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China-Australia trade tensions have escalated significantly
during 2020, and IHS Markit's PMI data show Australia's exports
slumping.
With Australia exporting around one-third of its total exports
to mainland China, there is a high degree of vulnerability to
disruptions in bilateral trade. Recent developments have resulted
in mounting concerns about the economic implications to the
Australian economy from a protracted disruption of Australian
exports to China.
Latest data from IHS Markit Commodities at Sea highlights the
significant impact of bilateral trade frictions on Australian coal
exports, with 76 bulk carriers loaded with Australian coal waiting
at anchorage at the various Chinese ports. China's General
Administration of Customs has also halted barley shipments from
Australia since September 2020, while exports to China of a number
of other products have also been impacted.
The escalation of trade tensions between China and
Australia
Mainland China is the largest export market for Australia,
accounting for 32.6% of total exports of goods and services in the
2018-2019 financial year. The importance of mainland China as an
export market for Australia has increased dramatically over the
past two decades, with Australian exports to mainland China having
grown from AUD 8.8 billion in the 2000-01 financial year to AUD 153
billion in the 2018-19 financial year.
Consequently, Australia has become increasingly vulnerable to
trade sanctions by China on its exports. Due to escalating
frictions on a wide range of issues, bilateral trade tensions have
increased significantly during 2020.
Total Australian exports of services to mainland China amounted
to USD 18.5 billion in 2018-19, with education and tourism
accounting for around 90 per cent of this total. Due to the
Covid-19 pandemic, Australian exports of tourism and education
services to China have largely come to a halt since April 2020 due
to the strict travel bans by Australia on foreign visitors entering
the country. Since Australian exports to China for both education
and tourism have been severely disrupted due to the Covid-19
pandemic, this has removed any scope for trade policy action on
these sectors, at least while the travel bans remain in place.
The economic shockwaves to Australia's service sector exports
due to the pandemic are of course not limited just to exports to
China. Total Australian services exports to all countries in
September 2020 were down around 40% year-on-year, according to
trade data from the Australian Bureau of Statistics. The latest
flash
IHS Markit Australian Services PMI reflects the continuing
contractionary conditions that are impacting on Australia new
export orders in the services industry.
However, Australian exports of goods have been impacted by an
increasing array of trade policy actions by China. Even during
2019, there had been some temporary disruptions of Australian coal
shipments to certain Chinese ports, with long delays in permission
to unload Australian coal cargoes at Chinese ports.
In May 2020, the Chinese government also imposed punitive
tariffs on Australian exports of barley to China, amounting to a
combined 80.5% tariff on Australian barley, comprised of a 73.6%
anti-dumping duty and a 6.9% countervailing duty. In September
2020, China's General Administration of Customs said barley
shipments from Australia would be halted after they stated that
pests were found on multiple occasions. Australian barley exports
to China amounted to around AUD 1.4 billion per year prior to
China's trade policy measures, with 70% of Australian barley
exports having been shipped to China.
There has been a more intense escalation in trade measures by
China in relation to Australian products since early November 2020.
These measures, which include unofficial guidelines to Chinese
importers as well as non-tariff measures such as customs
procedures, have created considerable concern amongst Australian
exporters of a wide range of products. The scope of the Chinese
policy measures is reported to include beef, lobster and wine.
According to Chinese and international media reports, Chinese
traders received an informal notice from authorities that
Australian products in seven categories - barley, sugar, lobster,
wine, timber, coal, and copper ore and concentrate - will not be
cleared in customs from 6 November 2020.
However, the Chinese government denied any restrictions on
Australian commodities. Amidst the confusion, there were reports
that the Chinese end-users and traders are trying to resell their
cargoes that have not reached Chinese ports and could cut down
arrivals of Australian cargoes in the short term at least.
Australian total exports of goods to all countries were down 3%
year-on-year in October 2020, with exports of coal down 27% and gas
exports down 43% year-on-year. However, the overall contraction in
exports has been mitigated by the continued strong performance of
certain mineral commodity exports, notably metal ores, which rose
37% y/y in October 2020. This strong increase in metal ore exports
has been helped by robust iron ore export volumes as well as
buoyant iron ore prices throughout 2020. Meanwhile gold exports
have benefited from the surge in world gold prices during 2020.
Due to the importance of iron ore in overall export values to
mainland China, total Australian exports of goods to China actually
increased by 13.3% y/y in October 2020, despite the various trade
policy actions on a range of Australian exports during 2020.
Among the impacted export sectors, the Australian wine industry
has seen rapid growth in exports to mainland China over the past
decade, which reached AUD 1.2 billion in the year to September
2020, amounting to around 39% of total Australian wine exports.
However Australian wine exports to China are reported to have faced
severe customs clearance hurdles since early November. China's
Ministry of Commerce announced on 18th August that it had launched
an anti-dumping investigation into Australian wine. As a result,
the Australian wine industry has reported that new shipments of
wine to mainland China have been significantly curtailed while
these hurdles to customs clearance continue.
Disruption of Australian coal exports to
China
Australian coal shipments to China are also reported to have
been delayed at Chinese ports.
According to IHS Markit's Commodities at Sea data, during 02-08
November 2020, no vessels laden with Australian coal vessels were
discharged at the Chinese ports. In the last two and half weeks
(09-24 November 2020) only nine vessels laden with Australian coal
were discharged which is significantly below the normal levels
analyzed in the past. As per IHS Markit shipping data, a total of
76 bulk carriers loaded with Australian coal are waiting at
anchorage at various Chinese ports, with major congestion at
Jingtang (22 vessels), Caofeidian (15 vessels), and Bayuquan (9
vessels). In terms of vessel segments, out of a total of 76 ships,
26 are Capesize vessels while the remaining 50 are Panamax vessel
segments.
