Reducing Australia’s trade dependence on China

So, all Australian coal exports to China seem to have stopped. As usual, the Chinese government is keeping its actual decisions to itself and letting them leach out through state media and other sources. In this case, it’s a directive to stop all imports of Australian coal, probably both metallurgical and thermal.

China’s government ending $14 billion in annual trade seems to be the wake-up call Australia needed. It’s time to stop hoping that Beijing’s economic coercion will end soon or be managed through trade agreement dispute-resolution processes we know Beijing has no intention of honouring. It’s time for new partnerships that don’t just reduce China’s economic leverage, but can also shift climate policy and drive economic rebuilding and prosperity. And iron ore, perhaps counterintuitively, may be the place to start.

The Chinese government may be deliberately opaque, but it’s crystal clear that Xi Jinping is determined to continue inflicting costs on his own economy and citizens by wielding access to China’s market as a weapon against Australia, as he has against others.

This behaviour, across a range of traded goods and commodities now, is a deliberate and direct breach of commitments China has under World Trade Organization rules and of the increasingly badly named China–Australia Free Trade Agreement. As Prime Minister Scott Morrison has noted, that matters to any company and any government that operates under the WTO or any other trade agreement with China.

So, it’s good news that Trade Minister Simon Birmingham has told us the government is taking China to the WTO over its imposition of alleged anti-dumping duties on Australian barley. A WTO dispute will take a very long time, be comprehensively gamed and frustrated by Beijing, and probably not change its behaviour. Yet, while not being a solution for Australian trade, it will be useful in demonstrating to others the Chinese government’s disregard for rules and commitments it’s signed up to.

On ‘the relationship’ between Australia and China, even if the unexpected happened and the magical solution that Beijing’s advocates propose occurred—a Xi–Morrison meeting—and out of that meeting Xi lifted all the coercive trade measures he has put in place against Australia over the past six months, not much would change.

There would be a bounce as trade picked up, but Xi has reset the playing field for engaging with the Chinese market in ways that will outlast 2020 and any peace-pipe smoking in the near future. The Chinese government’s behaviour over much of this year has graphically changed the nature and scale of the business risk to any companies—Australian or otherwise—operating in China. Beijing’s stopping its use of trade as a weapon would be no guarantee that it wouldn’t start again, at less than a moment’s notice.

Xi has demonstrated the sheer scale of the sovereign risk that his government poses to businesses—and the speed with which that risk affects trade and business relationships. This is starting to drive a recalibration of supply chains and market plans.

There’s no near-term simple solution to selling commodities and goods that were headed to China to others. Some globally traded commodities like barley can find other markets fast. And, as in the case of barley, Australian exporters can find themselves receiving prices similar to or even higher than what happy Chinese buyers paid in less coercive times. Treasury Wine Estates has set out a two- to three-year business plan for diversifying its export market, and that timeframe is credible for other businesses.

But it’s worth remembering that a lot of Australia’s China trade has had a supernormal boom over the past six years, so in some ways, our response is about rediscovering and reconnecting with other markets. Did it ever make sense to sell 90% of our export lobsters to China and think that was risk free?

In other cases, like iron ore, it’s time for government and industry to chart a new course and invest in partnerships and technologies that work around the risky China market. Xi’s actions are creating common risk perceptions between Australia and countries like Japan, Germany, Canada and the US, something that can drive government and business plans in positive ways.

That’s good news as we rebuild our economies in the wake of the pandemic. Now is a great time to rebuild, because technological change and investor and consumer demand are combining to make new industrial processes like clean steel manufacturing using renewable energy economically viable and attractive.

Even the driest economists interested only in comparative advantage can understand how AustraIia’s low-cost, high-quality, reliable supplies of iron ore can be combined with our low-cost, abundant supplies of renewable energy. It’s not much of a leap to connect these two advantages to the production of clean steel using hydrogen instead of metallurgical coal, as German steelmaker ThyssenKrupp has started to demonstrate.

High-tech manufacturing nations like Germany and Japan know they need new sources of economic advantage given the technological and economic challenge from China. Their manufacturing firms know they need to do more than just double down on joint ventures with Chinese companies, because those partners are more likely to be existential competitors in the near future.

Australian clean steel, along with hydrogen production, can help provide this new source of advantage, particularly if it’s produced in partnership with German and Japanese firms. This has some similarities to an idea floated recently by National Party Senator Matt Canavan, who wrote about working with other steel-producing nations.

As Chinese authorities start to pressure Rio Tinto and BHP on iron ore pricing and supply and look for ways to get leverage over these mega-suppliers China is grudgingly dependent on, it’s time for Rio and BHP to do more than talk fondly about their Chinese partners and hope for the best.

It’s not hard now to imagine BHP and Rio partnering with ThyssenKrupp, BDI, and Daimler or Volkswagen to give the German auto industry new global competitive advantages from the combination of German technology and Australian scale of production for iron ore, clean energy and clean steel. Japan’s impressive car and steel industries create the foundations for a similar new partnership there, made easier by the existing energy partnership between our economies and businesses.

For those who say it could never happen, consider Germany’s leadership on renewable energy and its strategic understanding of China shown in its recent Indo-Pacific policy, combined with the steps Rio and BHP are already taking on renewable energy to power their mining operations. Add in the pressure to get moving on the economics of climate change as the Biden administration takes office.

And consider how China responded to a similar need to reduce it dependency on foreign technology firms by building outfits like Huawei from a standing start just a few decades ago. China worked alone, while Australia can work with some of the most trusted and capable partners on the planet.

Nation-building isn’t the negative, loaded thing it was before the pandemic and before Beijing showed the world how it plans to operate now that its peaceful rise is over. It’s time to stop simply soaking up Chinese economic coercion and get ahead of Beijing’s next moves.

That means making new plans, with new partners that will drive our security and our prosperity, while also reducing China’s ability to use trade as a weapon. Iron ore and clean energy could well be at the heart of this for Australia.

This article was published by The Strategist.