For China-Australia relations, year 2020 was the year when things went from bad to worse and the prevailing situation suggests 2021 may not be much brighter either. The article highlights various developments in the region having an impact on China-Australia relations. The context in which things have been changing dramatically in the last decade has contributed enough to the complexities in their relationship.
China-Australian relations go back into history with the establishment of diplomatic relations in 1941. The ties have grown over the years with more and more engagement in various sectors. Economically, the countries have been trading since the early 20th century, but the scale of such interaction was limited. The bilateral trade picked up since 1972 to an extent that China had become Australia’s largest trading partner in the past years. Culturally too, the states have active relations with the Chinese diaspora living in major Australian cities and Confucius institutes within Australian Universities to foster better relations. With an initial reluctance in 2007 to pursue closer political or military ties with China, the Sino-Australian political ties have grown over the years under different Australian Prime Ministers.
Engagement over the Years
On the trade front, the bilateral relations are characterised by strong economic relations. China is Australia’s largest trading partner, while the latter is the leading source of mineral resources for the former. China’s strong demand for iron ore, coal and liquefied natural gas had helped Australia escape even the worst effects of the global financial crisis of 2007-08. China-Australia Free Trade Agreement (ChAFTA) has delivered significant trade benefits and given them access to each other’s local markets and stimulated economic growth, leading to job creation over the years. In 2018-19 as well, 33 per cent of Australia’s total exports and 19 per cent of its import bill were towards China.
On Investment side, both states are attractive investment destinations. Australia attracts greater Foreign Investment (FI) due to its infrastructure, which benefits it in the form of more productivity and more job creation. Chinese investment in Australia grew since 2007 reaching US$ 32 billion in 2013, making China the 8th largest investor in Australia. Moreover, Australian investment in China was also valued at US$ 30[VC1] billion, making China its 12th largest investment destination. However, Chinese investments in Australia have been declining since 2016 because of a change in Chinese investment strategy and investments made only in sectors that are relevant to developing Chinese consumer market at the expense of Australian markets.
In the tourism and education sector, the diplomatic relations between the two countries have been bolstered over the years. The number of short-term holidaymakers arriving in Australia from China has risen by 14.5 per cent per year since 2013 to almost 1.5 million in 2018. Chinese visitors contribute relatively more to the Australian economy than other visitors due to the large number of Chinese students studying there. The Tourism Australia data shows almost about 20 per cent of the total Chinese visits in 2019 were for educational purposes.
Downward Trend in Relations
Australia’s early and eager calls for inquiry into the origins of the pandemic were met with Chinese retaliation by imposing trade restrictions on Australian exports in the beginning of the year 2020. This move has worsened brewing tensions between the two countries which were already fragile since 2018 when Australia banned Huawei Technologies Co. from its domestic 5G network on national security grounds and urged other countries to do the same. Much before calling for an investigation into the origins of the pandemic, Australia had initiated an anti-dumping investigation into various Chinese export products such as aluminium, tube steel, A4 copy paper, among others. Media and diplomatic relations also became a target of this souring relations with journalists in both countries facing expulsion and investigation.
The unilateral move of China to change the status quo and sheer disregard to the International Law in the South China Sea is becoming another issue between the two countries. Chinese historic claims over the Sea waters and resources, establishment of artificial islands, frequent harassing of Vietnamese ships and encroachment into Malaysian and Indonesian waters coupled with military drills in the contested waters are raising concerns amongst more and more states in the region. These activities involve military and non-military forms of assertiveness and coercion aimed at achieving strategic interests without provoking a major conflict.
Additionally, coal and timber trade was also hit hard. Chinese imports of Australian coal have fallen sharply from 9.44 million tons in May to 5.17 million tons in October and to a low of 1.79 million tons in November. The trade hits have proved fatal for Australian trade and economy and it has approached WTO against China’s ban. This trade war is a classic example of how, in an anarchist and globalised world, economy[VC2] and geopolitics are not kept separate by states when it comes to global as well as regional power struggles.
What does it mean for the Two Economies?
About US$ 21 billion of Australia’s US$ 147[VC3] billion in goods and services exports to China have been affected by this trade war. Australian winemakers are the ones who are most hit by this, with a 28 per cent price fall estimated for wine grapes. The country could break into new markets for wine like the UK and the US. However, high-quality wine formerly expected to be exported to China will be sold into other markets at much lower prices (2/3rd exports to China were priced at A$10 per litre or more, whereas the wine sold in the UK and the US was predominantly from the sub-A$5 segment).
The next worst affected product is barley. However, Australia is eyeing other markets like the Middle Eastern countries, mainly Saudi Arabia, and South East Asian countries to sell it, making up for the loss incurred by Chinese restrictions. Australian wheat and cotton are identified as the next potential items to be targeted by China amidst its tensions with Australia. China’s threat to curtail travellers and students who contribute significantly to the Australian economy can be another major hiccup in the growth of Australian economy and tourism industry.
While the Chinese economy would also suffer from this economic coercion against Australia as minerals, mainly iron ores, are not something easily and readily supplied from anywhere else. The huge and high-grade iron ore mines of the Pilbara region in Western Australia ships 70 per cent of China’s imports, earning some A$80 billion a year. In fact, in the first nine months of 2020, China relied on Australia for 60 per cent of its imported iron ore — crucial to make the steel needed for building bridges, factories and high-rise apartment blocks. Disruption in iron ore trade will have greater impact on Chinese companies as a number of steel mills could be hit with a supply cut, which in turn could have a massive impact on the domestic steel industry. Therefore, both economies stand to lose from the ongoing trade tensions.
Australia’s relationship with China is destined to be in a constant ebb and flow, following suspicion and scrutiny dominating the bilateral relations this year too. The call for an investigation into the origins of COVID-19 and questioning Chinese illegal territorial claims over the South China Sea with economic coercion in the form of limited trade war, threat of cyber espionage and subsequent banning of Huawei from its market and China’s disregard for international law will be some issues that will haunt China-Australia relations. With both sides unlikely to back down in any stated issues and areas and with shrinking policy space among diplomacy will dent the decade-long relationship.
This bump in relations could severely harm both economies. Unlike the United States, Australia is no hegemon and does not strive to be one as well and therefore, it needs Chinese markets to maintain economic stability, if not desire growth. If the trade relations further deteriorate, the short-term impact on Australian economy would be quite prominent as the bilateral trade accounts for 11 per cent of Australia’s GDP. China also stands to lose in terms of its iron ore and coal trade as a certain degree of trade substitution is bound to be undertaken by Australia. As the perils and pitfalls of over-dependence on Chinese markets are also being realised by the Australian manufacturers and traders, diversification and structural changes in commodity trade and expansion of export markets would be the way forward for them. Looking at the pace with which China is imposing trade restrictions on Australian exports, the economic struggle is expected to be long. Meanwhile, India could take advantage of the situation by further reinforcing bilateral ties with Australia as an alternative to the loss incurred in relations with China. It would also be interesting to see how the US can leverage from this situation. Would the Biden administration renter CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) to counter China’s growing economic influence in the region or would it go about differently to reap the benefits of the state of affairs and the changing political and economic dynamics in the region?
Views expressed are personal and need not reflect or represent the views of Centre for Public Policy Research.
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