Tensions Expose Australia’s Over-Reliance on China

Australia faced one of its biggest challenges in the twenty-first century, in flattening the curve of the coronavirus epidemic. The coronavirus pandemic has torn the economies of many countries to shreds, requiring their reserve banks to implement unprecedented fiscal and monetary policy. Another solution in countries maintaining their economy, was by leveraging trading relations with long-lasting partners. Australia turned to their largest trading partner, China. However, Australia felt the heat from Beijing, who blocked exports of beef, barley, and wine.

China is Australia’s biggest exporter, accounting for more than $200 billion in the bilateral trade partnership. [2] With political tensions rising, many analysts and economists are worried regarding the sustainability of this trade partnership. Given that Australia is on its COVID-19 recovery path, China’s trade barriers are especially concerning. In a recent interview with prime minister Scott Morrison, Sunrise host and former financial journalist David Koch suggested that ‘if China decide[s] to get narky with [Australia]… [Australians] go into depression.’ [3] Koch summarises the question on everyone’s mind: how can Australia reduce its economic dependence on China? [2]

Currently, China single-handedly consumes more than 30% of Australian exports, while Japan is the next largest, importing a relatively small proportion of 14%. This discrepancy in export consumption has been hovering around this level for quite some time. China is also Australia’s top partner in the import market too. [1] Although the difference in volume of imports between trade partners is much smaller, over-dependence on China in the import market might also be cause for concern. This strongly suggests that Australia should begin to diversify its trading partners.

Sourced from: https://www.dfat.gov.au/sites/default/files/australias_goods_and_services_by_top_15_partners_2019.pdf

What are Australia’s options?

Australia’s trade partnership with China is based in the exchange of abundant raw materials for cheap Chinese labour and products. [4] Australia’s solution for this economic over-dependence may lie in their second and fifth largest export markets, namely Japan and India. [6] In 2015, Australia, Japan, and India formed a trilateral partnership with the goal of reducing bilateral trade dependency with China. In September 2020, sources from Japan and India suggested talks were underway with the goal of diversifying their supply chains and exports. Australia’s dependence on China is well established, but do India and Japan suffer the same problems?

India is strongly connected to China through various multilateral agreements and projects. Although prime minister Narendra Modi’s ‘self-reliance’ policymaking attitude has shown economic benefits, India must do more to become the world’s leading manufacturer. India still consumes a large volume of Chinese imports, allowing China to take India’s top rank in the import market. [8]

Similarly, Japan relies on China’s production of automotive parts, medication, and hygiene-related equipment, such as sanitisers. Additionally, they assisted China in its development of the ‘One Belt, One Road’ initiative, with Shinzo Abe proclaiming that ‘Japan – China relations have been moving in the direction of great improvement.’ However, Japanese authorities are currently increasing its supply chain diversity by subsidising leading companies to shift production into other countries. [7] Although each of the three countries have expressed willingness to improve trade inter-relations, their respective bilateral ‘China connect’ partnerships might suggest a lack of effective action. [5]

With China flaunting its grip on the Australian economy amidst political tensions, now seems as good of a time as any to improve trade relations with Australia’s other partners. While the trilateral partnership platform with Japan and India is a promising beginning, there is still much work ahead for each of the individual countries before they are truly independent of China.

[1] Australian Government: Department of Foreign Affairs and Trade. (2019). Australia’s goods and services by top 15 partners. https://www.dfat.gov.au/sites/default/files/australias_goods_and_services_by_top_15_partners_2019.pdf

[2] Chan, L. (2020). Can Australia Flatten the Curve of its Economic Dependence on China?. https://thediplomat.com/2020/05/can-australia-flatten-the-curve-of-its-economic-dependence-on-china/

[3] McGregor, R. (2019). Does China have us over a barrel?. https://www.afr.com/policy/economy/does-china-have-us-over-a-barrel-20191011-p52zq1

[4] Holmes, A. (n.d.). Australia’s economic relationships with China. https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/China#:~:text=Today%2C%20China%20is%20Australia’s%20largest,of%20both% https://www.news.com.au/finance/economy/australian-economy/trilateral-trade-agreement-that-could-change-australian-relations-with-china/news-story/742fd80eef13fe3a68cae317e12297d720imports%20and%20exports.&text=Twenty%2Dfive%20per%20cent%20of,investment%20relationship%20is%20also%20developing.

[5] Panda, J (2019). Australia-India-Japan Trilateral must overcome ‘connect contradictions’. https://www.griffith.edu.au/__data/assets/pdf_file/0025/1007728/AJI-trilateral-dialogue.pdf

[6] Brooker, T. (2020). Trilateral trade agreement that could change Australian relations with China. https://www.news.com.au/finance/economy/australian-economy/trilateral-trade-agreement-that-could-change-australian-relations-with-china/news-story/742fd80eef13fe3a68cae317e12297d7

[7] Denyer, S. (2020). Japan helps 87 companies to break from China after pandemic exposed overreliance. https://www.washingtonpost.com/world/asia_pacific/japan-helps-87-companies-to-exit-china-after-pandemic-exposed-overreliance/2020/07/21/4889abd2-cb2f-11ea-99b0-8426e26d203b_story.html

[8] Sunil, S & Beniwal, V. (2020). India’s growing reliance on China may be tough to break. https://economictimes.indiatimes.com/news/economy/indicators/indias-growing-economic-reliance-on-china-may-be-tough-to-break/articleshow/76742026.cms