Australia is prepared to stand up to its largest trading partner in the name of national security. The hard line on Huawei to protect Australia’s critical 5G infrastructure, the Morrison government’s $2.2 billion infrastructure package for the South Pacific, and its recent tough stance towards Chinese political donor Huang Xiangmo show this.
But Australia’s relationship with China needs to be viewed in the context of the United States’ dealings with the Asian juggernaut. The Trump administration has made no secret of the fact it considers China something of an economic pariah, and efforts over the past eighteen months to take China to task on currency manipulation, intellectual property theft and forced technology transfers are testament to that. This attitude is not confined to the White House: throughout Congress and the foreign policy establishment, China has few friends left in Washington DC.
Beijing knows this, too. That knowledge, coupled with slowing growth and a steep tariff increase on the horizon, has brought it to the table to negotiate a free trade agreement with the US. At the National People’s Congress, the Chinese Communist Party’s annual meetings held this week, delegates will vote on new foreign investment legislation designed to appease certain key US government concerns.
Yet Australia has not gone so far as to double down on US calls for China to make major economic reforms. A look at areas where its economy is most exposed to China offers several insights as to why.
Higher education is Australia’s third largest export, and China is the source of over one third of Australia’s international students. But their impact goes beyond the ivory towers: a report commissioned last year by Australia’s major universities found that every three international students at a Group of Eight university will contribute $1 million to the economy over the course of their degree. Yet the honeymoon may be coming to an end for Australian universities; China is investing heavily in building its own higher education and research capabilities, spending $222 billion last year alone.
This strategic shift is already underway, with an Australia-Indonesia free trade agreement inked in Jakarta this week that will pave the way for Australian universities to open campuses in Indonesia and retain a majority stake of up to 67 per cent.
One third of all Australian exports are bound for China, and raw materials are one domain in which Australia’s trade exposure is particularly salient, both in good times and bad. While Chinese demand drove the mining boom that kept Australia out of recession during the GFC, we saw how beholden the nation’s economic fortunes are to China’s geopolitical calculations when Australian coal imports were halted at Dalian port. Add to that softening demand for iron ore and coal – Australia’s two largest export commodities – driven by a cooling Chinese economy, and Australia begins to look less insulated.
Australia’s long-term liquified natural gas (LNG) export contracts with China have delivered a windfall to the largest energy companies on the east coast, but they may be living on borrowed time. There is speculation that China will agree to purchase US$18 billion worth of LNG from exporter Chernier as part of its FTA with the US.
After all, the US produces significantly cheaper gas, unlocked through the shale revolution, and is rapidly enhancing export capabilities. When Australia’s contracts expire, how long will it be before China looks for a new, more affordable supplier that will provide greater energy policy certainty?
It would be a cruel irony – but a distinct possibility – that the lucrative export deals that have contributed to a domestic energy affordability crisis in Australia could be poached by our closest ally, the United States.
China is Australia’s largest agricultural export market, and as Rural Bank found, it has led growth in Australia agri-food exports over the last decade by a considerable margin. While the trade war may benefit Australian farmers in the short-to-medium term by displacing Chinese demand for US beef and cotton, the long-term impact will be detrimental to global demand. As Treasury Wine Estates experienced in 2018, increasing concentration in the Chinese export markets means Australian growers and food manufacturers are more vulnerable to blowback from China as a result of tensions between China, the US and its allies.
From January 2018, the Chinese government began restricting the import of 24 types of plastic recyclables. Estimates suggest this decision affects 30 per cent of recyclable waste exported by Australia each year, putting pressure on prices and local council waste facilities. The radical shift in consumer behaviour this has contributed to, including the move away from single-use plastics in Australia, shows the enormous influence Chinese policy changes have on Australian consumers.
The prosperity and continued expansion of China’s middle class will make or break Australian companies hoping to tap into the Chinese market. The fortunes of ASX200 companies like a2 Milk, Bellamy’s, Treasury Wine Estates and Blackmores depend on Chinese consumer preferences, and for products like theirs with very elastic demand, the consequences of demand drying up are especially acute.
Alongside weakening growth, an over-leveraged Chinese economy also poses risks to this business model, as does the CCP’s push to encourage Chinese consumers to buy local, a move that crowds out Australian companies looking to do business in China. A race to the bottom on protectionism is in no way in Australia’s interest: even in the best-case scenario, economic modelling puts the cost to the Australian economy at $36 billion.
Looking beyond May 2019, if a Shorten Labor government follows through with its promise to revive Australia’s merchant shipping industry, the South China Sea will become an area of even greater strategic vulnerability for Australian supply chains.
If the forecasters are to be believed, the next Australian Government will preside over an economic downturn. As China’s growth slowdown continues and the ‘New Cold War’ between Washington and Beijing looks set to continue – regardless of whether a trade deal is struck and who is in the Oval Office post-2020 – Australia needs to think clearly about what diversification looks like.
Freya Zemek is responsible for the development and implementation of the United States Studies Centre’s corporate engagement strategy. She is currently completing a Graduate Diploma in Economics with London School of Economics.