Why is Australian trade becoming a political weapon?

Is Australia dependent on China? Or is China dependent on Australia? At a time of increased geopolitical tension, the growing trade relationship between the two countries is now a burning political issue.

Australia’s iron ore exports to China have always been strong but, with the trade war between the US and China turning red-hot, they have strengthened further. The trade imbalance between Australia and China is now at a record high.

The shifting narrative

This development led to a fascinating story in The Australian Financial Review last week that upended a popular trope: it is China which is reliant on Australia, argued author Angus Grigg. He claimed the steady northward stream of boatloads of iron ore and coal were “crimping Beijing’s ability to penalise Canberra for its tougher stance on national security issues”.

Australia is now the major source of Chinese iron ore imports, providing 74% of that country’s supply during June. Iron ore remains central to the steel-making that drives China’s infrastructure-led economic growth.

It is doubtless true that China depends on us — we control a mighty share of iron ore supply globally. However it’s not as if we are giving away iron ore for free. They pay for it, and handsomely. This year iron ore prices leapt back over $100/tonne — levels not seen since the heady days of the mining boom.

Seeing trade through a lens of winners and losers, power and weakness, is a Donald Trump move. Trade is an inherently interdependent relationship. Both sides gain from trade. We forget that at our peril. And focusing on a single commodity in which Australia has some market power may miss the bigger picture.

The iron ore narrative could just as easily be flipped: after all, Australia’s giant mining industry depends heavily on a single major customer. Goldman Sachs issued a research note this week showing that our economic growth would be halved if China trimmed its imports from Australia.

The narrative of Australian dependence on China was also advanced in a different recent media storm about higher education. Australia’s universities are highly dependent on China, and a downturn in Chinese students, the pieces argued, would be “catastrophic”.

All of these articles are a disappointment for those who abhor Trump’s trade war. The use of trade as a political weapon is now coming back with a vengeance, and the old rules-based trading order is looking wobbly.

That rules-based trading order — carefully tended since the end of World War II — has been vital to Australia’s growth, and arguably to its security. The golden arches theory of global conflict, which claims two countries with a McDonald’s have never gone to war (the theory can be defended only if you rule out various small wars, skirmishes and NATO bombings), illustrates the idea that once two nations’ interests are sufficiently intermingled, conflict becomes unimaginable.

But the power of the World Trade Organisation is in decline as tariffs come back and the fragile consensus for free and non-discriminatory trade crumbles.

The opposite of free trade is a mercantilist approach that exploits power, favours friends, pays little heed to the will of the market and is historically terrible for mutual economic growth.

China and unavoidable politics

Of course, trade has never been without a political dimension. We keep foreign affairs and trade in one department for a reason. And, in dealing with China, the link from the economic to the political is even tighter.

Communist Party control of state-owned enterprises means the distinction between trade and everything else is never that clean. Banning Huawei from Australia’s 5G network is a great example of how muddy the situation can get. Where is the line between China’s economic interest and its political ambitions?

The AFR story mentioned above emerged in the aftermath of extremely strong comments by Liberal backbencher Andrew Hastie over how Australia should work to control the threat of China. With China appearing set to roll armed police into Hong Kong, that threat has never looked more concrete nor more immediate.

So, can our trade relationships and the wealth they have created survive the threat of a rising China?

The pessimistic conclusion that could be drawn is that rather than supporting decades of global peace, the rules-based trading order was merely facilitated by it. We lived through a dreamlike period of growing trade and growing wealth because there was no major non-Western threat. Between the US, Europe and a demilitarised Japan, consensus allowed trade to be decoupled from great power politics.

In this pessimistic view, the rise of China changes that — and expecting free trade to continue unabated denies the importance of major geopolitical powers in world history.

The more optimistic conclusion would be to look at the role of Donald Trump in setting the narrative by scapegoating China. His insistence that America’s trade imbalance with China is a major political issue is echoed in recent media reports about Australia’s trade imbalances with China.

With a different president in the White House, a different story could be told — one that returns trade to its rightful role in the background.

What do you think of the current narrative on Australian trade? Send your comments to boss@crikey.com.au. Please include your full name.