Australia’s trade with China is at a crossroads. Source: Getty

The Morrison government’s decision to team up with the United States and the United Kingdom to build and acquire nuclear-powered submarines in Australia has offended the Chinese administration.

After the decision on the submarine was announced, Chinese Foreign Ministry spokesman Zhao Lijian called the deal “extremely irresponsible”. Chinese media have said that Australia is now an “adversary” of China and that we must “prepare for the worst”.

This commentary was not widely circulated in Australia, but it is baffling in many ways, including what it might mean for Australia’s export market.

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This latest tension follows last year’s explosion when the Morrison government fiercely led the call for an international inquiry into China’s handling of the coronavirus. This clumsy diplomacy has seen China impose a series of economic sanctions, including the imposition of high tariffs, on Australia’s exports of barley, wine, timber, lobster, meat and coal.

As a result, coal exports to China fell to zero.

The submarine decision is likely to see the Chinese administration impose more trade restrictions either explicitly or implicitly by sourcing imports from countries other than Australia.

Australia’s trade with China

China accounts for over 35 percent of all Australian exports. This dependence is extreme. Japan is the second largest export partner with just over 10 percent of all exports.

Just 20 years ago, China accounted for a tiny 5% of Australia’s exports.

Australia’s trade ties with China have been a critical factor in sustaining what until recently was a formidable two-decade period of sustained economic growth and rising national income. Without the support of Chinese demand for Australian goods, our economy would be about 5% smaller than it is today, with equal incomes and higher unemployment.

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The economic relationship with China has so far been successful with few parallels in Australia’s economic history.

All of this is threatened by awkward and damaging diplomatic failures.

According to data from the Australian Bureau of Statistics, Australia has an annual trade surplus of more than $ 100 billion with China. The two main exports are iron ore and natural gas, which total well over $ 150 billion in annual revenues.

Australian producers of these commodities have a distinct advantage in supplying Chinese importers, including low cost of production and the ability to supply reliably and in huge volumes to meet ever-growing Chinese demand.

As the diplomatic row unfolds, there is an increased risk that China will turn to other producers of iron ore, natural gas and other important export products for Australia.

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If these alternative producers are able to provide China with everything it needs, Australian exporters will be in dire straits.

It’s happened in the coal market before, where Chinese sanctions against Australian producers were put in place over a year ago.

According to Westpac research manager Robert Rennie, Australia accounted for 46 percent of China’s imported coal at the start of 2020. That figure has fallen to zero and now China sources 42 percent of coal. ‘Indonesia and 31 percent more from Russia.

While such an extreme drop is unlikely to be evident with iron ore exports as Australia is the world’s largest producer, alternative markets are developing in Brazil and India and China has invested heavily in it. exploration and new mines at the national level.

A threat to the economy is 2022 and beyond

It is not known to what extent Australia’s export boom to China will be affected by the escalating diplomatic cuts triggered by the sub decision.

But if one sticks to the experience of coal, barley, meat, wine, meat and lobster, there must be a real risk that the export market and the economy in general are significantly affected.

And just as the vaccination rate was inspiring optimism that the national economy will open up before the end of the year, there are dark clouds on the export side of the economy. Australian who could still extinguish what was optimistic prospects.

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