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Relations between Australia and Mainland China have deteriorated
in recent years, forcing the administration of Prime Minister Scott
Morrison to reconsider the country's economic reliance on China,
especially against the background of the 'decoupling' of China and
the US, a close security partner.
Deteriorating relations
The latest diplomatic spat between Australia and China has a
long history. In the last two years, Australia has effectively
banned Huawei from its 5G infrastructure; passed the National
Security Legislation Amendment (Espionage and Foreign Interference)
Act, prompted by concerns over Chinese political interference; and
in April 2020 led an international call for an independent inquiry
into the origins of COVID-19. In early November Australia joined
the India-Japan-US Malabar naval exercises for the first time,
further deepening its security cooperation with these strategic
rivals of China. Over the last few months China has imposed
restrictions on Australian imports citing alleged breaches of trade
practices (resulting in tariffs on barley and wine) or quality
issues found during product inspections (affecting some shipments
of barley, beef, lobster, and timber).
Australian industry representatives have reported that some
farming and fisheries businesses are amending their business
strategy to preemptively exclude exports to China in anticipation
of Chinese restrictions. In early November,
The South China Morning Post reported that Chinese traders had
been informally notified that some Australian shipments of wheat,
barley, sugar, lobster, wine, timber, copper ore and concentrate,
and coal would not be cleared in customs from 6 November.
Australian mining company BHP Group and grape and wine industry
groups have reported that Chinese buyers have either cancelled or
deferred some orders.
Coal congestion
Coal and coal products, which accounted for 16% of Australian
exports in 2019, has been among the worst hit. Commodities at Sea
data show that Australian coal shipments to China have fallen
sharply in recent months and related port congestion in China
surged. Australian media report that no thermal coal cargoes have
left Newcastle in New South Wales, the largest coal port in the
world, for China so far in December.
By October, monthly Australian coal shipments to China had
fallen to 3 million tons (both thermal and met), compared with 7.5
million tons a year ago. Congestion is worst at Jingtang and
Caofeidian; and a third of the vessels waiting at anchorage are
capesize (very large bulk carriers), the rest panamax vessels
(typically half the cargo capacity of capsize). Some vessels are
being diverted to other countries. Meanwhile, the latest McCloskey
Coal Report shows Chinese buyers have turned to the Atlantic
market, purchasing several cargoes from South Africa and
Colombia.
Economic dependence, strategic realignment
Australia's exposure goes well beyond coal. China is its largest
trading partner - accounting for a third of Australia's total goods
and services exports in 2019, according to the Australian Bureau of
Statistics.
And this is in the context of
Australia's increasing reliance on its external sector. Exports of
goods and services only accounted for a fifth of GDP in 2009 but as
the rest of the domestic economy slowed in 2014 with the end of the
mining boom, exports have grown to account for a quarter of GDP.
Further highlighting their increased importance to the economy over
the past decade, real exports for 2010-2019 contributed on average
0.26 percentage point to GDP growth each quarter, up from only 0.15
in 2000-09. The Australian Department of Foreign Affairs and Trade
(DFAT) estimates that Australian trade is directly responsible for
one in five Australian jobs.
While some lobby groups, notably for grain producers, and
parliamentarians are calling for economic diversification, the
Morrison government has so far hoped to resolve issues through
diplomacy - a strategy supported by the influential Australian
Industry Group, wary of alienating one of its main markets. (The
Minerals Council of Australia has not yet commented on the coal
congestion.) Nevertheless, Australia is taking steps to reduce its
reliance on China. Ratification of the 15-member Regional
Comprehensive Economic Partnership (
RCEP) in the next year or two will help. Australia is in early
stages of negotiations with India and Japan - two members of the
'Quad' and close US allies - for a Supply Chain Resilience
Initiative (SCRI). 'Decoupling' from China will also be through new
legislation. In June Australia's federal government proposed
changes to tighten scrutiny of foreign investments in assets
categorized as a 'sensitive national security business'. On 8
December, the Federal Parliament passed the Foreign Relations
(State and Territory Arrangements) Bill 2020, which empowers the
federal government to cancel any arrangement or contract between
Australian states and territories and foreign governments if these
are inconsistent with Australian foreign policy.
The weight of trade with China, however, is heavy. Against a
background of post-pandemic economic fragility, Australia will need
more political resolve than most to reset its relationship with
China.
Posted 14 December 2020 by Bree Neff, Director, News & Research Management, Economics & Country Risk, S&P Global Market Intelligence and
Hannah Cotillon, Senior Analyst, Asia-Pacific Country Risk, S&P Global Market Intelligence and
Rahul Kapoor, Vice President & Head of Commodity Analytics & Research, Maritime, Trade & Supply Chain, S&P Global Market Intelligence and
Rajiv Biswas, Executive Director and Asia-Pacific Chief Economist, S&P Global Market Intelligence
And this is in the context of
Australia's increasing reliance on its external sector. Exports of
goods and services only accounted for a fifth of GDP in 2009 but as
the rest of the domestic economy slowed in 2014 with the end of the
mining boom, exports have grown to account for a quarter of GDP.
Further highlighting their increased importance to the economy over
the past decade, real exports for 2010-2019 contributed on average
0.26 percentage point to GDP growth each quarter, up from only 0.15
in 2000-09. The Australian Department of Foreign Affairs and Trade
(DFAT) estimates that Australian trade is directly responsible for
one in five Australian jobs.
