Australia - China: Trade tensions need political reconciliation

Cause ofAustralia-China relationsThe rapid deterioration is said to have stemmed from miscalculations on both sides. Beijing has punished Australia with trade measures, such as tariffs on barley, a temporary suspension of beef imports, and two investigations into cheap Australian wine. Meanwhile, Canberra has used the partnership spirit enshrined in the 2015 China-Australia Free Trade Agreement (ChAFTA) to side easily with the US.

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According to the Australian Bureau of Statistics, two-way trade between Australia and China was worth about 240 billion AUD/year (about 175 billion USD) as of June 2020. The volume of two-way trade has increased by almost 60% in the past five years.

The Australia-China Free Trade Agreement ChAFTA was signed in 2015. Photo: AP

The Covid-19 pandemic appears to have hit the quietest ground in Canberra-Beijing relations.

In contrast to the bilateral trade relationship, which is still growing, albeit slowly, the political relationship between Australia and China has deteriorated as strategic conflicts have increased, along with accusations of Chinese interference in Australian affairs. In particular, the pandemic attack seems to have hit the "quietest territory" in the relationship between Canberra and Beijing, changing the nature of this relationship. Especially since Australian Prime Minister Scott Morrison, after a phone call with US President Donald Trump, announced that Australia would cooperate in investigating the origin of the Coronavirus. China has considered this announcement as a provocation, betrayal, adding fuel to the fire.

Attacking China’s sensitivities will only encourage it to impose more trade measures on Australia. Beijing will use legitimate, globally-ruled trade disputes against Canberra, such as launching anti-dumping and anti-subsidy investigations into imports of cheap Australian wine into China. This would be a major blow to Australia, becauseThis country depends heavily oninto wine exports to China (annual exports of 40% of output, worth 731 million USD).

Relying on China for 33% of its total international trade leaves Australia vulnerable not only to economic pressure but also to supply chain competition. But so far, China has retaliated only in areas important to Australia, and Australia has its own reasons for not being too quick to succumb to Beijing’s attacks.

According to the Australian Customs Department, trade turnover between Australia and China reached 175 billion USD as of June 2020. Photo: EPA

China still needs high-quality, competitively priced raw materials from Australia, and Australia is making progress in developing its mining industry. Australia supplies two-thirds of China’s iron ore imports, and iron ore plays a key role in China’s nuclear weapons. Replacing Australia would not be an easy task, but would be a very costly and multi-year decision, something Beijing is not prepared to do.

This is not the first time in the world that a trade conflict has occurred between two countries due to political differences, but in the case of China and Australia, the free trade agreement has seriously failed and has not brought about the strategic geopolitical results that both sides expected.

POLITICAL RECONCILIATION

Canberra seems to have caught itself in the vortex of geopolitics.

When ChAFTA was signed, both countries used it as a tool to cement ever-closer economic cooperation, aiming to harmonize future multilateral regional agreements such as the Regional Comprehensive Economic Partnership (RCEP) between the 10 ASEAN members and Australia, China, Japan, New Zealand and South Korea – expected to be signed this year. But after the US changed its trade policy towards China, Australia relied on ChAFTA, hoping that Canberra could toe the Washington line without facing retaliation from Beijing due to the binding provisions of the five-year-old trade agreement. China has called Australia a “bluff” in response to every such move, and Canberra now appears to have “trapped” itself in the geopolitical vortex.

Political tensions between Australia and China have flared since Australian Prime Minister Scott Morrison announced he would join an investigation into the origins of the Coronavirus at the request of the US. Photo: EPA

Chen Hong, director of the Australian Studies Center at Shanghai Normal University, said: China has no objection.Australia-US alliance, as long as it does not affect China's national interests. If Australia takes actions that threaten China's core interests, by supporting Washington's agenda to contain Beijing, China will not hesitate to take defensive measures. On the other hand, some analysts say that Australia's strong relationship with the US is not too serious a barrier. Many countries in the region also see it as a bridge between Asia and the Americas, but Australia should not focus only on the US.

Trade tensions are increasingly making Australia realize that it is too risky to have a close relationship with the Chinese economy.

Few politicians in Canberra believe that relations between the two countries will have a bright future in the short term. Trade tensions are increasingly making Australia realize that it is too risky to have a close relationship with the Chinese economy. The more Beijing tries to use trade as a weapon of pressure and unilateral trade sanctions, the fewer voices in Australia will call for reconciliation.

However, using ChAFTA as a “weapon” is unlikely, as it is crucial to agreements like RCEP, which Beijing is eager to ratify. “China will not use ChAFTA as a weapon for two reasons,” said Jeanne Huang of the University of Sydney Law School. “First, the dispute settlement mechanism outside of negotiation and consultation is rarely used by China. This means that China will not initiate an arbitration or conciliation against Australia, according to ChAFTA. Second, China has been pushing for RCEP for several years, so it cannot push Australia out of RCEP at this late stage, as this would affect China’s interests.”

China's blacklisting of Australia's four largest beef processing plants is seen as retaliation in the dispute over the origin of the Covid-19 pandemic. Photo: Getty

Trade does play a stabilizing role in bilateral relations, but political discord is not so easy to resolve. From China’s perspective, the Australian government has now joined the Trump administration in advocating a confrontational approach to Beijing. While China’s rise has shaken Australia’s ideology, Canberra has also shifted its stance, becoming less concerned about whether Beijing is angry and more accustomed to its anger.

Conflict is inevitable. Therefore, if the Australia-China trade tensions are to be resolved, there must be a political reconciliation step. Moreover, both China and the US are Australia's most important security and economic partners. How Australia will continue to play this role in the future, in the context of strategic suspicions between the two "arch-rivals" China and the US, which are increasingly inexorable, will be the answer to the Australia-China trade picture.

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