Economic reality bites: What Australia needs to know amidst US-China strategic competition

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

Thomas Pantle, Project and Research Officer, Australia-China Relations Institute, University of Technology Sydney

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Executive Summary

• Eliding economic reality is a poor starting point for an informed public discussion about how best to advance Australia’s interests amidst heightened strategic competition between the US and the People’s Republic of China (PRC) and trade punishment by Beijing. Yet a good deal of local commentary and analysis does just that. This report identifies four key economic realities for Australia. 1. The PRC and the rest of the world are not decoupling; 2. For strategic friends, shared values with Australia don't trump pursuing commercial interests with the PRC; 3. Economic fundamentals, not strategic alignment and/or shared values, are still driving Australia's exports; 4. Triumphalism that a trade decoupling from the PRC is low-cost for Australia's economy is ill-founded.
• Australia cannot take comfort in disrupted trade ties with the PRC being part of a broader, global decoupling trend. Rather, the weight of evidence points to greater economic integration between the PRC and the rest of the world – Australia’s strategic friends included. Despite both Washington and Beijing now imposing an average tariff of 20 percent on each other’s goods, in January-September 2021 the value of two-way trade between North America and the PRC stood at US$603 billion, up 33 percent on the same period in 2019. The stock of US investment in the PRC also hit a record high in 2020 – US$124 billion, up nine percent on 2019.
• Australia’s strategic friends have offered useful rhetorical support for Australia’s predicament. But outcomes demonstrate a parallel commitment to advancing their own commercial interests, including by snapping up lost Australian sales and trading more with the PRC. In January-September 2021, the PRC’s imports from Australia of 12 disrupted goods fell by US$12.6 billion (approximately A$17.3 billion), compared with 2019. The biggest beneficiary was Australia’s security ally, the US, which increased sales of the same goods to the PRC by US$4.6 billion (approximately A$6.3 billion). Canada and New Zealand increased their sales by US$1.1 billion and US$786 million, respectively.
• Expressions of solidarity with Canberra have also not extended to strategic friends significantly stepping up their purchases of Australian goods disrupted by the PRC to help mitigate costs. In January-September 2021 sales of Australian wine to the PRC fell by US$480.5 million, compared with 2019. US purchases rose by just US$7.1 million. For Australia’s wine producers, market diversification is as difficult, long and costly a process as ever. Nor has there been a broader re-orientation of Australia’s trade patterns towards countries with which Australia has shared values, such as a commitment to democracy. Comparing January-September 2021 with 2019, global markets have re-directed Australia’s exports of goods like coal to Turkey (up US$191.4 million), barley to Saudi Arabia (up US$520.4 million) and cotton to Vietnam (up US$350.5 million) – other countries where an alignment with Australia’s values is not clear.
• Triumphalist local assessments that the cost to the Australian economy of decoupling from the PRC is low fail to acknowledge that decoupling in any overall sense has hardly begun. In fact, the total value of Australia’s goods exports and imports to and from the PRC is much higher now than when Beijing’s campaign of trade punishment began – up 72 percent and 62 percent, respectively. The scope for costs to rise is ample.
• None of these economic realities excuse or deflect attention away from Beijing's actions being the source of Australia's predicament. Nor do they suggest Australia should not stand up for its values or automatically eschew actions that might bring repercussions from the PRC. But Australia's interests are served by a full and accurate accounting of the probable costs and benefits associated with different policy options. Eliding economic reality only makes that task harder.

Authors

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

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

Note: An earlier version of this report omitted text on page 11, which had dropped out during the design process. The report was updated at 11.35pm AEDT November 30 2021 to correct this.