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Australia’s asymmetrical trade with China offers little room to move

Posted By on November 10, 2020 @ 15:04

Australia has no realistic alternative market to China for a third of its exports and no viable source but China for almost a fifth of its imports.

By contrast, it is only as a supplier of minerals that Australia has any significance to the Chinese economy. As an export market for Chinese businesses, Australia is almost irrelevant, accounting for just 1.9% of their worldwide sales.

The asymmetry in the trade relationship has been laid bare by Beijing’s exercise of economic coercion, with interruptions to Australia’s sales to China of barley, coal, cotton, beef and lobsters and threats to more, including wine, sugar, timber, copper, wool, education and tourism.

The default position of the National Party, as expressed by its leader Michael McCormack in late August, is that the relationship is reciprocal: ‘We need China as much as China needs us [1].’

Deputy Nationals leader and agriculture minister David Littleproud has urged Australian exporters to exploit Australia’s full range of free trade agreements to diversify [2] their markets.

However, this is not practicable when China is the dominant customer. China accounts for more than a third of global sales for 22 of Australia’s top 30 exports to the nation. Those exports with a dominant Chinese market share were worth $123 billion in 2019, which was 32% of Australia’s total exports.

The impracticability of diversification is most obvious in iron ore. Australia will ship almost 800 million tonnes of iron ore to China this year. The total seaborne market in the rest of the world is only 460 million tonnes and Australia already captures around 100 million tonnes of that. If China didn’t buy our iron ore, there would literally be nowhere else to send it.

An analysis of Australian trade data [3] shows our overwhelming dependence on China for many other exports.

China’s share of Australia’s exports %
Nickel ore 100
Timber 95
Iron ore 83
Wool 77
Lobster 76
Cotton 64
Wood chips 57
Processed food 55
Barley 54
Pharmaceuticals 47

Source: Author’s analysis of Department of Foreign Affairs and Trade data [3].

Copper exporters, who sell a third of their output to China, have expressed confidence that they would be able to place sales elsewhere. Copper is a widely traded commodity with a liquid market. By contrast, the only option for lobster fishermen in the absence of sales to China is to stop catching lobsters.

China accounts for 31% of Australia’s education exports, earning $12.7 billion. Education is a diverse market, but China represents more than our next four largest foreign markets combined, so its loss could not simply be backfilled.

Australia is not only bound to China by the dependence of our exporters. China is also the dominant supplier of many of our imports. Items in which China has a dominant market share (greater than a third) account for 18% of Australia’s total goods imports.

China’s share of Australia’s imports %
Lighting 76
Toys, games 74
Textiles 74
Household equipment 72
Furniture 70
Computers 70
Electronic circuits 68
Steel/aluminium structures 66
Womens clothing 66
Phones & telecom equipment 62

Source: Author’s analysis of Department of Foreign Affairs and Trade data [3].

While the large shares for many consumer goods do not look like a strategic vulnerability, the multitude of industrial inputs for which China is the major or sole supplier is.

Iron ore is among a handful of commodities for which China is, as McCormack says, as dependent on us as we are on it. Australia supplies about 70% of China’s iron ore imports and its big eastern steel mills couldn’t operate without them. Australia has also become a vital supplier of as much as half China’s LNG imports.

China’s apparent ban on Australian coal imports is unlikely to be long-lasting. Australia isn’t a pivotal coal supplier for the Chinese power industry, but it is for China’s steel mills, providing an average of 40% of their metallurgical coal and, in the first half of this year amid coronavirus interruptions to other suppliers, as much as 63%.

World Bank data on China’s trade dependence shows that Australia supplies 37% of China’s minerals imports overall. For most agricultural exports, with the exception of wool, Australian sales have ready substitutes. In total, Australia is the source of 4.9% of China’s goods imports.

The classic study of the use of trade as an instrument of power [4] was by the German economist Albert Hirschman, who fled Germany for the United States before World War II. He developed his analysis based on Nazi Germany’s trade with southern and southeastern European nations.

The common feature for those countries was that Germany accounted for a huge share of their trade, but they represented only a tiny share of Germany’s trade. It is through the ability to interrupt trade or financial relations that one country exercises power over another.

Hirschman says the goal is to make it as difficult as possible for the smaller nation to replace the large one as a market or source of supply. That difficulty is a function of how much the smaller nation gains from the trade, the length and painfulness of adjusting to its loss, and the strength of vested interests in the smaller country.

The strategies large nations pursue to induce dependency include fostering vested interests, encouraging a wide gap between the pattern of production for exports and the pattern for home consumption, and importing goods for which there is little demand in other nations. These strategies fit well to China’s trade with Australia.

In a 1979 update to his 1945 work, Hirschman noted that the willingness to inflict deprivation is more easily quantified than the willingness to accept it, which is shaped by political resolve. The failure of 60 years of US sanctions on Cuba to bring the least change in its government policy highlights this.

The Australian government’s position is captured by the comments [5] Prime Minister Scott Morrison made to radio station 2GB in June: ‘[W]e are an open trading nation, mate, but I’m never going to trade our values in response to coercion from wherever it comes.’

Australia’s resistance to Chinese coercion is helped by the relative weakness of the vested interests represented by the National Party. The Nationals had always held the trade portfolio until the precedent was broken by the Abbott government in 2013.

The Nationals had a succession of influential and able leaders throughout the post-war period. Arthur Fadden was treasurer, while John McEwen, Doug Anthony, Tim Fischer, John Anderson and Mark Vaile were all ministers of trade. None would have sat quietly musing on mutual dependence while core markets were threatened.



Article printed from The Strategist: https://www.aspistrategist.org.au

URL to article: https://www.aspistrategist.org.au/australias-asymmetrical-trade-with-china-offers-little-room-to-move/

URLs in this post:

[1] We need China as much as China needs us: https://www.michaelmccormack.com.au/media-releases/2020/8/26/transcript-parliament-house-press-conference-26-august-2020

[2] diversify: https://minister.awe.gov.au/littleproud/speeches-and-transcripts/abc-breakfast-trade-china

[3] analysis of Australian trade data: https://www.aspistrategist.org.au/wp-content/uploads/2020/11/201110-D-Uren-China-trade-spreadsheet.xlsx

[4] classic study of the use of trade as an instrument of power: https://dspace.gipe.ac.in/xmlui/bitstream/handle/10973/29303/GIPE-026809.pdf

[5] comments: https://www.pm.gov.au/media/interview-ben-fordham-2gb-4

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