Australia-China Relations Nosedive over Trade Frictions

Introduction

The recent development of the Quad assuming a robust security character and further honed by Australia joining the Malabar naval exercise have received plenty of media attention in India and elsewhere. A host of analysts have discussed threadbare the nuances of this mechanism on whether Quad is a suitable or not in the wake of China’s rise and assertiveness in regional issues. Similarly, American President Donald Trump (soon to make way for Joe Biden) taking umbrage against China on its predatory trade activities has equally received extensive attention of scholars and opinion makers. In the midst of the on-going debates, the issue of rising tensions between China and Australia that have intensified in recent months, after Canberra called for a global investigation into the origins of the coronavirus, has received little media space or in the websites of leading think-tanks in India. Canberra’s move angered Beijing, which imposed trade curbs on Australian imports. This essay makes an attempt to fill this gap in order to understand how Australia has positioned with other countries of the region vis-à-vis China and what China’s punitive measures mean to the future of Australia-China trade relations.

Background of Australia-China Trade

A brief discussion on the evolution of Australia-China relations is necessary to put the current situation in perspective. Until the mid-1980s, Japan had emerged as Australia’s largest trading partner after the latter discovered enormous amount of minerals and raw materials in the 1960s and 1970s with Japan providing a lucrative export market for Australia. Australia’s export specialisation matched perfectly well Japan’s import specialisation as the former continued to feed Japan’s manufacturing industries. This was a win-win situation for both. Australia-Japan relations were overwhelmingly complementary. The present author wrote his doctoral dissertation on this issue.¹ Australia’s export contracted when Japan entered into the phase of “lost decades”² leading to dramatic fall in Japan’s demand. Pleasantly for Australia, this coincided with China’s start of high economic growth with Australia meeting the Chinese demands and feeding the Chinese manufacturing industries with precious raw materials. Like with Japan, Australia’s import specialisation with China remained concentrated on manufactured products. The outbreak of the coronavirus has now threatened to upset that mutual gain situation.

An issue not related to the Australia-China trade friction but relevant in the context of understanding Australia’s changing outlook towards Asian nations since the time it emerged suddenly rich because of new-found wealth in exporting raw materials. Australia felt proud in identifying itself with the Western nations as most of its trade was targeted with the Western nations. In a letter correspondence in 1979 with an Australian economist with strong influence to shape Australian government’s economic policies, Professor H.W. Arndt of the Australian National University, since deceased, assertively mentioned that Australia has consistently repudiated to be identified as an Asian nation and wants to align its destiny with that of the West. Recent developments reveal that Australia’s external outlook has undergone a dramatic change. Apart from expanding economic relations with a host of Asian nations in recent times, Australia has aligned its security interests with Asian allies as demonstrated by bilateral naval and Malabar naval exercises and member of the Quad security grouping.

So how does Australia joining others for demanding global investigation now into the coronavirus derail bilateral ties? Australia’s exports and imports in goods and services grew by a modest 0.6 per cent in 2016 but surged by 11 per cent the following year to $763 billion.³ There was a strong demand in the markets of China, Hong Kong and Taiwan as well as in the ASEAN region, Japan, South Korea and India for Australian goods and services, leading to the rise in two-way trade by 15 % and 21% to $217 and $286 billion for the two groups of countries respectively in 2017. The Asia-Pacific region (Asia and Oceanic region) accounted for 71 % of Australia’s two way trade in 2017. In dollar terms, Australia’s trade with the Asia-Pacific region jumped by $253 billion over the past ten years, while the combined European and American share of trade declined to 26 % from 33 % over the same period.⁴

Twelve of Australia’s fifteen largest markets within the Asian region accounted for a combined trade value of almost $500 billion. Of these the top five Australian trade partners in 2017 accounted for 53 % of total trade value were: China with $183 billion accounting for 24 % of total trade, thereby remaining Australia’s largest two-way trading partner; Japan with $72 billion accounting for 9.4 % of total trade, thereby overtaking US market as Australia second largest trading partner, to be followed by the U.S. with $68 billion, South Korea with $55 billion and India with $27 billion as the fifth largest trading partners.

The export trade composition was concentrated on iron ore and concentrates, coal, natural gas, wine, beef and personal travel (excluding education). The major imports consisted of personal trade services, passenger motor vehicles, refined petroleum products, telecommunications equipment and parts. With such strong export/import foundation, the demand for virus investigation by Australia now threatens to undo the burgeoning trade between Australia and China.

The Inquiry Demand and Reactions of China

When Australia joined the US bandwagon and the World Health Organisation (WHO) after initial resistance on Beijing’s pressure in demanding for an independent investigation into the coronavirus pandemic and refused to back down despite China sternly rejecting the proposal, this was a spark enough to ignite a trade dispute as threats and retaliation by either side followed.

