Aug 17 2020
The health of Australia’s trade relationship with China will be a vital factor in determining Australia’s economic recovery. China is currently Australia’s largest trading partner, representing almost 40% of Australia’s export purchases and satisfying over 25% of Australia’s imports.
‘Australia’s post-COVID economic recovery will heavily rely on China as a source of economic growth, and the growing fracture in the diplomatic relationship could threaten to slow Australia’s rebound in 2021-22 and beyond,’ said IBISWorld Senior Industry Analyst, Liam Harrison.
Australia’s trading relationship with China has become strained over the past several months, due to a multitude of trade and diplomatic disputes, ranging from issues as diverse as the Australian response to civil upheaval in Hong Kong, Australian restrictions on Chinese telecom giant Huawei, and strengthened national security barriers restricting Chinese investment in Australian businesses.
‘The growing challenge for Australia in the 21st century is to find a way to protect the economic interests of the China-Australia trade relationship, without compromising equally vital diplomatic and national security interests,’ said Mr Harrison.
China’s slowdown threatens Australian economy
Irrespective of the diplomatic relationship between Australia and China, the growing Chinese demand that underpins many Australian industries is expected to fade in coming years.
Rapid industrialisation, growth in the working-age population, strong residential investment and productivity-enhancing reforms have driven China’s extraordinary GDP growth over the past 50 years. Unfortunately, the reversal or slowdown of many of these factors over the past decade indicates that China’s age of above-average growth is drawing to a close.
‘The strong economic link between China and Australia means that a slowdown of Chinese economic growth, either gradually or sharply, represents a significant risk for the Australian economy,’ said Mr Harrison.
The need for Australian manufacturing
The rise of just-in-time supply chains and a growing dependence on low-cost manufactured goods have increased Australia’s reliance on China over the past five years. The outbreak of COVID-19 has exposed significant risks associated with this economic dependency, and has established that essential supply chains, such as medical equipment manufacturing, can be at significant risk during economic shocks.
‘The emergence of COVID-19 led to a global shortage of medical equipment in the early stages of the pandemic, particularly due to widespread breakdowns in global supply chains. This issue raises the question of whether Australia should place more emphasis on domestic manufacturing of essential products and reduce the risk of reliance on foreign economies,’ said Mr Harrison.
Over recent months Australia has significantly increased its manufacturing capabilities to fill the gap in supply. This increase has benefited the Medical and Surgical Equipment Manufacturing industry, which is expected to grow by 3.2% in 2020-21 to total $4.6 billion.
Opportunities and threats in Chinese trade
A number of emerging markets have appeared in China over the past five years, with industries such as Meat Processing and Wine Production strongly benefiting from rising demand from China. China is expected to represent over a third of demand for Australian meat products and over half of demand for Australian wines by 2025. A combination of growth in mature and emerging markets in China is anticipated to assist Australia’s recovery from the COVID-19 recession.
A further breakdown in relations between Australia and China could have devastating consequences for Australian industries that generate a significant share of their revenue from China:
‘A breakdown in the trading relationship between China and Australia could have significant consequences for businesses in the Agricultural, Mining and Manufacturing sectors, which have increasingly invested in Chinese markets over the past five years. For example, over 80% of iron ore exports were sold to China in 2019-20, and a breakdown in trading relationships could put over $50 billion dollars of iron ore exports and over 10,000 jobs at risk in the Iron Ore Mining industry alone,’ said Mr Harrison.
The Chinese economy currently sits on a knife edge, as it faces down the possibility of recession as a consequence of the COVID-19 outbreak. Although the Chinese economy has exceeded expectations over the past several months, the threat of new COVID-19 outbreaks and sluggish demand from global economies are expected to dampen China’s growth.
‘Another COVID-19 outbreak could have significant ramifications for both China and Australia, as a faltering Chinese economy may significantly reduce demand for Australian goods. High exposure to the Chinese economy is becoming more of a risk for Australian firms, which have benefited from strong Chinese demand for so long,’ said Mr Harrison.
IBISWorld reports used to develop this release:
- Medical and Surgical Equipment Manufacturing in Australia
- Synthetic and Natural Textile Manufacturing in Australia
- Meat Processing in Australia
- Wine Production in Australia
- Iron Ore Mining in Australia
- Bauxite Mining in Australia
- Nickel Ore Mining in Australia
- Grain Growing in Australia
- Milk Powder Manufacturing in Australia
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647