Daniel Andrews
Victorian Premier Daniel Andrews (Image: AAP/James Ross)

An agreement with China signed by Victorian Premier Dan Andrews in 2018 is suddenly at the centre of a blazing international controversy.

The pledge commits Victoria to join China’s Belt and Road Initiative — a global infrastructure plan that the federal government views with suspicion. 

To judge by high-level comments, the US is apparently suddenly furious about it. US Secretary of State Mike Pompeo warned the US will “simply disconnect” with Australia if the deal impinges telecommunications security.

Although the US ambassador to Australia later walked back Pompeo’s comments — and perhaps they were, Trump-style, off-the-cuff and uninformed — the deal between Victoria and China suddenly looks questionable.

The pandemic has destabilised whatever equilibrium existed between China and the west, and China has dramatically elevated the level of aggression in its diplomacy. At this point, whoever is closest to China is tarred by association.

The furore raises many questions.

Should we trade with a country that doesn’t share our values? Or is trade a way to help prevent conflict with a nation that doesn’t share our values? Should states build their own relationships with foreign countries? Do states have sufficient access to intelligence to make these decisions wisely? Is it even constitutional for a state to sign a trade agreement with a foreign nation? 

Australia’s relationship with China is rich and deep. But it is not shared equally between the states. Some depend on China far more in terms of goods exports, and some far more in services exports.

As the next graph shows, there is one state which rises above the rest in exporting goods to China. Western Australia’s huge iron ore deposits are being extracted in a rush to help China build infrastructure and homes for over a billion people.

Western Australia’s earnings from exporting to China dwarf those of the other states. WA is also the most China-dependent state, as the next graph shows. It is not only the absolute amount exported to China which is high, but also the proportion of WA’s exports that go to China.

While other states send between 19% and 34% of their goods exports to China, WA is over 50%.

The above graph also illustrates how recent China’s rise has been. Its export share in each state has roughly doubled in just the last decade. That is true even in NSW, which is the least dependent on China for its good exports.

So is NSW insulated from the currents of ill-will flowing between China and the west? Far from it.

NSW and Victoria are both huge services economies and it is via services trade that they depend on China. International education is a giant industry in both states, and in 2020 just under 30% of international students in those two states are from China.

The China-dependence of international education has been falling, however, as universities and other institutions try to diversify.

In the ACT the proportion of international enrolments coming from China has moderated from 59% in 2017 to 49% in 2020. In Victoria the share has fallen from 33% to 27% in the same period, and similar patterns are visible in the other states.

But while education is growing slightly less China-centric, travel is growing moreso.

China is now Australia’s second-biggest source of tourists, behind only New Zealand. And those tourists overwhelmingly come to NSW and Victoria.

So why has Victoria jumped into bed with China while WA — which sells far more to China in raw terms — remained cool?

The answer is the nature of these markets. Iron ore is a commodity. Commodities are extremely fungible. One can replace another.

If China changes the source of its ores or its coal, we can still sell our coal and ores into the global market, to meet the demand that now exists because someone else is selling to China. Commodity markets heal-over fast.

Markets in non-commoditised goods like education and travel are not like that. When your services sector depends on China, you’re more vulnerable.

So is Victoria Australia’s soft underbelly; the weak spot China can exploit? Perhaps. But it also gives us a much richer set of links to China.

Chinese people who’ve visited Victoria are far more likely to have a positive view of Australia than people who live in apartment towers made with West Australian iron.

And even though it is not a democracy, the Chinese government needs to pay attention to the will of its people.