Prime Minister Scott Morrison insisted Australia remains committed to the investigation demand, despite China's dismissal of the prospect. Beijing also rejected Foreign Minister Marise Payne’s calls for the inquiry, labelling the basis of such a review as groundless and without factual basis.⁵ Not deterred, Morrison pursued the inquiry demand as an issue of importance for public health. Morrison refused to back down as China was not transparent in disclosing when the virus originated in Wuhan late in 2019. In an opinion piece in China’s propaganda arm, the Global Times, author Wang Wenwen accused Australia of being a “petty follower” of the United States and of joining the “US bandwagon over virus policy”.⁶ The Australian Strategic Policy Institute's analyst Alex Joske said concerns over Beijing’s lack of transparency in handling the virus and the need for an independent inquiry were “totally justified”. Subsequently China refused entry to Alex and another scholar Clive Hamilton in accordance with its Entry and Exit Law of the People’s Republic of China.⁷

China followed this with economic coercion threat. Chinese ambassador in Canberra Cheng Jingye hinted that Chinese consumers could boycott Australian beef, wine, tourism and universities in response.⁸ When it comes to major public health issue, Australia does not want to succumb to Beijing’s use of threat despite it could impact its export products to China. China needs to be sensitive to its own interests as Australia is a “crucial supplier” to China key resources and energy that helped power much of China’s manufacturing growth and construction. In the wake of this deteriorating ties with China, Australia also has started looking at other markets such as India and the European Union with a view to lessen dependence on the Chinese market. Australia’s trade with the European Union was worth A$114.3 billion and India A$30.3 billion in 2018-19 and Australia is looking to augment these figures. Notwithstanding the escalating diplomatic tensions, Australia-China two-way trade grew by 20 %.⁹

Diversifying Production Bases

Australia’s tensions with China have led more companies to consider diversifying to other parts of Asia, rather than focussing on China alone. Many Japanese and South Korean companies have already started relocating their production bases from China to other Asian countries such as Vietnam, the Philippines, Bangladesh, Thailand and India, thereby reorienting the supply chains. Now Australia has joined these countries in similar strategy. The CEO of Australia and New Zealand Banking Group, the ANZ, one of Australia’s largest banks, Shayne Elliott has been talking to companies in Australia and New Zealand about opportunities in Asia.¹⁰

Retaliation and Counter-retaliation

Since Australia’s virus inquiry demand, tensions between Australia and China have progressively worsened. China has accused Australia of “political manoeuvring”. China decided to punish Australia in a way seen as retaliation to the Covid-19 inquiry. When Foreign Minister Payne called for an inquiry on 19 April for the first time, China reacted the following day labelling the probe demand as “politically motivated suspicion”, with Chinese Foreign Ministry spokesman Geng Shuang attacking it as “highly irresponsible”. Then in its Wolf Warrior diplomacy narrative on 27 April, the Chinese ambassador Cheng Jingye called the inquiry “dangerous” and warned that Chinese consumers would boycott tourism and stop sending Chinese students to Australia. Two weeks later on 10 May, China threatened to impose an 80 per cent tariff on Australian barley imports.

Australia’s barley exports to China are to the tune of $1.5 billion to $2 billion and are among the top three agricultural exports to China. Barley is a grain commonly used in breads, soups, stews but is largely grown as animal fodder and as a malt source in alcohol like beer. Earlier, Australia was accused of “dumping” its barley that was sold at a lower price overseas than at home, thereby leading to “substantial damage” to the domestic industry of the importing country. This time around, China used the alibi of inquiry demand by threatening to impose high tariff on Australian barley imports.¹¹ Then on 12 May, China suspended beef imports from Australia and blacklisted four Australian abattoirs, affecting $3.5 billion of Australia’s beef exports as the four meat works represented more than one third of beef exports from Australia to China. After initial denial that the ban was related to the inquiry demand, China’s international economic lawyer Weihuan Zhao confirmed that the beef ban was related to the Covid-19 inquiry.

China soon found itself on the back foot as 62 countries joined the demand for the inquiry by 17 May. The following day, China went ahead to impose 80 per cent tariffs on barley imports, thereby artificially increasing the price. A full-blown trade war had begun. Australia started looking to other markets such as India, Saudi Arabia and Kuwait to export barley. By 19 May, more than 120 countries had co-sponsored the motion at the WHO calling for a Covid-19 inquiry. Australia was ready to face China’s bullying tactics.

China’s retaliatory measures and trade restrictions adversely affected the Australian economy. The economy already in recession with jobs disappearing, Australia found itself in the receiving end. There were other areas such as iron ore, coal and natural gas that China could target, Australia feared. The ensuing trade frictions soon reflected in the volatility in the share market, leading to further weaker economic growth. The fears of a second wave were also worrying the policy makers.

The retaliatory measures were soon expanded when China threatened to ban Australian wheat to the tune of $400 million imports, thereby joining the list of commodities such as barley, sugar, red wine, timber, coal lobster, copper ore and copper concentrates that came under higher tariff regime. Taking a tougher stand, the tariffs on these products came into immediate effect even if these goods were already paid for and already arrived in Chinese ports.¹²

Not remaining silent, Australia too resorted to anti-dumping trade contest with China. Australia’s Anti-Dumping Commission decided to extend anti-dumping duties on Chinese steel sinks. Soon eight anti-dumping actions against Chinese products were added. Some of the punitive tariffs imposed on Chinese products were as high as 78 %.¹³ Space prevents a detailed discussion here.

