Desperate Measures

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Australia’s trade relationship with China hit a new low last Friday when it was reported in the Chinese media that seven Australian commodities (wine, coal, barley, copper ore and concentrate, sugar, timber, wine and lobster) amounting to $6 billion in annual trade would be turned away from Chinese ports and airports. It remains to be seen whether this represents an official country-wide ban on these products, which could potentially be in breach of World Trade Organisation (WTO) rules and the China Australia Free Trade Agreement (ChAFTA), or simply a “scare campaign” or “warning shot” from the Chinese Government.

Many readers have asked me for my views on what’s happening here, and so at the risk of jumping into dangerous waters, here goes:

  • I think the position is likely to remain unclear for some time, and will probably get worse before it gets better. We could see major disruption across the board for Australian trade in China, including in sectors which have been spared so far (eg iron ore, beef, dairy, citrus etc.)
  • The Chinese Government will want to avoid breaching WTO or ChAFTA commitments for fear of exerting permanent long term damage. I have seen this happen before with an unofficial ban on American ‘Sunkist’ oranges which occurred at a time when I was leading an Australian Citrus Mission to China in 2014. It only lasted for a few months but it caused short term disruption and pain for American growers, and advantages for Australia.
  • Australia is the 13th largest economy in the world and heavily dependent on China for trade, export and investment. Going out on its own to directly criticise China at the start of the Covid-19 pandemic, and demanding an enquiry led by WHO officials with powers akin to that of weapons inspectors was unnecessary, provocative and reckless. With hindsight, I’m sure everyone will agree that this could have been done much better, with the support of other countries and behind closed doors.
  • To make things worse, the Australian Government has, in the eyes of the Chinese, ‘doubled down’ on their hostility towards China, providing enthusiastic support for US policies designed to ‘contain China’ (e.g. via the Quad, Five Eyes, joint military activities etc) and targeting Chinese companies, individuals and interests in Australia. This has created an atmosphere of mistrust, suspicion and fear.
  • It’s unrealistic to think that Australia can quickly solve this problem by moving trade into new countries and diversifying the risk from over-exposure to China. Countries like India, Indonesia and Japan often get mentioned as new markets but it will take 20 years or more to build the deep relationships necessary to replace those that have been successfully built in China over recent years. And it’s hard to know whether these countries will welcome Australian trade after the stoush with China.
  • As mentioned by former Australian Ambassador to China, Geoff Raby in his new book, Australia’s leaders “have not prepared the public for the economic consequences of these policies”. I think this is an important point as the full effect of these actions are only just being felt. Australia’s wealth, prosperity and standard of living has been buoyed by China trade and investment for the past 20 years. Taking it away will have serious long term economic consequences, which nobody is facing up to yet.
  • Whilst considerable damage has been done, it’s not all over yet. China won’t make it easy but a genuine Government-wide commitment to repairing the relationship, led by the Prime Minister, could still turn things around.
  • China has announced that it expects its imports to grow by $22 trillion over the next 10 years which is a good incentive to repair the Australia-China relationship.

Australian exporters will be holding their breath. The Covid crisis has been bad enough and the Australian economy is already in deep trouble. Desperate times call for desperate measures.

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