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Best of Enemies: Why China Needs A Strong Trade Relationship with Australia

Parth Sharma | China Fellow

Following Australia's calls for an investigation into the origins of COVID-19 in 2020, the Chinese government placed a number of official and unofficial trade sanctions on Australia. These actions prompted a significant shift in Australian and Chinese relations compared to the previous two decades. In 2014, China’s President Xi Jinping stated that there was a “vast ocean of goodwill between China and Australia". Six years later, Hu Xijin, the editor of the Chinese state-run newspaper The Global Times, wrote that Australia was the "gum stuck on the sole of China’s shoes".

Recently, the two countries renewed talks amidst the heightening tensions. In June 2023, Australian Defence Minister Richard Marles met with his Chinese counterpart General Li Shangfu at the Shangri-La Dialogue summit held in Singapore. Following that, Australian Treasurer Jim Chalmers and Chinese Finance Minister Liu Kun met on the sidelines of the G20 Summit in India. This was the first meeting between an Australian Treasurer and a Chinese Finance Minister in four years. It suggests that the embittered relationship of late may be lessening in intensity.

Many think that Australia would have far more to lose through decaying relations given China’s size and the economic ramifications of the trade sanctions (particularly given Australia’s high reliance on its export economy). However, the sanctions that China placed upon Australia had consequences for both sides, prompting China to take action to normalise relations.

China recently began to lift trade sanctions placed on Australian goods despite Australian officials stating that the Australia-China relationship would not return to the lofty heights it had achieved 15 years ago. Notably, in the Australian Defence Strategic Review published in late April, the Department of Defence stated that "Australia will cooperate with China where we can, disagree where we must". This revealed a strength on Australia’s side of the table which is not often discussed in the media – nor are its bargaining chips.

Australia is one of the few states in the world to have a trade surplus in its economic relationship with China. This means that in the balance of trade, Australia ships more of its goods to China than what it imports. Major exports from Australia include critical products—such as iron ore and coal—which are essential for China’s development. Thus, the Chinese state is dependent on Australia for vital resources such as energy and infrastructure materials.

Beijing was already aware of this. Importantly, Australian iron ore was not included in the trade embargo given its high importance for the major infrastructure development projects taking place within the state, and abroad by Chinese companies through the Belt and Road Initiative (BRI). This is particularly important as Australia is the world's largest producer of iron ore accounting for 900 million tonnes in 2021, or 34.6 per cent of the world's iron ore production that year.

The second-largest producer, Brazil produced less than half of Australia's output, around 380 million tonnes. Consequently, China would be hard-pressed to find suitable alternative iron producers if its relationship were to sour even further. The sheer scale of Australia's iron industry represents an excellent bargaining chip. This becomes even more pertinent for China as a lack of iron would jeopardise the BRI which has already received financing upwards of USD$1 trillion.

While China was previously a priority market for Australia, the Australian economy has managed to find other export markets. In fact, Australia continues to prioritise market diversification as a means of avoiding an over-reliance on single markets, even those as large as China. Nevertheless, producers such as the wine and lobster industries have been detrimentally affected by the embargo.

This highlights a counternarrative to the one often presented in the media: China has also suffered as a result of the trade sanctions. This has seen China experience energy shortages which have further affected its productivity and led to the rationing of electricity to reduce power consumption. The energy crisis became so serious that the Chinese government shifted its political messaging to proclaim energy security as a more pressing need than the transition to renewable energy.

Economic downturn also poses notable risks for the ruling party. A major source of the Chinese government’s political legitimacy stems from its credentials as economic managers. The government regularly emphasises the state’s role in steering the direction of the economy and lifting hundreds of millions of Chinese citizens out of poverty as justification for the Chinese Communist Party's right to govern. Economic decline can only put this justification—and the Party's right to rule—into question.

Attempting to wean the state off Australian coal emphasised the importance of a stable Australia-China economic relationship. Even when the energy crisis abated, China’s concerns lingered. Mongolia was considered a suitable long-term alternative market to import high-grade coal. However, in January, Mongolia reneged on an existing underground deal it had with China following citizen outrage over corrupt practices. As a result, Mongolia no longer sells directly to China and instead does so through auctions, which raise prices further. This renders it a less desirable commodity and creates the risk of another coal supply gap forming.

The combination of economic pressures and coal supply issues has ultimately prompted Beijing to rethink the previous coldness in its trading relationship with Australia. China lifted its unofficial trade restrictions on Australian coal at the start of the year. Imports in March 2023 were up by 151% from the previous year. Almost 78% of the coal sent to China from Australia in March 2023 was thermal coal used for electricity production.

China’s decision to resume trade with Australia—particularly over coal to fortify its energy security—demonstrates that the economic relationship goes both ways. The freezing of the Australia-China trade relationship is far from ideal for Australia; yet, it has demonstrated Australia’s resilience in the face of Chinese economic coercion and the ability to counter China on key issues in the future.

Parth Sharma is the China Fellow for Young Australians in International Affairs. He is studying a Master of International Relations at the University of Melbourne and is a Melbourne Graduate Scholarship award holder from the 2022 intake. Throughout his studies, Parth has extensively examined China’s internal domestic context and foreign policy. He is currently interning at the Australia India Institute and will be heading to Jakarta at the end of the year to take part in the Australia-Indonesia Youth Exchange Program.


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