The Australia dollar fell 1% last week on reports of an apparent ban on Australian coal imports at China’s port of Dalian.
While Chinese and Australian officials have spent the last few days denying an outright ban, confusion over the incident has highlighted Australia’s vulnerability to any potential move by China to weaponize bilateral trade in response to perceived slights from Canberra.
What began as a reports of an indefinite ban on Australian coal imports to Dalian was quickly played down by Australian Trade Minister Simon Birmingham to “temporary blowouts” in “processing times” at the port.
Still, some have suggested the snag could be Beijing’s thinly veiled retribution for Australia’s ban on Chinese tech giant Huawei from participating in its 5G rollout, as well as claims last week that China was responsible for a massive cyberattack on Australian government servers.
Australia’s recent decision to bar Chinese billionaire Huang Xiangmo, a major contributor to local political parties, from entering the country has also reportedly caused bilateral ripples.
It is possible that there was nothing political in the stalled shipments at Dalian (though some reports said Russian and Indonesian coal entered the port unimpeded), and that the delays were only an isolated measure in China’s “stop-start” approach to managing a broad economic slowdown.
The ban, if indeed it’s a ban, could be viewed as a mere extension of existing measures limiting unloading to daylight hours and extending customs’ clearance procedures from a usual seven to 14 days, to more than 20. It could also aim to curb a bump in imports, which hit a record high of 34 million tonnes in January.
China’s actions on the Dalian coal shipments are still so opaque that only a small number of people in the upper echelons of the Chinese government are likely to know the real story behind the ban.
While an overt trade restriction on Australian coal imports would inevitably spike bilateral tensions, the uncertainty around the Dalian ban will leave Australia to ponder the potential economic impact of a formal and broad-based ban if it were eventually imposed across several ports.
The economic risks for Australia are potentially high: Around 6% of Australia’s gross domestic product (GDP) is currently derived from exports to China.
In the last financial year, Australian sold A$13 billion (US$9.3 billion) worth of coal to China. Australia supplies 23% of all Chinese thermal coal for power generation, and 53% of all China’s coal imports for power and steel production.
Dalian has a minor role in that big picture. The port receives around 8% of Australia’s coal exports to China and less than 2% of Australia’s overall A$60 billion (US$63 billion) in annual coal exports, which includes substantial shipments to Japan, South Korea and India.
If there is an official line which has come out of China since the initial panic of last week, it is that Australian coal is not being singled out and that there is broad slowdown in processing underway.
Coal is also caught up in the often contradictory Chinese goals of managing climate change and pollution, while also pursuing fast economic growth.
Over the last few years there have, at various times, been slowdowns and restrictions imposed on coal imports for a number of complex economic reasons which have had nothing to do with politics.
Australian Trade Minister Birmingham met with China’s ambassador to Australia on Saturday and emerged to reject what he said were “conspiracy theories” that Beijing was using coal as a way of punishing Australia.
“There are quite likely, from what we understand, domestic factors at play in terms of those environmental factors they cite as well as certain domestic industry factors,” Birmingham said on Sunday.
This official line may well be true, but it exposes two big risks: Australia’s general economic dependence on China as a driver of its own domestic economy, and the fact that Australia-China relations have become so tense that the market clearly believes that punitive and politically motivated trade actions are a possibility.
According to the conspiracy theory, the Dalian coal “ban” was a pointed way for China to remind Australia that it holds most of the levers of power in the economic relationship.
While Australian commodities are plentiful and cost effective, China could source them from elsewhere, including Mongolia and Indonesia, if there were directions from the top to do so.
A ban or reduction on coal imports would hurt, and the pain would be more acute if the policy was extended to iron ore, which is Australia’s top export to China and currently takes more than 30% of Australia’s total production.
Australia’s relationship with China has been fraught on several fronts over the last two years. Canberra’s policy of embracing China economically while often freezing it out diplomatically has become more exposed by rising US-China tensions on trade and geopolitics.
For many years, Australia continued on with a policy that believed it didn’t need to choose between China and its traditional security allegiance with the US, but increasingly it appears the two are no longer mutually exclusive.
The panic response to last week’s coal ban, real or imagined, shows how sensitive the relationship has become, and emphasized the price that Australia could potentially pay for the wider diplomatic choices it has made.