Trade
Australian reliance on Chinese exports an economic reality
Author: James Laurenceson, UTS
The share of Australia’s total goods exports going to China fell to 27 per cent in June 2022, a sharp decrease from 46 per cent just a year earlier. While some commentary has heralded this as a success for Australian diversification away from China, it is more accurately described as a redirection of trade flows.
‘Australia’s trade diversification away from China picks up pace’ was the narrative that the Australian Strategic Policy Institute chose to spin. Pointing to the same data, other analysts trumpeted that ‘Australia found other markets’ after Beijing disrupted access for Australian barley, coal, wine and other goods in 2020.
Taken as further evidence of desirable ‘diversification’ is an increase in trade with regional partners considered more strategically aligned with Australia. During the same period, Japan’s share jumped to 17.8 per cent — up from 11.6 per cent — while India’s reached 6 per cent (up from 3 per cent).
Looking ahead, free trade agreements (FTAs) including the Australia-India Economic Cooperation and Trade Agreement and ‘friend-shoring’ initiatives like the Biden administration’s Inflation Reduction Act are viewed as cementing the shift. The latter allows US-based manufacturers to claim a tax credit if they source a specified proportion of critical minerals contained in batteries domestically or from a country where the United States has an existing FTA.
But such tales cannot explain recent changes in trade shares. Changes in China’s trade share can be explained by movements in the world price of iron ore. Iron ore consistently accounts for more than 60 per cent of the value of Australia’s total goods exports to China. During 2020 and the first half of 2021, iron ore prices experienced an unprecedented run-up. Trade data indicates that this caused China’s trade share to be 12 percentage points higher. China’s trade share still rose by 6 percentage points even as Beijing was disrupting a range of Australian exports.
But iron ore prices began unwinding in July 2021. By December 2022, China’s trade share was in line with what would have been expected if iron ore prices had remained at their level in January 2020.
It is misleading to contend that trade share changes stem from Australian exporters ‘diversifying’ away from China and towards other markets. Diversification is a firm-level strategy that involves making costly investments in marketing and logistics to gradually cultivate new markets while generally striving to retain existing ones.
In contrast, the experience of many Australian exporters hit by Beijing’s trade disruption in 2020 was redirection of production at low cost to open and competitive global markets. The redirection of coal has been particularly significant as it accounted for 70 per cent of the AU$20 billion (US$13.8 billion) in Australian exports hit with disruption.
But redirection is not diversification.
If Beijing removes the disruptive measures, global markets may well redirect Australian exports back to China. Indeed, this process appears to have already begun as coal trade between Australia and China resumed in January 2023. Another implication is that the geopolitical risk from exposure to the Chinese market has proved to be limited, making the business case for many firms to invest in diversification much weaker than is often suggested.
Some affected Australian exporters were not protected by open and competitive global markets, particularly those selling differentiated products like those in the wine industry. These firms have been forced to begin the gradual and costly diversification process. At the end of 2019, markets for Australian wine other than China were worth AU$1.7 billion (US$1.2 billion). By the end of 2022, this had grown to AU$1.9 billion (US$1.3 billion).
But this was against sales to China collapsing from AU$1.1 billion (US$760 million) to just AU$12 million (US$8.2 million) and wiping out many exporters in the process. Particularly hard hit were smaller-scale exporters with insufficient resources to entertain the possibility of selling into multiple markets. In 2019, there were 1457 wine exporters selling fewer than 50,000 cases to China. In 2023, this now stands at just 45.
As the global transition to net-zero carbon emissions unfolds, the impact of ‘friend-shoring’ initiatives like the Inflation Reduction Act on trade shares are likely to be swamped by economic reality.
Bloomberg estimates that last year China invested AU$784 billion (US$545 billion) in…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
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Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
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Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
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Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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