Rising Australian - Chinese Trade Tensions Put Both Countries at Risk

Updated: Jun 27, 2020

The rise of Covid-19 has heightened tensions that had been brewing for years regarding frustrations around a lack of Chinese transparency and openness, especially in the realms of general trade policy, internal human rights and the BRI (Belt and Road Initiative). Such concerns, which have fostered rare bipartisan support with the United States, are quickly spreading to other nations who have come to realize the importance of a well-diversified supply chain. Indeed, an increasingly tough U.S. stance against Chinese interests, initially seen as harsh and anti-growth, have garnered considerably amounts of political sympathy, especially over the past several months within the EU, Great Britain and Australia. Arguments around growth maximization have given way, at least in part, to discussions around the need to limit political interdependence, even at the cost of higher prices.

Such recent increases in global tensions between China and much of the developed world is best highlighted by a rapidly deteriorating relationship with Australia. Disagreements between the two states began to boil over on April 20th, after Australian Minister for Foreign Affairs, Marise Payne, called for an independent review into the origin and spread of the Coronavirus. The move sparked a harsh Chinese disinformation campaign which focused on three key strategies:

  1. Propagating the idea that Australia is simply “following orders” coming from the U.S. state department. This type of messaging was an attempt to sow seeds of discontent with Australian citizens who value foreign policy sovereignty. In reality, such Chinese claims are far from truth. The Morrison Administration has shown a clear unwillingness to work closely with the United States. His administration was quick to back away from White House claims that an initial outbreak of Covid-19 could be sourced back to a lab in Wuhan.

  2. Accusing the Australian government of politicizing a health crisis. This was (and is) an attempt by the Chinese government to garner international sympathy at a time of intense scrutiny, especially in the early days of the Coronavirus.

  3. Singling out Prime Minister Morrison as a malicious actor. Also a way to present China as a victim rather than a contributor to the current Coronavirus situation.

Such an intense level of propaganda was an early warning that the Chinese politburo would do anything in it’s power to limit the effectiveness of an Australian foreign policy machine long seen as a credible institutional force. Indeed, the Chinese soon thereafter (1H May) issued yet another, ever more direct “shot across the bow,” instituting an 80% import tariff on Australian barley while simultaneously barring any beef imports from the country down under. While the move will have a relatively small impact (agriculture only makes up 3% of Australian GDP), a broader tariff regime would be hugely damaging for Australian mining interests, and thus the economy in total.

In recent years, Australia leaned heavily on domestic Chinese businesses as a key source of demand for mining outputs, a notable development given approximately 12% of Australian GDP consists of mining and related production activities. Through 2019, some 82% of all Australian iron ore (724 Mt), 22% of all Australian thermal coal (45 Mt) and 38% of all Australian LNG (29 Mt) was shipped towards China.

Source: Kpler

Australian reliance on the Chinese market puts the country in a difficult and risky position, but things are not as one sided as initial appearances suggest. There is certainly some optionality to shift thermal coal and LNG sales elsewhere (i.e. India, Japan, South Korea). The Chinese also have little choice but to lift iron ore volumes from Australia given the fact that China consumes most of the world’s seaborne iron ore shipments (70% of total) and Australia is by far the largest exporter (56% of total). Some Chinese demand could shift to Brazil, albeit the state is likely not equipped to displace more than ~150 Mt away from Australia. Indeed, iron ore is a key source of leverage for Canberra in a protracted trade war, especially as downstream supply chains recover from Covid-19 and the need for Chinese steel begins to trend higher once again.

Nevertheless, Australia faces questions around the long-term viability of a partnership with China. Given the recent movement against China by many in the West, Australia will ultimately face a choice, either bow to Chinese demands and preserve short-run growth or look to forge deeper partnerships with the United States and EU, a move that would likely result in highly negative economic outcomes for now, but could serve as a better long-term strategy for Australia. Of course, the latter course of action is highly speculative requiring notable amounts of heavy industry reshoring away from China.

The next few months will be a pivotal period in determining the direction Australia ultimately decides to take…