How the Australia-China trade dispute could unfold

Sydney Business School’s professor Hans Hendrischke dissects the rationale behind China’s punitive trade measures against Australia and the likely scenarios that could play out.

Australia’s agricultural industry is bearing the brunt of the fallout from increasing diplomatic tensions with China. Agricultural exports to China have grown in 2019/20, but trade bans are having an increasing and unpredictable effect.

Unlike the US and China – which are in a trade and economic war – Australia and China’s economies are complementary. That is, there is no serious competition between the two economies. Australia exports resources and agricultural products to China in a volume and quality that their domestic market does not produce. Australia is a service provider in tourism and education that appeals strongly to Chinese middle-class consumers.

The way China has imposed bans on Australian exports indicates a motivation by diplomatic rationale rather than an economic one. Their main function seems to be to cause pain to Australian producers and communities to put pressure on the Australian government. Chinese export bans have moved from pain point to pain point for Australia, while avoiding areas where Chinese industries could be negatively impacted, like iron ore or wool.

China is sourcing agricultural products from alternative markets, such as barley from Indonesia, beef from the US and wine from Europe and South America. China is also increasing domestic production for import substitution.

There are different scenarios for how these tensions will play out over time and how Australia could respond, depending on the explanations of the diplomatic crisis.

The geo-strategic scenario assumes that tensions between Australia and China are the result of the real trade war and the economic decoupling between the US and China, which was pursued by the Trump administration. Under this scenario, Australia is coming under Chinese coercion for pro-actively supporting US policies directed against China. Tensions would be reduced if there is a return to more predictable and rules-based policies under a new US administration.

The distancing scenario assumes that Australia will be politically distancing itself from China and joining other like-minded countries in a loose alliance against China, with the aim of reducing China’s political and economic influence in the region. This scenario envisages a gradual economic distancing from China and reorientation of Australia’s export markets.

The decoupling scenario is a more radical version of the distancing scenario in that it favors active decoupling from the Chinese economy, including boycotting Chinese imports into Australia. Proponents of this scenario would accept a collapse of Australian agricultural and other exports to China. This scenario is highly unlikely as it would isolate Australia from regional countries, which are strengthening their economic links with China.

The multilateral scenario is the most likely because it brings Australia and China together in a multilateral context of Asian and Pacific countries. As a signatory of the Regional Comprehensive Economic Partnership, Australia plays a major role in this regional context and will have an important voice when it comes to upgrading regional cooperation in line with a renewed Trans-Pacific Partnership. This scenario does not offer any short-term solution to the current trade friction but will have a stabilizing influence on the other scenarios.

Professor Hans Hendrischke is an expert in Chinese business and management from the University of Sydney Business School.