Australia-China trade will be caught in middle of Trump’s tariff war

By now, even the most stubbornly bullish of mining executives must be giving up on a new China-led iron ore boom, and by extension, delivering another windfall for Australian government budgets and super holdings.

Property prices are deflating, urbanisation is slowing, and Chinese steel production is finally peaking. Donald Trump’s coming tariffs on Chinese imports will likely make things worse, by design.

If these megatrends in Australia’s largest export market, which largely took root before the pandemic, aren’t enough, reading Xi Jinping’s speeches might finally convince the holdouts.

Xi has made clear to every level of the party-state that he wants “high-quality development”. Translated, that means competing head-on with the US on high-tech, not building a string of new steel mills in the provinces.

The big question for Australia, though, is not so much whether China has hit “peak steel”. It’s whether the two economies have reached what we might call “peak complementarity.”

As clumsy as that phrase might be, the issue of Australia’s natural, market-driven enmeshment with the Chinese economy continues to weigh heavily on foreign and defence policy in Canberra.

Beijing often cites the “complementarity” of the Australian and Chinese economies as an immutably friendly foundation for the two countries.

Australia exports resources, foodstuffs and services, such as education. In return, China sells us finished products, like computers, phones, solar panels, toys, and, increasingly, both electric and old-fashioned petrol cars.

The balancing act, of managing complementary trade ties with China, and complementary security ties with the US, will not get any easier.
 

If Beijing’s coercive campaign against Canberra, targeting $20 billion worth of exports from 2020, was meant to be a wake-up call about the dangers of putting too many eggs in a single basket, we slept right through it.

China didn’t touch the core of bilateral trade, in iron ore. But the sectors that were targeted, such as coal, barley and wine, rushed back into the profitable China market the moment Beijing lifted its barriers.

After emerging from an intense period of trade coercion at the hands of Beijing, then, Australia is still sending nearly 40 per cent of its exports to China. Even four years into a Chinese property downturn, iron ore remains an immensely valuable commodity.

That won’t change soon because there is no other market of China’s size, appetite and proximity to turn to. De-coupling from China, or even de-risking, is not an option in the short term.

As David Uren pointed out in The Strategist, Australia is now “more dependent on a single market” than it has been since the late 1940s when our biggest customer was the UK.

Paying the bills

Put another way, the two economies remain as complementary as ever. Has the trade relationship peaked? Maybe. But for Australia, it has not lost its central importance.

There are upsides to the enduring economic ties. All the talk that AUKUS would hurt Australia economically has proven groundless. Indeed, trade with China continues to help pay the bills for AUKUS. (Thank you, Beijing!)

Healthy bilateral trade is also a reminder that Australia is not dependent on China. In key commodities, the two countries remain, for the moment, interdependent.

Still, Australia is essentially where we started in 2009, the year Canberra welcomed Beijing as our top trading partner, and formally embraced the notion of a “China threat”, expressing concern about Beijing’s rising military power in Kevin Rudd’s government’s defence white paper.

To be fair, Australia hasn’t been treading water. AUKUS, foreign interference laws, closer ties with the US and Japan, the military build-up in northern Australia, and joint patrols off the Philippines – have all been driven by China’s ambitions to be the dominant regional power.

But the new Trump administration is likely to complicate Australia’s uneasy and improbable balancing act further, although precisely how is unpredictable.

Trump, for starters, does not hold all the cards on trade with China, although his endless blustering suggests that he believes he does.

The US president is focused on using tariffs to disrupt China. Beijing, in turn, has been readying the myriad of global supply chains locked within its borders to retaliate, by disrupting US factories that rely on them.

Trump’s tariff war will be competing with Beijing’s supply chain war, with countries like Australia caught in the middle.

Higher military spending

If any consistent line on Australia does emerge from Trump and his national security advisers, they will want visibly higher military spending and a more explicit alignment with US security goals and strategy.

That was evident in the statement from the Quad ministers – representing the US, Japan, India and Australia – released in Washington last week.

The Quad once regularly rebuffed any notion that it was a security body. The Washington statement seemed to embrace a security role for the body, a sharp departure.

On some issues that Washington is focused on, such as breaking China’s hold on critical minerals, Trump and his team will find support across the board in Australia.

When it comes to sharp increases in military spending, and a willingness to be more outspoken about China, bipartisanship could be more elusive.

Peter Dutton will buy into a more hawkish position; Anthony Albanese, having trumpeted the restoration of trade ties with China under his government, will likely be a much harder sell.

The balancing act, of managing complementary trade ties with China, and complementary security ties with the US, will not get any easier.