork for reduced reliance on imports from Australia.
Chinese consumers can get by without premium-quality Australian beef, wine and infant formula. But China will judge it is vulnerable to any Australian decision, in a conflict, to curtail its exports of iron ore to China. It’s one reason China is pouring money into the development of a vast, rich, iron ore deposit in the West African nation of Guinea. Production could start within five years. Then China will depend on Australia for nothing.
Australia should not be bullied by an aggressive China. Nor should we embrace Donald Trump’s anti-China, anti-trade, anti-world, make-America-great-again folly. Neither the Coalition nor Labor has any intention of doing so.
Australia should chart its own course, a free, independent country, confident of our future, subservient to no one and willing to pay the economic price of our freedom. We should be pleasantly surprised if that price is not high, but we must assume the worst and prepare for it.
Craig Emerson was an economic adviser to Prime Minister Bob Hawke when Australia’s economic engagement with China was underway. As Australia’s Minister for Trade in the Gillard government he was the architect of the White Paper on Australia in the Asian Century.