Australia is facing its first recession in 30 years. The Covid-19 pandemic ended an unprecedented period for the country's economy which expanded consecutively for decades. Even during the financial crisis of 2008, Australia managed to prevent the faith of other countries. The most obvious reason is the close economic relations with the world's economic growth engine: China. Canberra, however, has become increasingly bellicose in its opposition to Beijing in numerous cases since the pandemic started.
Australia has managed to balance the country's most important trade ties concerning China with political and security ties concerning its Western allies and the U.S. more specifically. That has become more difficult recently as Canberra voiced opposition to Beijing's handling of the pandemic and internal human rights issues. There is even a discussion of a decoupling that is desirable according to an Australian parliamentary inquiry. In contrast to the United States, however, this is easier said than done.
First, Australia exports either low-value goods or products that can be easily replaced by alternative exporters such as LNG. Chinese importers can increase energy imports from, let's say, Qatar or Indonesia with relative ease. Especially as demand has collapsed due to the Covid-19 pandemic, exporters have fewer options meaning China's position has strengthened.
Second, the Chinese economy will remain the biggest contributor to global economic growth despite the trade war with the U.S. and the pandemic. While the Asian country's economy took a brutal hit during the lockdown in the first quarter of the year, in the second-quarter, GDP grew by an surprising 3.2 percent. With these numbers, China is expected to become the only major economy to expand this year. Related: German Scientists Find New Way To Extract Lithium
Third, Chinese demand is essential to cushion the effects of the coming economic crisis. The bellicose language of certain Australian politicians has created the unflattering presumption that Australia is doing Donald Trump's bidding. The Chinese know they are acting from a position of strength and that Australia is more dependent on them than the other way around. The suspension of imports concerning Australian barley and beef and a warning for Chinese students and tourists against racism showed Beijing's many instruments in dealing with Canberra.
According to Keith Pitt, Minister of Resources, "we've had over $600 billion worth of investments in the last 10 years. That is a significant investment in resources." A large portion of the production capacity is aimed at the Chinese market. Recently, the insatiable demand for iron ore was underlined with BHP reporting a record export of 1,072 mtpa in June.
The presidency of Donald Trump is creating a difficult political environment for Chinese businesses. Beijing realizes that the current arduous situation won't change any time soon. Sustainable business ties are becoming more important and, therefore, diversification is also high on the Chinese agenda.
Australia's mining and energy sectors are attractive due to their efficiency and low costs of production in the country. Political calibrations could change that. Concerning natural gas, the Power of Siberia pipeline is already in operation, making Russia the most important new supplier this year. Also, Beijing may prefer strengthening and extending energy ties with Moscow to lessen dependence on less friendly nations. This could be bad news for exporters in Australia.
Other analysts are warning that Canberra's confrontational policies with China could alter the latter's investment policies. Beijing strongly encourages and provides favorable funding for investments in African countries that could soon replace Australia's mining sector. Trade ties with the continent have been expanding for two decades and the latest tensions with the West could give an additional push to diversify. Projects in among others Algeria, Cameroon, Republic of Congo, Guinea, Liberia, Senegal, Sierra Leone, Gabon, Nigeria, and South Africa are under study or being developed.
The growing trade ties with Africa serve another purpose, namely serving the growing and dynamic population of the continent. As the middle class expands, China will be able to supply ever-larger volumes of products such as household appliances, phones and other consumer products.
While China is facing structural challenges in the West, ties with the developing world are likely to remain growing. Therefore, the latest push by countries such as Australia to decouple could backfire in the long run as China will remain the most important industrial country in the global supply chain.
By Vanand Meliksetian for Oilprice.com
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Comments
Australia has over the years benefited greatly from its trade ties with China. According to official Australian sources, Australia have had over $600 bn worth of Chinese investments in the last 10 years. Until recently, Australia managed to balance its trade ties with China, its biggest trade partner, with political and security ties with the United States. However, a continuation of such trade ties has recently become more difficult as Canberra voiced on behest of President Trump opposition to Beijing’s handling of the pandemic and internal human rights issues.
Since his election in December 19, 2016, President Trump imposed tariffs and sanctions on China, waged a trade war against it, tried to tamper with the status quo over Taiwan agreed upon in 1972 between the Nixon administration and China, meddled in Hong Kong’s affairs, blamed China for the COVID-19 pandemic and labelled it as the greatest threat to the United States security.
To this could be added the disarray within America’s alliances and the democratic world. Not since the US invasion of Iraq in 2003 have political relations between the US and its key European allies been nearly so toxic. The international trade system is not faring better either because the Trump administration is deliberately undermining the World Trade Organization (WTO), marginalizing institutions such as the World Health Organization (WHO) and walking away from international treaties such as the UN-approved Iran Nuclear Deal, the Paris Climate Change treaty and the Trans-Pacific partnership. Australia is no exception.
However, it is Australia who will pay a heavy economic price for doing President Trump’s bidding. Australia exports sizeable volumes of LNG and iron ore in addition to barley and beef. The LNG could easily be replaced with imports of Qatari LNG and gas from Russia through the Spirit of Siberia gas pipeline while iron ore could also be imported from Russia or African countries. Furthermore, the Chinese know that Australia is more dependent on them than the other way around. The suspension of imports of Australian barley and beef and a warning for Chinese students and tourists against racism showed Beijing’s many instruments in dealing with Canberra.
While leaders who occupy great political offices would aspire to have a legacy saying they made a positive difference to the world, President Trump’s legacy will be the absolute opposite of the Midas touch.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London