Many diplomatic arguments are abstract disputes over symbols, status or lines on a map with little impact on ordinary Australians.
Not so the stoush over Australia’s proposal that there be an independent inquiry into the COVID-19 pandemic.
China is upset, and has threatened trade sanctions. The prospect of harsh diplomatic words becoming reality is a nightmare for Treasury.
It is not a few big businesses that will suffer. Australia’s economy depends on China. We can find new markets, over time and considerable cost — and in the meantime lose billions of dollars.
The market for international students has been grabbing attention, but the bigger story is iron ore exports.
Chinese students account for around 38% of total international students. That’s too great a reliance on one country; a reduction will be a blow to university revenues.
But it is nothing like our dependence on China for our biggest export, iron ore. Some 80% of Australia’s iron ore production is exported to China to feed that country’s enormous steel industry. It is far and away our biggest source of export earnings from China, worth over $63 billion a year in 2018-19.
There are alternatives — other countries could buy our iron ore. But moving into a new market is not easy. We can’t wander up to a potential customer and say, “I’ve got a load of iron ore in the truck, would you like a deal?”. Iron ore is exported in bulk — more than 800 million tonnes — to very large smelters and refiners, often government-owned or controlled. Setting up contracts can take years of careful negotiation.
A contrast with the international student market is that students come from families. Although the Chinese government could discourage them, it will be less inclined to risk internal dissension by outright banning parents from sending their children to Australia. Social pressure is a big influence in a one-party state, but not 100% certain.
With iron ore, however, there are a relatively few buyers, and some of the largest are state owned. It is thus much more straightforward for the Chinese government, should it choose, to direct where and how these companies import iron ore.
Small wonder then that Andrew “Twiggy” Forrest of Fortescue Metals — one of Australia’s large iron ore exporters — was prepared to risk a public bagging for inviting the Chinese consul-general in Victoria Long Zhou to share a platform with Health Minister Greg Hunt at a recent presentation. He was accused of “ambushing” the minister, an accusation he has denied.
If those expressing concern were only the mining companies, it would matter less — they are big enough to look after themselves.
What matters more is the impact on the economy and federal budget.
Iron ore is a big deal for Commonwealth government revenues. So much so that the budget papers have a large section (see box 4 of Budget Paper 2) devoted to assessing the sensitivity of GDP forecasts and the budget to iron ore prices.
Last May the government’s projected return to surplus depended on iron ore exports — a key variable for the budget bottom line.
Obviously a surplus is now off the table due to extra government spending — much needed and desirable.
However, in an alternate universe where there had been no bushfires or COVID-19, but China decided not to buy Australian iron ore for a different reason, the surplus would disappear. Iron ore is that important to the budget bottom line.
If there are trade sanctions it will be difficult to determine the damage bill. We are likely to be entering a recession no matter what. While economists could calculate how much deeper and longer the recession will be if China imposes trade sanctions, such estimates would be open to debate and unlikely to fire up the public.
So the government may feel the risk of a domestic backlash is low. Or it may feel that China is unlikely to follow through on the diplomatic rhetoric.
Though it is puzzling why the government would want to take the risk at this time.
China — like any country — gets defensive if it feels criticised. Unlike most countries its trade policies matter to the health of our economy.
Diversifying and reducing our dependence on China is a great objective for the long term. Right now that dependence is real. A provoked panda has a scary bite.
Even Stephen Bartos falls into the trap of not reading the AFR’s interview with the Chinese Ambassador thoroughly with his “China is upset, and has threatened trade sanctions.” I prefer the words of Professor Jane Golley in today’s Canberra Times:-
As the director of the Australian Centre on China in the World at ANU, I am dismayed at some of the press coverage of Chinese ambassador Cheng Jingye’s supposed “threat” to “boycott” Australian goods. After reading various newspaper reports, I found my way to the source of the information: an interview by Australian Financial Review political correspondent Andrew Tillett with Cheng on April 26. I pored over the interview looking for evidence of a government-directed “threat”. I was unable to find anything.
Instead, when pressed on the issue of whether “China could stop buying our iron ore and coal and gas and look elsewhere for it?” and whether this would result in “a boycott of Australia”, the ambassador responded: “I don’t know. I hope not”. He also pointed out that the “Chinese public is frustrated, dismayed and disappointed” with how Australia is treating them, and that they “maybe” would think twice about travelling to Australia for tourism or study, or buying our beef and wine. The article subsequently published in the AFR was headlined “Chinese consumer backlash looms over Morrison’s coronavirus probe”. This seemed to be an accurate headline for what had transpired, unlike the headlines in numerous other newspapers that followed, including The Sydney Morning Herald’s “Australia could lose billions from Chinese government boycott threat”.
Or see this:
https://johnmenadue.com/jocelyn-chey-who-would-be-a-chinese-ambassador/?mc_cid=5790e5a005&mc_eid=03d30e5519
You can’t make steel without iron ore which is not as generic a mineral as you may think. Transport distance and reliability of supply are very important.
