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The cost of the China bans on Australian goods

The cost of China’s ban on a series of Australian goods has been almost negligible for some of the country’s exporters, indicating Australia’s dependence on the world’s second largest economy for trade has not been as devastating as some had predicted, a new report has found. Source: South China Morning Post

Free markets have provided exporters “risk mitigation mechanisms” including opportunities to redirect goods to other countries or switch to supplying other products, and financial insurance in the form of earlier bumper profits from sales to China that have helped mitigate the current hard times, the report by the Australia-China Relations Institute (ACRI) at the University of Technology Sydney said.

Therefore, when governments in Australia or elsewhere, such as the United States, call for “collective action” to push back against Beijing’s “economic coercion” their calls might be overblown as traders are free to rationally consider the risks and rewards of their relationship, according to the report.

When trade disputes such as the one between China and Australia arise however, it would be better for multilateral institutions like the World Trade Organization (WTO) to arbitrate them in line with agreed trade rules, the report’s authors James Laurenceson and Thomas Pantle said.

Traders should have the tools to resolve or mitigate problems without interference by governments, they added.

“Australia’s recent experience has been held up as a warning for other countries, particularly liberal democracies, as to why exposure to the [People’s Republic of China] market is potentially dangerous,” they said.

“[Our] findings serve as a corrective to the claim that Australian businesses with a high exposure to the PRC are necessarily naive or irresponsible.

“In fact, what these results show is that many business owners were able to secure premium prices in China for an extended period, and when this opportunity closed, quickly and successfully pivoted to alternative markets.”

China and Australia have been embroiled in diplomatic conflict for 18 months after Canberra pushed for an independent investigation into the origins of the coronavirus and Beijing subsequently restricted exports of eight Australian products.

Only exports of wine and a certain type of log timber suffered vast “net’’ damage, either in lost trading volume or lower return on sales in less premium markets, the report found.

The other products – coal, barley, copper ore and concentrates, cotton, log timber, other categories of lobsters, and some beef from six Australian abattoirs – found new homes or did not suffer severe losses as exporters were able to find other ways to continue trading.

The report’s cost analyses found that since China’s ban on bottled Australian wine last November and its subsequent imposition of anti-dumping duties on wine in containers of two litres or less, which accounted for most of the Australian wine in the Chinese market, exporters have struggled to redirect the wine elsewhere.

Wine that has gone to other markets has not commanded premium prices like it did in China. On the other hand, barley, cotton and coal that would have been shipped to China has been successfully redirected to other countries.

Much of the Australian lobster that was blocked has also been sold in other markets, as well as through “grey channels”, such as intermediary markets like Hong Kong, therefore staunching losses for exporters.

Not all beef exports have found new buyers, but the timing of China’s ban coincided with production cuts due to re-herding of cattle and therefore a lower slaughter rate.

Exporters of most goods suffered losses of less than 10% of their total export value, the report found.

But the uneven impact of the bans on Australian exporters showed economic coercion by Beijing has had limited effect, as traders were not helpless victims, Laurenceson added.

“Take wine exporters, or lobster producers. If the China market closed, can we really say they were ignorant of the risks? I don’t think we can,” he said. “They took an opportunity that paid off for many years and the alternatives were either non-existent [lobster] or paying much less [wine].

“So, their exposure to China reflects a rational assessment of costs and benefits. Sure, things are now tough, but that is not proof they made the wrong decision.”

The argument that China has the upper hand also does not take into account the nuances of the bilateral trading relationship; for example, that some businesses which suffered are foreign-owned, or that workers are able to move from one industry to another, the report said.

So, what China had hoped to achieve by disrupting trade has not necessarily come to fruition.

“Put another way, exposure to the Chinese market and Australian sovereignty can coexist,” the report said.

Other researchers such as the University of Adelaide’s Institute for International Trade in Australia have also undertaken similar analyses but found a lot of “lost trade” to China has not been fully absorbed by other markets.

In a report released in July, the institute found revenue for the eight commodities targeted by China fell by around $6.6 billion over the eight months from July to February, the time when most of Beijing’s restrictions were imposed.

Like ACRI, Australian think tank the Lowy Institute found that although there had been “limited damage” from the bans, most exporters had found new markets.

“China has targeted products for which it thinks the cost to itself is relatively low, mostly because alternative suppliers exist,” said an April report by the institute’s lead economist, Roland Rajah.

“But, in most cases, that also means there are alternative buyers. And this reshuffling of global trade is precisely the reason the damage inflicted on Australia has been limited.”

Separately, Adelaide’s Institute for International Trade in Australia also pointed out it was not just the conflict between Beijing and Canberra that had inflicted damage on Australia’s trade, but also the US-China phase one deal, which hurt Australia after China committed to buying additional American goods, including many supplied by Australia.