Small grey rhinos: understanding Australia’s economic dependence on China

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James Laurenceson, Acting Director, Australia-China Relations Institute, University of Technology Sydney

Michael Zhou, Project and Research Officer, Australia-China Relations Institute, University of Technology Sydney

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Executive Summary

Australia lives with an acute ‘fear of abandonment’.

In security terms this fear has underpinned Australian foreign policy settings for decades. Recently, doubts about the reliability of the United States as Australia’s security guarantor have sent Australian government ministers on a mission to convince America that ongoing – and expanded – engagement with Australia’s neighbourhood is in its own interests.

These days Australia also fears economic abandonment by China. This arises from the possibility of being cut off from voracious Chinese demand worth nearly seven percent of GDP, an exposure that can lead to claims that Australia’s economy has become ‘too dependent’ on China.

The usual prescription to address Australia’s China risk is greater diversification. But this misunderstands how economic ties are formed. Unlike security ties, the pattern of Australia’s external economic engagement is mainly determined ‘exogenously’ by market forces – economic complementarities and purchasing power – not elected officials or bureaucrats sitting in Canberra. While diversification ought to be vigorously pursued with traditional customers such as the US and Japan as well as with up-and-comers like India and Indonesia, the reality is that none of these countries – individually or collectively – offer the potential to substitute for the scale of demand that China injects into the Australian economy, now or into the foreseeable future. Such are the complementarities and scale of purchasing power expected to be added to China’s economy that many Australian industries will need to grapple with more exposure to China, not less.

A more extreme policy to deal with Australia’s China risk would be to try to force a decoupling. But given that trade is mutually beneficial, this would necessarily be costly to Australia’s prosperity. Other countries would also be happy to pick up any trade opportunities with China that Australia left on the table. Further, economic interdependence with China helps to manage and reduce security risks by keeping China engaged in multilateral frameworks and disciplines. In contrast, China-specific tariffs, quotas and outright bans would represent an abandonment of Australia’s international treaty commitments and its oft-stated commitment to supporting an international rules-based order.

What is needed is a rigorous analysis of the risks that exposure to China presents. Economic risks are sometimes described as ‘black swans’, shocks that are made more challenging by the fact they cannot be foreseen. Alternatively, there are ‘grey rhinos’: obvious yet perhaps neglected threats. This paper argues that Australia’s China risks are of the ‘grey rhino’ variety. The first is that Chinese economic growth could experience a ‘hard-landing’, causing demand for Australian goods and services to fall. The second is that a shift in the structure of Chinese demand could be unfavourable to the industries in which Australia excels, limiting the scale of trade opportunities. The third is that China could use economic links to punish Australia over political disagreements.

Evidence is presented showing each of these ‘grey rhinos’ risks to be relatively limited, at least at more aggregate levels. The visibility of Australia’s China risks, as well as their likelihood and scale of impact, suggests they are largely capable of being managed with appropriate contingency planning.

The key takeaway is that Australian government policymakers and businesses are justified in focusing on the opportunities that economic engagement with China presents, while putting in place mechanisms to protect their interests in the event of disruption.

Read a summary of the key facts of the report in this factsheet.

Authors

Professor James Laurenceson is Acting Director of the Australia-China Relations Institute at the University of Technology Sydney.

Michael Zhou is a Project and Research Officer at the Australia-China Relations Institute, University of Technology Sydney.