David Wu
Since establishing relations in the 1970s, the People's Republic of China has been one of Australia's most important economic partners. However, the dynamics of this relationship has become increasingly strained over the past decade. This article will review crucial events within this relationship and provide insights regarding the future of Chinese-Australian trade.
Chinese-Australian trade relations began with the Chinese economic reforms in the 1980s, where the country began a transition from a state-owned to a more market-oriented economy. These reforms included reducing the mandate of the state planning commission and increased the role of the state economic and trade commission. These gradual and persistent institutional changes and policy reforms alongside high saving rates, low interest rates and high technology growth increased China's capital intensity and growth rate of real per capita GDP to an average rate exceeding 8 percent per year. The liberalisation of the Chinese economy directly lead to an increased appetite for free trade, thus their entry in the General Agreement on Tariff and Trade (GATT) in and subsequently the World Trade Organisation (WTO) in 2001.
Graph 1
After China opened up to world trade, the trade volume between China and Australia increased rapidly. China overtook Japan in late 2007 to become Australia’s largest trading partner, and in 2009 became Australia's largest export market. The development of this successful trade relationship was bolstered through the establishment of The China-Australia Free Trade Agreement (ChAFTA) which entered into force in December 2015. This agreement lead to duty-free entry for most Australian goods exports, improving Australia’s trade advantages in Barley, Iron Ore, Beef and Dairy compared to the United States, Canada and the EU, and counters New Zealand and Chile's Free Trade Agreements (FTAs) with China.
Graph 2 Australia's Trade Shares
The reasoning behind how the China-Australia trade relationship developed could be supported by a myriad of international trade models, such as the Gravity Model and the Heckscher-Ohlin Model. The Gravity Model of international trade as developed by Tinbergen in 1962, posits that bilateral trade between two countries is directly proportional to GDP in the two countries and inversely proportional to the distance between them.
As China is the largest economy in the Asia Pacific Region by GDP and Australia the 8th largest, and with China being located closer geographically to Australia in comparison to 7 of the 10 largest economies in the world, a large trade volume is predicted by the Graphic Model due to size of the economy and lower costs of transportation.
The Heckscher-Ohlin Trade theory states that the capital-abundant country will export the capital-intensive goods and the labour-abundant country will export the labour-intensive goods. This is due to the capital-intensive country being able to produce the capital-intensive goods at a lower relative price, and vice-versa. This trade specialisation will lead to the export industry being better off, as they would be able to sell at a higher world price as the relative prices converge as the two countries enter into free trade. Both countries benefit overall as they are able to consume beyond their production possibility frontier.
Graph 3
Production possibility frontier of goods X and Y and consumptions of Countries I and II
As Australia is much more capital intensive compared to China, Australia is driven to export more capital intensive goods such as Iron Ore, Coal, Beef, Barley, Wine and Dairy, and import more labour intensive goods such as textiles and clothing, electronic products, and some general machinery from China, which in turn provides Australia with cheaper goods for consumption.
However, recently some crucial tension have arisen in this relationship. Starting from early 2020, due to Prime Minister Scott Morrison's endorsement of an inquiry into the origins of COVID-19, along with some political differences related to human rights in Tibet and XinJiang province, the Chinese government imposed various restrictions on Australian exports, believing its economic size could directly translate into political influence. These restrictions included tariffs of 80.5% on Barley, 206% on Wine and 4 abattoirs being blacklisted. This decreased trade volume drastically, where barley exported decreased by 50%, and wine exported decreased by 40%, and an estimated loss of 9 billion AUD in the Australia markets. This lead to increases in goods prices in Australia and China and negative impacts to 8% of Australia’s GDP.
These restrictions were not viable long term, as the two countries' economic well-being have become closely connected. Chinese-Australia relations began to showed signs of improvement with the Albanese Government starting in 2023. Despite holding its positions in geopolitical issues such as the Ukrainian war, and commencement of defence agreements such as AUKUS, the Australian Government increased efforts to restart trade with China which included Albanese's China visit in November 2023, the first by an Australian Prime Minister in 7 years. By April 2024 the trade barriers imposed by China had been mostly removed. Currently, China remains Australia's primary trading partner, accounting for 26% of total goods and services trade in FY 2022-23. Bilateral trade demonstrated continued growth, increasing by 12% to reach $316.9 billion. Australian exports to China rose by 13% to $203.5 billion in the same period. Notably, the service sector witnessed a significant increase of 27%, likely attributable to the return of tourism and international student mobility. This data suggests a resilient trade relationship between Australia and China, despite recent geopolitical complexities.
Moving forward, the following points must be considered as China-Australia relations continue to develop. First, the two governments should continue to optimise trade relationships despite security concerns and political differences. As Albanese stated during his visit to China, the two countries should "pursue equality and mutual benefit, maintain communication and exchanges," in order to continue to benefit from each other's sustained economic development. While Australia should continue to establish strategic relationships with Western Allies, and access security risks posed by China through its investment activities, pragmatic thinking in the management of China-Australia trade should be encouraged, and pointless hostile rhetoric should be avoided. Furthermore, as Chinese-Australians consist of 5.5% of the Australian population, the cultural and local political implications should also be considered as the Australian Government continues to manage this relationship.
Second, Australia should continue to establish closer relationships with other countries in the Asia Pacific region and build further economic resilience. When Chinese restrictions were imposed in 2020, Australian exporters began to divert trade away from China and into new and existing markets, including Indonesia, Thailand, Bangladesh, and Pakistan. Australian exports to China, excluding coal, experienced a significant decline, falling by $4.5 billion as China intensified trade sanctions. Conversely, exports of these same categories to other countries increased by approximately $4.2 billion on an annualised basis. This growth effectively mitigated most of the losses incurred by China. Consequently, the overall economic impact of China's trade measures on Australia appears to have been fairly limited. In addition, Indonesia, the second largest democratic country in the world by population, is projected to become the 4th largest economy in the world by 2050, the Australian government should encourage closer relations with ASEAN countries to be better prepared against a turbulent relationship with China and global economic crises.
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