Shanghai Import Expo

The on-going trade spat also affected Australia’s participation in Shanghai International Import Expo held between 3 and 10 November where verbal instructions by Chinese authorities were issued to effectively impose a trade ban on a variety of Australian goods, raising concerns about China’s trade regime transparency and true intentions.¹⁴ The Chinese government projection of an image of promoting free trade and goodwill stood exposed highlighting its hypocrisy and double-standards.

Effect on Universities

Another fall out of the trade tension is that it has affected Australian universities as they face a “catastrophic China problem”. Some Universities are over-reliant on revenue generated from the Chinese students. The trade tensions have led to a drop in enrolment of Chinese students, putting the Universities to a “massive financial risks” of closures.¹⁵ Unless the government steps in to avert a crisis, the universities depending so far on revenues generated from Chinese students might face a grim future. If the government does step in bailing out with subsidy, the burden could finally fall on the taxpayers who shall have to foot the bill. It transpires therefore, that a trade disputes between two countries does not just remain confined to trade and economic exchange issues but also have cascading effect and spill over to other areas as well.

Concluding Remarks

Bilateral ties having moved south, a great deal of efforts are now needed by both sides to restore of mutual trust and thereby normalcy. If bilateral relations are to be brought back to the right track, a lot of give and take is necessary so that mutual gains that are lost can be restored. Truism is that unless China changes much of its questionable external behaviour, both with individual nations and the region, and gains their trust and confidence back, it seems next to impossible that Australia shall move away from aligning its interests with nations that respect democratic values, international law and global rules and align its interests with the authoritarian system that China symbolises both in principle and practice, no matter if Australia’s economic interests are impaired to some extent. The reversal of downward spiral in relations does not appear to be in the near-time horizon.

Endnotes

1. A revised and updated version of the dissertation was published subsequently as a book. See, Rajaram Panda, Pacific Partnetship: Japan-Australia Resource Diplomacy (Rohtak: Manthan Publications, 1982).
2. See, Hiroshi Yoshikawa, Japan’s Lost Decade, (1999), International House of Japan Press, Tokyo, pp. 267.
3. Edmund Tang, “Australia’s two-way trade with the world was up 11 % to $763 billion in 2017” 23 July 2018, https://www.austrade.gov.au/news/economic-analysis/australias-two-way-trade-with-the-world-was-up-11-to-763-billion-in-2017 [3]
4. Ibid.
5. Tom Stayner, “Australia and China clash over independent inquiry into coronavirus pandemic”, 21 April 2020, https://www.sbs.com.au/news/australia-and-china-clash-over-independent-inquiry-into-coronavirus-pandemic [4]
6. Wang Wenwen, “Australia joins US bandwagon over virus policy”, The Global Times, 20 April 2020, https://www.globaltimes.cn/content/1186211.shtml [5]
7. Mazoe Ford, Samuel Yang and Michael Walsh, “China bans Australian academics Clive Hamilton and Alex Joske from entering country”, 24 September 2020, https://www.abc.net.au/news/2020-09-24/australian-scholars-banned-from-entering-china-state-media-says/12698410 [6]
8. Kirsty Needham, “Australia asks China to explain 'economic coercion' threat in coronavirus row” 28 April 2020, https://www.reuters.com/article/us-health-coronavirus-australia-china-idUSKCN22A14H [7]
9. Ibid.
10. Weizhen Tan, “‘Asia isn’t just China’: CEO of Australia’s ANZ says more companies are looking beyond China as tensions flare”, 29 October 2020, https://www.cnbc.com/2020/10/29/anz-ceo-on-australia-china-tensions-asia-diversification.html [8]
11. Jessica Yun, “China’s trade tussle with Australia: Here’s what’s going on”, 10 May 2020, https://au.finance.yahoo.com/news/china-australia-trade-tussle-022759773.html [9]
12. Su-Lin Tan and William Zheng, “China-Australia relations: ban on US$400 million Australian wheat imports looms”, 3 November 2020, https://www.scmp.com/economy/china-economy/article/3108176/china-australia-relations-ban-us400-million-australian-wheat?utm_medium=email&utm_source=mailchimp&utm_campaign=enlz-us [10]
13. David Uren, “Did Australia start the anti-dumping trade contest with China?”, 27 October 2020, https://www.aspistrategist.org.au/did-australia-start-the-anti-dumping-trade-contest-with-china/?utm_medium=email&utm_campaign=Weekly%20The%20Strategist&utm_content=Weekly%20The%20Stra [11]
14. Amanda Lee, “China-Australia relations: looming ban on Australian goods clouds Shanghai import expo”, 6 November 2020, https://www.scmp.com/economy/china-economy/article/3108787/china-australia-relations-looming-ban-aussie-goods-clouds [12]
15. Jessica Yun, “Australian universities face a ‘catastrophic China problem’”, 21 August 2019, https://au.finance.yahoo.com/news/australian-universities-financial-risk-chinese-students-063559457.html [13]

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