[Analytics] Australia, China trade war ensures mutual destruction

Chinese visitors sample white (R) and red wines (L) during the Vinexpo Asia-Pacific trade fair in Hong Kong on May 30, 2012. Photo: AFP/Laurent Fievet/Getty Images. Sketched by the Pan Pacific Agency.

Treasury Wine Estates, the largest wine company listed on the Australian Securities Exchange, said in its recent annual report to shareholders that China’s new anti-dumping measures on Australian wine are a serious concern. Helen Clark specially for the Asia Times.

“This matters deeply to our business and the industry, both in Australia and China.”

China recently launched a second investigation into Australian wine imports. Beijing is probing separately what it believes are subsidized wine imports, claiming that Australian wines cost more at home than they do in China.

This may be true, but that’s largely because alcohol is heavily taxed in Australia, despite its reputation for cheap and abundant booze. The Chinese Ministry of Commerce’s investigation will reportedly run between a year to 18 months.

For its part, the Australian government maintains it does not subsidize wine exports. Australian wine might be selling best by volume and value in China, but it has never been the cheapest; on average Australian bottles cost more than Spanish and South American wines.

The wine tiff is the latest to hit once-strong bilateral trade ties. Relations have been on a downswing ever since Prime Minister Scott Morrison’s call for an inquiry into the origins of the Covid-19 pandemic, which by all credible accounts first emerged in Wuhan, China.

China has taken umbrage into what it views as interference in domestic affairs and has fired back through a series of trade reprisals and threats.

Morrison has responded in kind by running a ruler over Australian states’ various agreements with China and has threatened to cancel those he deems as not in the national interest.

Victoria state’s surprise decision to sign on to Beijing’s Belt and Road Initiative (BRI), although non-binding, will likely be first on Morrison’s chopping block.

“The Belt and Road initiative will create opportunities for Victorian businesses and local jobs – opportunities that will be more important than ever as we rebuild from this crisis,” a Victoria government spokeswoman said back in May, before the downturn in ties.

Overall, trade with China may not be hit hard yet, but the tit-for-tat salvos are increasingly targeting industries that are important in Australia but have little direct importance to national economic goals or strategy, including in the security realm.

China and Australia’s trade is interlinked in many areas but the largest value items are commodities Beijing arguably cannot readily source in sufficient supply elsewhere.

This is often missed when Australia and China’s trade relationship is weighed against security ties with the US and a rapidly changing world order some view as a New Cold War.

Australian businesses, to be sure, are taking certain market hits in an already dire economic environment. When China first announced it was instituting anti-dumping measures on Australian wine, TWE’s share price dropped 17% the same day.

Australia is the single largest wine supplier to China, a market worth an estimated A$1 billion ($728 million) per year. But that’s still small compared to the value of Australia’s iron ore and LNG exports to China.

This month, China suspended imports from another Australian abattoir, in Queensland, over suggestions it found chemical chloramphenicol in slices of its beef.

Beijing suspended shipments from four other abattoirs in May while also putting in place a barley tariff of 80%, though the anti-dumping trade dispute began years ago.

The barley tariff will reportedly cost Australian farmers as much as A$500 million ($364 million), according to reports. Over 60% of Australia’s barley exports go to China.

Broadly, it’s been trade tit for investment tat. The Foreign Investment Review Board recently blocked a Chinese Dairy from acquiring a local company that owns several well-known soft drink and milk brands.

FIRB has blocked prior Chinese investments, including one by CK Group in 2018 to purchase gas pipeline company APA Group.

CK Group currently already holds substantial pipeline infrastructure, but had earlier promised to divest it to avoid competition issues. Previously, there was no pushback on China’s entry to the market.

China also recommended – pointlessly for now – that its tourists avoid Australia and has urged Chinese foreign students to abandon Australian universities.

At the same time, there are ongoing concerns in Canberra of undue Chinese influence within academic institutions beyond the usual Australian government concerns about Beijing-backed Confucius Institutes.

But it all circles back to what Australia does best: dig minerals out of the ground and send them overseas

“The appetite of China’s consumers for Aussie tenderloin and Merlot is insignificant in terms of overall trade. Iron ore, coal and LNG are what really matter,” consultancy Wood Mackenzie said in a report.

“As China recovers from the pandemic, demand for Australian iron ore, coal and LNG is booming – iron ore and LNG imports are up 8% and 9% year-to-date respectively versus 2019. Chinese imports of Australian coal are way ahead of where they were before the pandemic,” the report said.

China has threatened to impose tariffs on Australian coal and iron ore, but made few serious moves. Reports indicate Australia is looking to ally Pakistan for more coal imports amid the spat, though it lacks the quantity and quality of Australian coal. Russia and Indonesia are also alternative suppliers.

Australian iron ore, analysts note, is more difficult for China to source elsewhere; its domestically produced ore is of a much lower quality.

That explains why Chinese state companies previously bid to buy large stores of Australia’s ore, only to be ultimately rebuffed. As much as 80% of Australia’s iron ore exports go to China.

Chinese LNG tariffs, on the other hand, would be especially problematic as most is sold via long term contract and would cause Chinese buyers to pay more at a time when energy demand is rising.

Some LNG contracts are up for renegotiation but the three LNG export consortia in Queensland have Chinese partners, meaning tariffs would redound on Chinese interests.

A Shell and PetroChina joint venture known as Arrow Energy recently agreed to develop a large coal seam gas project to feed Shell’s plant. In July, Australia sent 32 LNG cargoes to China, just five below its largest customer, Japan.

Australia has been among the biggest beneficiaries of China’s soaring iron ore demand. Photo: Agencies
The issue is that the value earned for that fell 52% this July over the previous year, as most LNG contracts are also linked to the Brent oil price, which fell to $20 per barrel earlier this year but has since recovered to a relatively historically low $40.

The Australian government is in a bind. While China’s tariffs hurt and generate news headlines, Beijing is mostly playing tit for tat. Yet few in Australia want Morrison’s government to take a softly-softly approach; rather, they want a tougher stance.

A recent poll by the Lowy Institute think tank found 94% of respondents want the government to find new export markets outside of China.

Whichever way the poll result is broken down, from age to location to education to even if the respondent was born in an Asian nation, 90% of respondents agree with more trade decoupling from China.

At the same time, 48% of respondents agreed with the statement that “China’s economy will continue to grow strongly and this will benefit Australia”, a sentiment that was down only four percentage points from 2016, when trade and broader relations were riding high.

Finally, only 3% of respondents believed Xi Jinping “would do the right thing regarding world affairs.” New Zealand’s Jacinda Ardern received 52% of that vote, but the more staggering revelation was that five years ago few polled even knew who the Chinese leader’s name.

“In 2020, trust in China is at its lowest point in the history of the poll, “ the Lowy Institute said.

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