Australia / Analyst Insights
The Risks of a China-Australia Trade Dispute

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by IBISWorld
May 21 2020

Amid the backdrop of the ongoing COVID-19 pandemic, the once robust China-Australia relationship has begun to sour in recent weeks. Most recently, the Chinese Ministry of Commerce implemented an 80.5% tariff on Australian barley imports, following a ban on red meat imports from four major Australian abattoirs. Despite coinciding with Australia’s push for an independent inquiry into the origins of the COVID-19 pandemic, China has denied that the trade disruptions are related. Nevertheless, these trade barriers represent a growing threat to Sino-Australian relations, which has surged since the implementation of a free-trade agreement between the countries in December 2015. As the world continues to grapple with COVID-19, IBISWorld explores what a worsening Sino-Australian relationship could mean for industries caught in the crossfire.

Mutual dependence

China is Australia’s largest trade partner, accounting for 26.0% of Australia’s trade with other nations. Two-way trade, which is the sum of exports to and imports from China, grew by 20.5% in 2018-19, to a record $235 billion. This relationship dwarfs Australia’s second largest two-way trade partnership with Japan, which amounted to $88.5 billion over the same period. Australia exports raw mining and agricultural commodities to China, such as iron ore, coal, grains, meat, and dairy products. In exchange, Australia imports consumer items such as electronics, clothing, furniture, and textiles.

In addition to the trade of goods, Australia also relies on Chinese consumers for education and tourism demand. Chinese students account for 9.5% of revenue in the University and Other Higher Education industry, equivalent to $3.3 billion in revenue. In the year ending December 2019, Chinese nationals accounted for 15.3% of total international arrivals, and spent $12.4 billion while in Australia. Although China is integral to Australia’s economy, the importance of Australia to China is relatively weaker. By comparison, China’s two-way trade is much higher with the United States, the European Union, Japan, South Korea and Taiwan.

The United States, China and Australia

In January 2020, the announcement of a trade deal between the United States and China created potential headaches for Australian industries. Under the so-called ‘phase one’ agreement, China must increase purchases from the United States by $US200 billion over two years, including $US32 billion in agricultural products. As China pivots to American suppliers, Australian firms may be left worse off. Ahead of the imposition of tariffs on Australian barley this week, China announced that it would permit greater imports of American barley into their domestic market. Under the phase one agreement, China has also pledged to purchase $52.4 billion worth of American energy products, which could become a major threat to the Australian Oil and Gas Extraction and Black Coal Mining industries.

Top Australian industries exposed to a China-Australia trade war

It is unclear how the Sino-Australian trade relationship will develop in coming months, with the Australian Government thus far opting not to escalate trade tensions in response to China’s recent moves. However, many industries in Australia should remain on high alert for any further deterioration in the trade relationship. Both exporters and imports may be at risk.

Mining and energy

Mining and energy are unlikely to be drawn into a trade disruption between China and Australia. Key Australian exports in this area include iron ore, black coal, and natural gas.

The Iron Ore Mining industry is expected to generate $83.4 billion in revenue in 2019-20, and is highly exposed to Chinese trade. Exports are expected to account for 84.9% of revenue in the current year, with China accounting for 81.8% of total export revenue. As a result, almost 70% of the revenue in this industry is generated from trade with China.

Iron Ore Mining is unlikely to be drawn into any trade dispute between Australia and China, as both countries are highly dependent on the trade of iron ore. In 2019, China imported 62% of its iron ore from Australia. Comparatively, the next largest supplier, Brazil, accounted for 21%. Furthermore, China is expected to announce new economic stimulus measures to counter the COVID-19 downturn at the National People’s Assembly on May 22nd. This stimulus is expected to include significant funding for construction, which will require greater output from Chinese steel manufacturers, and result in higher demand for iron ore. Australian iron ore is expected to satisfy this rising demand, due to the worsening COVID-19 outbreak in Brazil, which has threatened local mining output and led to a spike in global iron ore prices.

Exports of black coal and natural gas to China may be disrupted if trade disruption escalates. In early 2019, China previously attempted to influence Australia through trade restrictions by delaying Australian coal deliveries at major Chinese ports. This may have occurred in response to the Turnbull government introducing anti-foreign interference laws, and banning the Chinese telecommunication giant Huawei from developing a 5G network in Australia. However, this disruption was short-lived, due to the ease with which Australian firms in the Black Coal Mining industry could transition supply to alternative markets such as India, Japan, and South Korea. Similarly, exports from the Oil and Gas Extraction will likely be able to find alternative markets if trade barriers are introduced in the Chinese market.

Agriculture

The agricultural sector faces the highest level of risk if trade relations continue to deteriorate. In addition to barley and beef, which have already been disrupted, other major agricultural exports include wine, dairy, seafood, grains, and fruits.

The Wine Production industry is expected to generate $7.0 billion in revenue in 2019-20, including $2.9 billion in export revenue. China is expected to account for 36.3% of export revenue this year. Wine exports to China have surged over the past five years, following the removal of tariffs through the China-Australia free-trade agreement. Wine exports have also been supported by rising middle-class incomes in China, and the weakness of the Australian dollar. If trade barriers were to be introduced, it would be devastating for Australian wineries. China would also likely be able to replace Australian wine with imports from other major producers, such as France, Chile, and Italy.

Seafood is both exported and imported between China and Australia. In 2019-20, China is expected to account for 46.1% of export revenue, as well as 17.2% of seafood imports in Australia. The Seafood Processing industry is expected to generate $1.2 billion in revenue this year. Australia tends to export high-value seafood products such as shellfish, rock lobster, and abalone, while importing cheaper items such as prepared and preserved seafood.

If China were to introduce trade restrictions on Australian seafood, the impact would be moderate. Prior to the removal of tariffs on seafood through the China-Australia free trade agreement. Vietnam was the largest export market for Australian seafood. Australian seafood producers would avoid Chinese import duties by first delivering their produce to Vietnam, where it was then transferred into China. In the event that Chinese tariffs on Australian seafood are re-introduced, it is possible that Australian firms could return to the use of Vietnamese supply chains.

An escalation of trade disruptions between China and Australia may also threaten the Wood Chipping industry, which is expected to generate $1.8 billion in revenue in 2019-20. Australia is the world's second-largest woodchip exporter, second only to Vietnam. In the current year, Australian woodchips are expected to account for more than 20% of the world's woodchip exports by volume and value. In 2013-14, China surpassed Japan as the largest market for Australian woodchip exports, and is expected to account for an estimated 58.0% of Australian export revenue by value in 2019-20. China predominantly uses Australian woodchips to manufacture pulp, paper, and paperboard. If trade restrictions were implemented, Chinese buyers would likely transition to alternative suppliers in Vietnam, Chile, and the United States.

IBISWorld reports used to develop this release:

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