Balance of Power — Australia vs China

Background — Coronavirus pandemic

The first coronavirus infection was detected in Wuhan in China in early December 2019. Since then it has spread to most of the countries. WHO declared the virus outbreak — a pandemic in March 2020. The virus outbreak has forced all countries to go into a lockdown and all economic activities have come to a grinding halt. It’s resulted in massive job losses, closure of small and medium businesses and global economic losses.

Uncertain about the source of the virus, global leaders demanded an independent investigation into the source of virus and failure of Chinese government’s to take prompt action. What started thereafter was a diplomatic spat between China and the rest of the world. Australia supported the idea of conducting independent investigation and not surprising enough, China opposed it.

China not only opposed the Australia government but also threatened the government with dire consequences. China’s Ambassador to Australia called it “dangerous” and “politically motivated” and said that Chinese people would retaliate with economic consequences which will adversely affect Australian exports (includes wine and beef), Chinese tourists and Students coming to Australia.

So China is now directly threatening Australia’s sovereignty and decision making. Let us try to understand why it has come to this!

Bargaining Power

Chinese government’s behaviour is nothing short of “big brother bullying”. How has China come to this position that it can bully another country based on its economic position?

Table 1 — lists the balance of trade between Australia and its partner countries. Australian exports to China account for a whopping 34.7% (US$ 87.7 billion) of its total export and Australia has a positive trade balance with China by US$ 30 billion. China has exports all over the world, whereas Australia is overly dependent on China for export revenue and has failed to identify new export market.

Table 2 — lists the nationalities that visit Australia as tourists. It is clear that China tops the chart with 27.3% (US$ 12.4 billion) of total revenue earnings from tourists. Earnings per visitor is also highest in case of Chinese.

Table 3 — lists the international students studying in Australia. China is again the leader in this list with 30% (approx. US$7.5 billion) contribution.

Aggregating these three categories, China’s Contribution to the Australian Economy is to the tune of US$107.6 billion whereas China’s export to Australia is US$ 57.7 billion.

Is “export earnings from China or Chinese nationals” the only reason for bullying?

No, not the only reason in my opinion. Over the years china has strengthened its economy, industry and market presence around the world and on the other hand Australia’s position has weakened. Manufacturing and value added activities has gradually reduced in Australia. We have not only killed our industries but also have not been able to develop more markets globally. Our main export are primary products — iron ore, coal etc. and the economy has been overly reliant on China — 33% of Australia’s foreign exchange earnings come from China.

What Next?

What remains to be seen is the next action by either country — Will China stop importing from Australia or will Chinese people stop eating Australia wine and beef? What other options do China have? Practically none — it is the middle of a diplomatic spat with US, Europe and countries in Asia regarding the spread of corona. Will China fight with all and put itself in an economic isolation situation. Moreover, switching supplier for commodities that China imports from Australia, will be a big effort as it has relationships with Australian companies and supply channels are well developed.

Will China stop selling things to Australia to teach us a lesson — it is highly unlikely, as it will be killing its own local industry and Australia, at the moment, has lot of friendly countries that are willing to help, whereas China is definitely not in that position. Russia and N Korea is on China’s side though.

What would have happened if it was just a diplomatic / economic fallout between China and Australia alone? It would have definitely put Australia in a big trouble.

Introspection?

There are three question that we will have to ask ourselves (Australia as a Nation) …

1. Are we willing to make investments and proactively look for new markets? We have put too many eggs in one basket i.e. China.

2. Are we going to encourage and incentivise manufacturing and value added production?

3. Are we willing to invest in development of technical skills to support manufacturing and value added production.

Written by Partha Mazumdar, Founder of Vertical Bricks — a company that facilitates investment based migration.