Due to the long queue, some vessels are also being diverted. For
example, MV NAVIOS STELLAR (169,001 dwt) had loaded coal at
Newcastle (sailed 5 October 2020) initially destined for Zhoushan;
however, around 19 October 2020 got diverted to Krishnapatnam,
India.
As a result of the severe disruption to Australian coal cargoes
being shipped to China, latest IHS Markit Commodities at Sea data
also shows that new loading of shipments of Australian coal cargoes
destined for China have slumped in September and October, with
weekly data also showing very weak coal shipments for China during
November.
According to the McCloskey Coal Report (13th November 2020
edition) published by IHS Markit, Chinese buyers have been turning
to the Atlantic market for replacement coal shipments due to the
difficulties of customs clearance for Australian coal. Chinese
buyers have been picking up numerous cargoes from South Africa and
Colombia. In January-September 2020, Australia exported 74.9 mt of
coal to China (41.1 mt of thermal, 33.6 mt of met coal), but by
October 2020, monthly Australian coal shipments to China had fallen
to a total of around 3 mt of both thermal and met coal, compared
with 7.5 mt in the same month a year ago. In calendar 2019,
Australia exported around 93 mt of coal to China.
Asia-Pacific Free Trade Agreements
Both China and Australia are members of the Regional
Comprehensive Economic Partnership (RCEP) trade deal that was
signed by 15 Asia-Pacific nations on 15th November 2020. The scope
of RCEP includes reducing tariffs on trade in goods, as well as
creating higher-quality rules for trade in services, including
market access provisions for service sector suppliers from other
RCEP countries. The RCEP agreement will also reduce non-tariff
barriers to trade among member nations, such as customs and
quarantine procedures as well as technical standards.
Nevertheless, the impact of this regional trade deal on reducing
bilateral trade tensions between China and Australia has not yet
been felt.
China and Australia also have in place the China-Australia Free
Trade Agreement that entered into effect on 20th December 2015.
This free trade agreement is due for a five-year review in December
2020, in the midst of significant turbulence in bilateral
relations.
Outlook for Australia-China trade flows
A key weakness for Australia is that many of its major exports
to China are agricultural and mineral commodities, many of which
can be substituted by China for similar imports from other
countries. Thermal as well as metallurgical coal is widely
available from other global suppliers. China is willing to pay
$115/t for USA mid-vol metallurgical coal versus cheaply available
Australian mid-vol PHCC coal offered at $100/t which also had a
freight advantage and short voyage journey.
While some Australian coal shipments can be diverted to other
markets, China accounts for around 25 per cent of total Australian
coal exports, amounting to around 100 mt per year, so it is
extremely difficult to find alternative markets rapidly for such a
large displacement of coal exports. However, over the medium term,
Australian coal exporters had already recognized the need to
develop their coal exports to other Asian markets such as India,
Vietnam and Pakistan.
Similarly, agricultural commodities such as barley or beef can
be bought by Chinese importers from other major agricultural
exporting nations. As over 50 per cent of Australian barley exports
had been sent to China in recent years, it will be difficult for
Australian barley exporters to quickly find alternative markets for
the entire displaced barley exports to China. However key
international barley markets such as Saudi Arabia, India and
Vietnam do offer some alternative market opportunities, and farmers
will also shift production to other crops, mitigating the overall
economic impact.
A particular challenge for Australia is that China is trying to
meet its bilateral Phase One trade deal commitments to the US to
ramp up imports of US goods. Consequently, substituting Australian
agricultural exports for US exports would help China with its own
commitments to the US under the US-China Phase One trade deal
agreed in late 2019.
While a large share of total Australian exports to China, such
as iron ore and LNG, have not been impacted so far by China's trade
policy measures, there are intensifying concerns that an increasing
range of Australian exports to China could face such measures.
Australian trade policy responses
Over the past decade, many Australian export industries had
become increasingly vulnerable to disruptions of market access to
China due to rising concentration risk to that single market. This
had become well recognized as a key risk by Australian policymakers
and industry leaders in recent years. However, as the former
Citibank CEO Charles Prince was quoted as saying in 2007 prior to
the Global Financial Crisis in relation to the leveraged lending
business, "As long as the music is playing, you've got to get up
and dance". The music has certainly stopped for a number of
Australia's significant exports to China.
While Australia is unlikely to embark on any kind of tit-for-tat
retaliatory trade measures, particularly given the very asymmetric
bilateral trade relationship, the policy implications for Australia
are that most Australian export industries with significant exports
to mainland China will be urgently looking at diversification
strategies to reduce their vulnerability to future Chinese trade
policy measures. It seems clear that any hopes of a return to
"business as usual" have become a rapidly receding mirage.
However, the process of trade diversification for various
industries is likely to be gradual, over a protracted period of
time, as different industries look to diversify into a wider range
of export markets.
Despite the tremendous challenges of significantly diversifying
its export markets, Australia will benefit from its proximity to
many other large consumer markets across the Asia-Pacific region.
India is already the world's fifth largest economy, with its
consumer market forecast to grow strongly over the next decade. The
ASEAN region has also become a very large consumer market with a
total regional GDP of USD 3 trillion and a population of over 600
million. Consequently, ASEAN and India are likely to be high
priorities for Australia's export diversification strategy over the
decade ahead.
Rajiv Biswas, Asia Pacific Chief Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
