Is now the right time to move away from China?

14.05.2020 Tamara Oyarce

The short answer is – no.

The COVID-19 crisis has augmented the rhetoric that at a macroeconomic level Australia seems too reliant on China and so are our businesses – particularly exporters. 

This issue came to life with the Australian government’s travel ban on China, a decision which saw Australia’s tourism and higher education sectors lose their largest market overnight, impacting other export-related industries as the crisis unfolded.

There are different camps arguing on the risks of being too reliant on the Chinese market. Some hold the view that putting too many eggs in the Chinese basket can have consequences for our national security and sovereignty. While others argue that the post-COVID-19 international economic order will see countries moving away from China and diversifying to other locations to reduce the dependence risk that came to life with this crisis, and Australia should follow suit.

The idea of the overreliance in China has been exposed in the media and the lively tensions in the bilateral relations which have led the Chinese Ambassador of China to state that the “Chinese public” might no longer seek Australian products or services. Trade tensions have further grown over the past few days as Chinese authorities have now followed through on its threat to impose tariffs on Australian barley on the grounds of an anti-dumping investigationand the suspension of export permits for beef supplied by four abattoirs – three based in Queensland and one in New South Wales– which comes at the backdrop of already strained bilateral relations. 

But what in all of this is ‘true’? Are our businesses really too reliant on China?

The reality is that the bilateral relationship with China – whether we like it or not - is critical for our economy and for our businesses. China is our biggest trading partner accounting for almost a quarter of all of Australia’s international trade and more than one-third of our exports for both goods and services.

Without China, Australia’s education sector, as well as wine, wool, iron ore industries and more would not be the success stories they have been up in recent days. Without Chinese students, Australian universities would not be in the position they are in now.

Interestingly, and if we look back in history we notice that Australia is no stranger to having one country dominate its international trade. Japan accounted for nearly the same share of Australia’s trade as China does nowadays at its peak in the 1970s and 80s. Trade with the US peaked during World War II, accounting for 39% of Australian imports and 40% of its exports. England consistently accounted for more than half of Australia’s trade until the end of Commonwealth preferences after World War II.

This might lead us to think that instead of intervening in the market to artificially reduce trade with China, a better strategy would be to manage these highly interdependent economic relationships and the inevitable shocks that the current crisis has brought to the fore.

Exporters, farmers, education providers and other businesses need to make commercial decisions based on a risk assessment that includes diversification. Diversification comes at a high cost. One of the biggest risks for many businesses is to limit engagement in the huge Chinese economy with its rapidly growing middle class, particularly now that China is one of the economies re-emerging from the Covid-19 crisis and re-opening it the market for our products and services.

Stating that we are too dependent on China also assumes that we can reduce our dependence by ‘switching’ to an alternative (e.g., the US, Japan or Indonesia). But switching might not be a commercially viable option or might just not be possible considering the interconnectedness of global supply chains. Also at a policy and Government level, forcing a switch by impeding exports and imports, or intervening in the market to expand trade with other countries might not be valid options considering mutual commitments to international trade mechanisms and the existing free trade agreement with China – ChAFTA – now in its fifth year in force and soon to enter a review process.

So, what are the alternatives and what is the way forward?

Although answering this question might grant for a full report, I would like to leave you with three key ideas:

First, there is an imperative need for better management of the relationship that acknowledges its complexity and the framework in which it is the nest. The relationship is creating benefits for both sides and that needs to be at the core of any revision of the relationship. Well-known is that China needs our commodities and we benefit from the market opportunities China provides for our exporters, so the dialogue can be re-focused on the value we bring to each other.

Secondly, as Australia and countries around the world start the road to recovery from the COVID-19 crisis, the strategy going forward needs to be strengthening the macroeconomic framework and tools at home while engaging China and the global system in protecting openness, rules and engagement. Moving away from megaphone diplomacy and focusing on articulating a clear plan at a policy level that integrates businesses needs and wants might be a good start.

Lastly, maybe the best way forward is for businesses - who are the key actors in international trade - to start devising a ‘China-and’ rather than a ‘China-or’ strategy,where we learn to live with China as a trade partner rather than lean on it.

*Note: the original article was published in our members' newsletter last week but the topic is current and we feel we should share with all of our partners and stakeholders.

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