Australia's flag flutters in front of the Great Hall of the People during a welcoming ceremony for Australian Prime Minister Malcolm Turnbull (not in picture) in Beijing, China, April 14, 2016. Photo: Reuters/Jason Lee
Australia's flag flutters in front of the Great Hall of the People during a welcoming ceremony for Australian Prime Minister Malcolm Turnbull (not in picture) in Beijing, China, April 14, 2016. Photo: Reuters/Jason Lee

Australia could pay a steep economic price for its pro-American stance over militarization of the South China Sea if China decides to elevate its most recent diplomatic outburst into punitive trade retaliation.

The Global Times newspaper, a mouthpiece for Communist Party gripes and saber-rattling, warned in an article this week that China might “adopt strong countermeasures which will seriously impact Australian economic development” unless Canberra stopped “kissing up to the United States.”

Published with a drawing of a kangaroo stoking a bee hive, the article by Zhang Ye of the Chinese Naval Research Institute stated that China “won’t allow Australia to take a free ride and meanwhile make provocations.”

“Its bigoted actions have jeopardized not only China’s national interests, but also Australian long-term interests, bringing Canberra’s structural contradictions and strategic dilemma to a worse level. This will poison its relations with China, shake up foundation for its strategic balance between China and the US and reduce its independence of foreign policy.”

Bilateral relations have sunk to a new low since Australia released a foreign policy White Paper in November that pointedly warned against the militarization of atolls in the strategic South China Sea, claimed in part by China, Taiwan, Vietnam, Brunei, Malaysia and the Philippines.

Aircraft carrier USS Kitty Hawk receives fuel from the Royal Australian Navy auxiliary oiler replenishment ship during a joint exercise. Photo: US Navy via AFP

Australian warships have crossed into the defensive zone declared by China under its claim during military exercises with the US and its allies. Though Canberra is neutral on the issue, it wants freedom of navigation in the contested maritime region.

In December, Australia passed new laws to counter foreign influence in government which were seen as mostly aimed at China. There were media reports of similar perceived as predatory Chinese behavior at local universities.

The research institute, an agency within China’s People’s Liberation Army, does not reflect official viewpoints, which are usually expressed via signed letters in the People’s Daily, the party’s newspaper of record.

However, such a letter was issued in mid-December by Party elite after the two countries had traded accusations of diplomatic meddling, and the article may be building a case for more direct Chinese actions.

There are plenty of options, as Australia has an unhealthy level of economic reliance on China and few countermeasures at its disposal. The question is how much pain China itself would suffer if it exacted economic penalties.

A free trade accord activated in late 2015 triggered a surge in two-way shipments of goods and services, worth a combined US$122 billion in 2016, and attracted US$68 billion of direct investment in Australia alone last year.

Australia’s Prime Minister Malcolm Turnbull sits with Chinese Premier Li Keqiang as they watch an AFL game. Photo: Reuters/David Gray

China buys 31.6% of Australia’s merchandise exports, worth US$63.7 billion in 2016 but sent only US$46.4 billion of goods to Australia, leaving a trade imbalance of US$17.3 billion — a possible economic motive for cutting shipments. Australia’s exports grew by 8.9% in 2015-2016, but China’s fell 3.3%.

Australia also exported services valued at US$8.7 billion in 2016, mostly in education and banking, while it bought only US$2 billion from the Chinese. China was Australia’s second biggest market for services in the same year.

The dilemma for China is that most of its Australian imports are raw materials — iron ore and concentrates (US$34.3 billion in 2016) and coal (US$6.2 billion), which fuel its power stations and industrial plants. Despite recent localization efforts, iron ore imports grew by 13.2% in 2016 and coal by a hefty 31.5%.

Demand for both ores is forecast to decline from 2020, but China is probably in too deep to sever the linkage with Australia entirely. Many of its own enterprises, including China Trust and Investment Company, Sinosteel and Yanzhou Coal, have direct stakes in Australian mining operations, and they were acquired specifically to underwrite these same import connections.

Two softer targets might be education and tourism, whose viability have also become increasingly reliant on Chinese cash and sustained goodwill.

About 120,000 Chinese are studying in Australia, comprising 30% of all international students and US$23.6 billion in income, including tuition fees. They account for nearly 20% of funding at some larger universities and 6% of all students, the highest dependency of any developed country.

Chinese tourists look and take pictures of the Sydney Opera House through a security fence Photo: Reuters/David Gray

About 1.1 million Chinese visited Australia in 2016, bringing US$6 billion into the country, or about 25% of all tourism revenues. At current growth 3.3 million Chinese will visit by 2026, becoming the biggest source of tourists.

China has shown little hesitation in using its economic clout for diplomatic purposes when the need arises, even with close trading partners.

Last year it launched an extraordinary offensive on South Korea for allowing the deployment of the US anti-ballistic missile Terminal High Altitude Area Defense system, costing the Korean economy at least US$6.5 billion.

South Korea was hit on all fronts, including a consumer trade boycott, investment curbs affecting its businesses in China and the cancelation of cultural visits. Lotte Group, which owns the land where the defense system was sited, lost an estimated US$1 billion from a specific state-driven campaign.

Australia’s spat with China is not in the same league, yet, but Beijing may want to send a message to other client states in an expanding zone of economic influence: challenges to its political authority and security interests will no longer be tolerated.

As American influence in Asia wanes and China begins to reshape regional institutions in its own image, it will become increasingly apparent that the nation’s diplomatic and economic objectives are really one and the same.

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