An All-Out Trade War With China Would Cost Australia 6% of GDP

And a 14% hit to real disposable income

Can be Empire’s attack dog and make money in China at the same time?

China accounts for more than a third of export dollars earned by Australia.

The figures, for the 12 months to October, cover the period of coronavirus disruptions and disputes over trade.

They apply to physical exports rather than harder to measure services, and are dominated by record-high Chinese takings of Australian iron ore.

But they mightn’t last.

China is changing, transitioning from growth driven by the iron-ore hungry expansion of cities and manufacturing to growth driven more by the supply of services.

Externally, its “belt and road” infrastructure investments facilitate the supply of resources from locations other than Australia, among them the Simandou iron ore and bauxite deposits in Guinea, West Africa that will eventually offer higher quality ore than Australia from a region China may regard as more friendly.

Even if this source is slow to emerge, China will seek to diversify its supplies of iron ore by other means, as suggested by Australia’s former ambassador Geoff Raby in his recent book China’s Grand Strategy and Australia’s Future in the New Global Order.

One will be to ensure a steady supply from Brazil which, with China, is a member of the BRICS group of major emerging national economies.

Australia produces few manufactured goods and pays for the considerable quantity it imports by exporting commodities, mostly to China.

The loss of this export channel would be serious, but how serious?

Iron ore matters more than we think

Conversation authors John Quiggin and James Laurenceson argue the effects would be small. They point out that mineral exports account for only 1% of Australia’s national income and that China would hurt itself if it cut off the flow.

But China’s size means the damage to China would be proportionately smaller than the damage to Australia.

And while the mining sector is not the largest in Australia’s economy, its growth since 2002 has brought with it a secondary boom in Australian service industries. Australia’s East Coast cities have prospered even while most of the mining has been occurring in the Pilbara.

The mining boom brought a substantial boost to our terms of trade (the earning power of our exports relative to the cost of our imports), pushing up the Australian dollar and making imported goods much cheaper.

A reversal would see our terms of trade fall and our cost of living rise.

Some commentators place store in our ability to redirect exports of wine and barley, and whatever else is affected by trade disputes, to other customers.

At least for iron ore, however, there are few other customers at current volumes. This suggests a decline in export prices and in Australia’s terms of trade.

Damage to us, a mozzie bite for China

So its worthwhile attempting to quantify the damage from a winding back by China of its imports from Australia.

We have conducted simulations of the effect of shutting down Australia-China trade by 95% in which we allow time for capital flows and production and employment to readjust and assume that monetary policy and fiscal balances remain unaltered throughout the world.

We find the shock to the demand for Australian products is large and it is only partially offset by the redirection of our exports, even with a large depreciation of the Australian dollar.

The reason for this is that the loss of Chinese exports reduces the rate of return on investment in Australia, forcing financial markets to reallocate finance to other parts of the world.

The effects on Australian gross domestic product and real disposable income per capita are big (6% and 14 %), while those on China are mosquito bites by comparison (0.5% and 2.4%).

It’s wise to be prepared

Important things we can do to hedge against such an occurrence include maintaining strong relations with current and potential export destinations and fostering innovations that will allow our export product mix to adjust so as to better service the markets that remain open.

Examples include the proposal by Ross Garnaut to turn Australia into an exporter of green energy and associated plans by Fortescue and others to raise exports of energy by more than the east coast of Australia currently consumes.

Without such innovations a substantial decline in trade with China would cut investment in Australia and cut living standards.

It is, of course, entirely possible that the worst won’t happen, but we don’t think that’s something Australians can bank on.

If our ship does begin to sink, capital and skills will jump off and what we are left with won’t be enough to support us in the manner we have come to expect.

Source: The Conversation

  1. itchyvet says

    This anti China beat up came about because the U.S. and Australia, (though Victoria and N.T. were able to recognise the benefits) were unable to see the wood for the trees with the New Silk Road and BRICS. Unlike the U.S. China actually builds infrastructure for the nations it signs agreements with. The majority of those nations benefit hugely economicly as a direct result of those agreements and infrastructure. Where the U.S. does nothing of the kind, only ripping out the guts of the countries it rapes and pillages, leaving nothing but poor and destroyed countries behind. Australia is not far behind. Example, take a good long look at how Australia has treated the countries in the Pacific region. For years they have been ignored and pushed around by Canberra, but mostly ignored. All of a sudden China assists them by building infrastructure to aid them in their development, so such nations can return the favor by buying Chinese products and Australia starts to whinge and complain that the Chinese are intruding in their territory? (Since when are the Pacific nations Australian territories ?) Now, out of the blue, Australia is trying to catch up for the years of neglect by shoveling money at them, but that money has strings attached, as always, can only be used to buy Australian products from specific Australian firms.Still no signs of Australian investment in infrastructure, just a round about way of making certain Australians richer.
    The hypocrisy is astounding.

    1. Southern says

      Hear hear a brilliant comment!

      Timor gas and oil being one such example.

      1. itchyvet says

        My point exactly. Australians seem to be cutting off their noses, to spite their faces, simply to please their masters in London.

        1. Southern says

          The steps of Parliament serve as steppingstones towards future corporate appointments and careers – cushy and lucrative.

  2. Southern says

    Why tag an article with those pesky Chinese?

    It appears first of all racist and second to that it reveals the authors ignorance in matters Geo-Political.

    China did not start the pivot to Asia – That was initiated by Washington and announced by Obama.

    So if you’re going to start making accusations against some ideology than that will have to be focused on Washington’s Neo-Liberals …then it would be wise to try figure out where those sell outs to humanity get their clues.

  3. Franck Vadim says

    The main problem with this kind of stupid war between countries of the same region because of the sneaky infiltration of the US on some bribed Australian politicians is that it creates deep rivalries between peoples. And those rivalries last longer than those politicians.

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