There is often talk about how minerals affect our balance of payments, government revenues and currency exchange rates. There is hardly ever any detail despite how important a matter it is. For instance I can’t see much benefit at all to the Australian people or governments from Chevrons northwest shelf gas. No royalties and no company tax and lots of the equipment imported. I often wonder if I’m missing something though.
You would be a good candidate Stephen for an explanatory article. Something along the lines of “…. for every thousand dollars of iron ore, gas, coal etc sales… this is a breakdown of who gets what.” Crikey has tried a few new ideas lately so give it a try. Opinion and the daily political roundup is good here, but opening up new factual territory would raise the competitive bar.
An excellent suggestion for an article to demonstrate who gets how much from our energy, mineral & farm exports.
Such detail was once easy to find but not these days – too much is commercial-in-confidence, code for “STFU, how dare you question your betters!”
Was thinking the same Mark.
“It is far and away our biggest source of export earnings”.
And how much goes to foreign investors (most). How much royalties and tax really goes to Australia, how much tax avoided. I think Glencore sets the standard in paying zero tax. Is it just BHP and Rio Tinto? Our LNG exports seem to earn us nothing while enriching somebody, probably a Cayman islands bank account.
Forensic analysis required. Export earnings can’t be doing that much good if the earnings are also exported.
What can they get from Trump : that they could get from us (while rubbing our nose in it)?
First we do not need to have the fight. Scummo has been at the Trump Kool-aid again. We can press for an inquiry with out bellowing like idiots, or we could if Dutton would go die quietly somewhere and Morrison stopped channeling the dimwitted Pompeo. As to iron ore, yep it ain’t rare but the iron content of the Pilbara is. As to Twiggy, he has a lot second tier ore somehow managed to get access to railways on the cheap, contributing nothing to the build which Rio and BHP paid for, no doubt because every branch of his ancestry has Tory MPs on it starting with his great great uncle SIr John, WA’s first premier. The up by the bootstraps myth is more Twiggy bullshit. Ask how good his mining camps are in the cyclone season.
hi Stephen,
No doubt you are right about the immediate effects of any purchase strike by china of either students or iron ore.
I am more concerned with the longer term effects of allowing China to turn its new found might into right. It is a fascist state with as close to a dictator in charge as we have seen outside of Africa for some time. I do not see any sense of proportion or self-discipline of this new power. Every action from the Spratlys to Tibet and the Uigers detention has parallels to the 1930s in Europe. We know it is always easier to stop militaristic States at the start of their incursions than after they have become emboldened by non-action from neighbors.
Powerful States always act to the limit of their power. The United States has inflicted enormous suffering and retrograde politics throughout the last 70 years and they are much closer in language and culture to us than China. We can feel the evil inside the Chinese state with its executions and absence of any separate legal system.
If they are influencing our northern neighbors now imagine what their tyranny will be like in twenty years.
So do we want to help build this economy at all? Are we not in a situation similar to the ‘Pig-Iron Bob era where our wharfies had the good sense to know that what we were exporting was going to come back in the form of ordnance to our great discomfort.
Shouldn’t our relationship with China be that we reject their state system but respect their people and as such we develop closer ties with the Chinese in Taiwan, Hong Kong and Singapore rather than the thugs in Beijing? We can still accept their students but they will be on our terms and taught our values. We can still supply China but again not to extent where they can use trade to threaten us so that we allow them to act as they please on the world stage.
If this virus can teach us anything it is that massive change in policy is possible and in the case of China – very necessary.
I wonder how many readers know the “pig iron Bob” reference and understand what it entails?
Matt, what strange ideas you have. First, China’s government is autocratic in a way that Australians would never accept but it Is nothing like an African dictatorship run for the benefit of one individual, who is usually linked to some foreign companies, and is less autocratic than Saudi Arabia, which also carries out many executions and denies rights that we accept for women. Secondly, while China makes unreasonable claims on its neighbours in the South China Sea, there is little sign that it is anything like Nazi Germany. Nor is the slightly less autocratic Russia under Putin given to aggression like Nazi Germany, although it throws its weight around as much as China does. So, I doubt that there is any basis whatever, apart from the US interest in fostering hostility toward China, for your strange idea that all “dictatorships” strive to exercise power over others without limit. And please make realistic comparisons. China is about as dictatorial as Franco’s Spain and no more likely than it to be aggressive toward others.
Hello Ian
Predicting future actions of autocratic states is not a secure science and I agree comparisons with 1930’s Japan and Germany are equally fraught. However, strange as my ideas might be, they are already violently real to Uigers and Tibetans and Hong Kongers who probably thought they were seperate states or entities from China decades back.
My point is this only: Each autocratic state grabs what power it can. Spain didn’t need to attack next door – the Germans did it for them. Iraq attacked Iran because they thought they could prevail and then turned attention to an easier Kuwaiti target.
China would not worry me if it was the size of, and managed as incompetently, as an African state. It is not . It is probably the biggest economy in the world getting bigger and it is aggressive. If you cannot see trouble coming here we must differ but I think you will pause, at least for a moment, and look at the possibilities.