A tragic love tale that would captivate Shakespeare himself
This is an economic love story like no other, created out of the race to globalisation, the Australian-China trade relationship has been critical to both countries economic success in the last 3 decades.
Yet, like the Shakespearean classic, it seems these ocean crossed lovers are heading towards a challenging and even fatal outcome in their trading agreements. Respectively bounded by their political ties to the house of Capitalism and house of Communism, it’s a wonder that the trading relationship has been relatively seamless thus far.
But just as it has in many other aspects of daily life, the pandemic presents a revolutionary overhaul to the way the two countries do business. Australia has spearheaded an investigation into the origins of Covid-19, which will inevitably place a high level of scrutiny on the Chinese government and the events that took place in Wuhan. While this is a righteous decision to search for the truth behind a virus that has seriously deteriorated quality of life worldwide, it is also foolishly brave for Australia to act like a chihuahua yapping at a dragon.
In response, China sure has breathed some fire. The one party state has announced an 80% tariff on Australian barley and an import ban on 4 abattoirs who make up 35% of meat exports to China. Now the Chinese government is encouraging students to study elsewhere, on the back of a significant increase in racist attacks. Our coal and steel is under attack as well, with China increasing the amount of administrative red tape for exporters, which means less efficiency and more costs for the industry. Chinese diplomat Jingye Cheng, came out suggesting Chinese consumers “will say why should we drink Australian wine or eat Australian beef?, if Australia continues to lead this Covid-19 investigation.
So, big deal right? Well, considering China make up 32.7% of our total exports which equated to US$89.2 billion in 2019. Yes! These escalating trade tensions can have disastrous implications for the Australian economy.
But how did we get in such a position, to be so economically vulnerable to a country who we knew had completely contrasting political and social views to our own?
Two seemingly innocent nations, united by a common goal for money
It started in the late 1970s and 80s, when Chinese authorities began to conduct reforms that would begin China’s transition from an agrarian economy to an industrial one. When these reforms began, China only made up 1% of Australia’s merchandise trade. The nation utilised its rural labour force, fixed undervalued currency and cheap inputs to production to conduct low skilled manufacturing at artificially low prices.
The global economy lapped this up, with Multinational Corporations pouring money into the economy and by 2011 China made up 25% of Australia’s merchandise trade.
This is where the love affair began, Australian consumers loved the sharp decrease in the cost of manufactured products and China needed huge amounts of energy and steel to continue its industrialisation process. The mining boom across the 2000s is the underlying factor behind Australia’s economic success.
The RBA estimated the boom to have raised real per capita household disposable income by 13%, real wages by 6 per cent and lowered the unemployment rate by about 1.25%, across the decade to 2013. China’s demand for our commodities is the key reason Australia avoided a technical recession during the GFC and was able to achieve 29 years of consecutive economic growth.
As China has continued its progression from a developing economy to a developed one, it has averaged an economic growth rate of 10% across the last 40 years. Developed economies like the USA struggle to even get above 3%! This has resulted in the emergence of a middle class in China that can afford to buy Australian wine and meat, go on Australian holidays and send their children to Australian education institutions.
The trading relationship entered a new phase of prosperity, one centred around Australia’s service sector, which grew from 15% of exports in 1978 to more than 20% in 2018. Education and tourism are now our 3rd and 5th largest exported product, respectively. All forms of Australian businesses, including universities, miners, finance companies and even milk companies have been so distracted by the scram to cash in on the emerging Chinese market. This comes at the expense of constructing a contingency plan for if China were to boycott all things Australian, which will expose our highly undiversified export base.
So where does the love story go from here?
All couples fight, for some it makes the relationship stronger and for others it reaches a breaking point. What will it be for Australia and China? Do we need China or do they need us?
Well it seems in the short term, the two are stuck with each other. China is determined to keep attaining high levels of economic growth but it needs iron ore to do so. The next best alternative to Australia is Brazil, but their Covid situation is out of control and has impeded their ability to export reliably.
As for Australia, to think that we can just click our fingers, lose US$89.2 billion in GDP and be okay is wildly naive. Australia will need to take a subtle, protracted approach. Senior lecturer Lai-Ha Chan at UTS argues Australia needs to strengthen and gain new Free Trade Agreements with countries in the south east Asia region. Taiwan is a rapidly emerging economy that has felt the wrath of China in recent times and would no doubt provide huge benefits to Australia if it were integrated into the ASEAN Trading Agreement. Improving our industrial infrastructure to enable Australia to breach into niche areas of complex manufacturing is another way Australia can diversify its export base away from raw materials and agriculture.
Over the past 30 years, Australia has done well to walk the tightrope between economically partnering with China and politically partnering with the USA. We have capitalised on appearing to be caught between a rock and a hard place, using it to gain economic security and political stability.
If Australia continues to use its adept level of diplomacy and opportunism that it has used in the past, its economic love fling with China or potential other partners is bound to continue producing positive outcomes for our society.
References:
https://smallcaps.com.au/why-trade-peace-break-out-between-china-australia/
https://thediplomat.com/2020/05/can-australia-flatten-the-curve-of-its-economic-dependence-on-china/
https://www.macrotrends.net/countries/CHN/china/gdp-growth-rate
http://www.worldstopexports.com/australias-top-import-partners/
https://treasury.gov.au/publication/economic-roundup-issue-4-2012/australia-china-not-just-40-years