As tensions rise between Australia and its largest trading partner, China, the former asks whether it can really afford to sever economic ties
In a private conversation with German Chancellor Angela Merkel in late 2014, Australia’s then-Prime Minister Tony Abbott confided that Australia’s policies towards China were driven by two things: “fear and greed”. It was an awkward comment to find its way into the press – not least because, in official statements and documents, Australian officials usually waxed lyrical about the importance of maintaining Sino-Australian relations. But Abbott’s admittance was revealing of the bipolarity at the heart of Australia’s relationship with China.
Australia’s economy is highly reliant on the China. “Of all the major liberal democracies, Australia has the largest economic links with China in terms of investment, and flow of goods,” said Kerry Brown, Professor of Chinese Studies and Director of the Lau China Institute. This close economic relationship has become more problematic as China has moved to erode the freedoms of citizens in Hong Kong and repress the Uighur population, prompting liberal democracies to weigh their trading relationships with the country against their own values.
But it’s not just China’s human rights record that had been cause for concern. China’s made it increasingly clear that it’s willing to use economic coercion to penalise Australia during political spats. When Canberra called for an inquest into the origins of the coronavirus in April, Beijing responded by slapping tariffs on beef and barley exporters and warning students and tourists against travelling to the “racist” country. Ever since, fears have grown among Australian policymakers, businesses and economists that the country’s economic dependence on China could be a major liability.
Close ties
Australia owes its economic prosperity partly to China’s meteoric rise. As the Asian country rapidly industrialised from the 1970s onwards, Australia tangentially benefitted through the supply of raw materials, iron ore and, more recently, agricultural produce. “[These economic ties] have ensured that even during the economic crisis of 2008-9, Australia was able to maintain good growth, and has not had a recession since 1991,” said Brown.
In more recent years, China has also become a major client for Australia’s agricultural produce, tourism and education. China is the largest source of tourists and also foreign students to Australia, injecting billions into the economy every year.
Although this relationship had been mutually beneficial, it’s worked more in Australia’s favour. China’s own reliance is not quite so strong. “The relationship is asymmetric because of the size of the two economies,” said Hans Hendrischke, professor of Chinese business and management at the University of Sydney Business School. “In summary, Australia’s dependence on China is across the board, including goods and services, whereas China’s dependence on Australia relates to steel for infrastructure investment and to goods and services in demand by China’s middle-class consumers.”
That economic dependence is only increasing. Despite rising tensions, Australia continues to record a trade surplus with China. “In June 2020, half of all Australian goods exports (48.8 percent) went to China,” said Hendrischke. This figure is up from a third in February. Exports of iron ore to China, in particular, are on the increase, according to the Australian Bureau of Statistics, given China’s rising demand for steel to supply new infrastructure projects.
Rising tensions
For a long time, Australia and China’s relationship proceeded in a state of relative harmony. “The relationship over the last 20 years in particular has been one of opportunism and expediency on the part of Australia, just enjoying the benefits and never thinking much about the more complex issues,” said Brown. “That has slowly changed over the last few years, and seems to be dramatically changing now.”
Since the start of the pandemic, relations with China have steadily worsened. Australia’s criticism of China’s handling of the coronavirus outbreak angered the communist state. At the same time, when China imposed its national security law on Hong Kong, Australia warned its citizens against travel to Hong Kong and suspended its extradition treaty with the territory. In a secretive process, China sentenced an Australian man to death for drug smuggling. “Government and media attitudes towards China have changed toward animosity if not outright hostility,” said Hendrischke.
There are economic consequences to this rising tension. In May, China placed tariffs on 80 percent of Australian barley and bans on abattoirs that could block 35 percent of Australia’s exports of beef to China.
The damage caused by China’s recent tariffs won’t be immense; these exports represent only a small amount of the total A$153bn that represented Australia’s exports to China in 2019 (an amount equivalent to 7.7 percent of Australia’s GDP). There is only so much harm China can inflict without harming its own interests.
“Looked at from the point of view of the Chinese government not wanting to hurt its own economy,” said Michael Shoebridge, Director of Australian Strategic Policy Institute’s Defence, Strategy and National Security programme, “the most vulnerable sectors are those where there is not a deep structural need for Australian exports and services as part of trying to stimulate China’s economy during the pandemic. So, iron ore, other natural resources and energy seem the least vulnerable – and the trade with China has been growing over this year as a result. Wine, dairy and other exports that are aimed at China’s wealthy and its rising middle class are more discretionary imports where Beijing may have room to act coercively – even though Chinese consumers value the quality of these Australian products highly.”
Since tourism and education are not exclusive to Australia, these sectors are among those more vulnerable to economic coercion by China. For instance, China’s call for its citizens to avoid the “racist” country is predicted to have a knock-on effect on Australia’s tourism and education revenues.
Shoebridge points out that this was something of an empty threat. “Chinese tourists and students are stopped anyway because of the pandemic,” he said. “So, these ‘future threats’ from Beijing only show the manifest risks to Australian business and universities if they continue to build their business plans on assumptions of a reliable market from China. Beijing is actively raising the sovereign risks that companies and other institutions need to factor in to doing business with China.”
