Southeast Asia is reaping the benefits of other people’s trade wars.
At the height of the US-China trade war, many regional states, none more than Vietnam, saw a big boost to inward investment and outward shipments as Washington and Beijing sought to decouple from each other’s supply chains.
Now regional states are also making gains amid an intensifying Australia-China trade spat, prompted by Canberra’s call for an independent, international investigation into the Chinese origins of the Covid-19 pandemic.
This, amongst other disputes, led Beijing to impose painstakingly high tariffs on Australian goods ranging from barley to beef to sugar to wine. Given Australia’s broad export dependence on Chinese markets, Beijing presumably thought its decision would result in a quick Canberra retreat.
Yet while trade plummeted with China, in many areas a surge in Australian exports to other states has compensated for much of the losses (as has a surge global commodity prices.)
While most of the exports have been diverted to the US, United Kingdom and India, Southeast Asian states have also taken more Australian goods.
A report by the Australian Chamber of Commerce and Industry released on June 4 found that the majority of exporters believed normal trade with China was “impossible” and said trade needed to pivot to countries like Vietnam, Indonesia and Malaysia.
Reports suggest that Australian exports of barley to Southeast Asia are up, especially to beer-guzzling Thailand.
Australian thermal coal exports reached an eight-year low in March, a result of the China tariffs as well as supply issues. No coal was exported to China between January and March, a first for almost two decades.
Yet Australian coal exports to Vietnam rose to 20.34 million tons in 2020, up from 15.7 million a year earlier, according to Australian customs data.
Overall, bilateral trade between Vietnam and Australia was worth US$3.63 billion in the first four months of 2021, up 33.85% year-on-year, according to comments made by Nguyen Dang Thang, Vietnam’s Consul General to Australia.
On the other hand, Southeast Asian economies have also benefited from an increase in trade with China because of its trade war with Australia.
As a percentage of China’s overall coal imports, Indonesia’s share rose from 46.9% in early 2020 to 69.2% in early 2021, thanks in large part to a $1.5 billion deal signed with Indonesia’s coal suppliers last November.
No one imagines that Southeast Asia can replace China as a market for Australian exports. Bilateral trade with China was worth $235 billion in 2019, about double the $123.7 billion worth of trade it did with ASEAN states that year, according to the Australian Department of Foreign Affairs and Trade.
By comparison, Australian trade with European states was only slightly higher than with ASEAN, worth $127.5 billion in 2019.
However, the Australia-China trade war has refocused minds in Canberra as to the importance of Southeast Asian markets, with recent sectoral analysis suggesting that the region could play a much larger role for Australia’s cotton, coal and wine industries.
Australian trade with Southeast Asia has benefited from key trade deals, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), of which Brunei, Malaysia, Singapore and Vietnam are members, as well as the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA).
The latter, which came into effect in 2010 and will eliminate almost all tariffs by 2025, is also set for a revamp, with negotiators holding virtual meetings last month to update the pact for the latest WTO rule changes.
ASEAN states aren’t only a stop-gap as Australian exporters look to find new markets while trade tensions with China are on the boil.
A recent Vietnam Briefing by investment analysts Dezan Shira & Associates noted that Vietnam is an ideal market for Australian exporters to tap, with the fastest-growing middle class in the world and wine consumption increasing by 173.6% between 2018 and 2019.
Australian wine exporters have been especially hard hit after China imposed a 200% tariff until 2025.
However, they can expect declining tariffs in the coming years. For imports of wines, the CPTPP now has tariffs of 32%, but this will fall to 27% in January 2022 before progressively decreasing to 0% from 2028. Under the AANZFTA, tariffs will fall from 80% to just 20% from the beginning of next year.
In addition to increased trade, the Australia-China trade war has also refocused minds in Canberra on the importance of closer diplomatic relations with Southeast Asia.
During a virtual summit with Indonesian officials last year, Australian Prime Minister Scott Morrison said the two sides had a level of “trust that underpins only the truest of friendships,” while Indonesia’s president, Joko Widodo, repaid the compliment by calling Australia his country’s “truest friend.”
Although still under negotiation, the Indonesia-Australia Closer Economic Partnership is expected to be agreed soon. In terms of merchandise trade, the agreement will see over 99% of Australian exports entering Indonesia either tariff-free or under preferential treatment by 2020. Virtually all Indonesian exports to Australia will face zero tariffs.
In January, Australia and Malaysia held their first Annual Leaders’ Meeting and agreed to upgrade relations to a comprehensive strategic partnership.
Last year, Australia also opened a new infrastructure initiative office in Bangkok and had planned on opening a liaison office in Naypyidaw until Myanmar’s military coup in February put that on hold.
In the latest State of Southeast Survey, published by the ISEAS-Yusof Ishak Institute in Singapore, respondents were asked: If ASEAN were to seek out “third parties” to hedge against the uncertainties of the US-China strategic rivalry, which third country would they trust?
Some 7.5% said Australia, a higher percentage than for South Korea or India. Trailing behind Japan and the EU, Australia appears the third most popular “middle power” in the region.
For Southeast Asia, there will be a financial benefit from increased Australian attention.
Writing in February, Melissa Conley Tyler, a research fellow in the Asia Institute at the University of Melbourne, noted that the trade war with China has intensified Australian feelings that it “can’t ignore [Southeast Asia] in the face of intensifying great-power competition.”
At the end of last year, Canberra announced a slew of new development assistance packages to the region, including a $1.5 billion loan to Indonesia for budgetary support as well as tens of millions for pandemic support.
“This suggests that the government recognizes that the current investment is too low to meet Australia’s strategic objectives,” wrote Tyler.