China and Australia; China's economic power is less than we think

My post, China's apparently expanding Great Wall against Australia (18 November 2020), was an attempt to sort out my own views in the face of deteriorating relations between China and Australia. The position has continued to deteriorate since I wrote:

• Temporary "anti-dumping security deposits" have been imposed on Australian wine deposits, equivalent to tariffs ranging from 107 to more than 200 per cent. The effect is to block Australian wine from the Chinese market 
• Some seventy bulk coal carriers are still held up waiting to dock in China, entry blocked by Chinese "environmental" concerns. Coal is now being diverted to other markets
• An image, depicting a grinning Australian soldier holding a blood-stained knife to the throat of an Afghan child, was posted yesterday on the verified account of China’s Foreign Ministry spokesman Zhao Lijian. An angry Australian Prime Minister demanded an apology, leading to the Chinese Foreign Ministry apparently doubling down on the issue. 

In my previous post I suggested that the Australian Government's position suffered from lack of subtlety, noting that Mr Morrison was not an especially subtle man. I also noted that we had no control over the Chinese Government. It will  do what it will do. If we are to be punished, we will be punished. We just have to get on with life regardless. Our responses are the only things that we can control. 

I'm not sure that Mr Morrison could have handled the image matter differently given local circumstances. You will find Mr Morrison's press conference on the matter here. I suspect that I might have said that, unlike China, Australia was prepared to deal with its problems in an open, transparent fashion and then moved on.  Still, that might not have been wise either! The alternative would have been to trivialize the tweet.

As I write, the Chinese Embassy has apparently just issued a press release. I quote from Sky News:

 The Chinese Embassy has responded to the uproar from federal government ministers and media over a fake social media post from Chinese Spokesperson Zhao Lijian, claiming Australia was misreading and overreacting to the image.

The embassy claimed the "the rage and roar" of some Australian politicians and media was designed to "deflect public attention from the horrible atrocities by certain Australian soldiers" and to "blame China for the worsening of bilateral ties". 

"These may be another attempt to stoke domestic nationalism," the embassy said.

"All of this is obviously not helpful to the resetting of the bilateral relationship. It's our advice the Australian side faces up to crimes committed by the Australian soldiers in Afghanistan, hold those perpetrators accountable, and bring justice to the victims.

"We also urge the Australian side to face up to the crux of the current setback of the bilateral relationship and take constructive, practical steps to help bring it back on track."

I said that Australian responses lacked subtlety. In fairness to Australian ministers, they have tried hard to focus on specific issues, treating Chinese trade claims in due process terms, Mr Morrison himself has also tried to restate Australia's position. Here I quote from Mr Morrison's answer to a question at the BCA AGM.

QUESTION: Thank you Jennifer. Good evening Prime Minister, and thank you again. My question is also about a topic that not be so concise and what’s your views on our relationship with China and the various trade bans and export bans that some sectors face and importantly your comments on what we can do as business to manage business to business relationship and trading partnerships from a business point of view? 

PRIME MINISTER: Well, it is a very difficult issue and I won't pretend it's not. There are clearly tensions there and have been played out again over the last couple of days but I think what we've seen over the last couple of days is you know what is more at the source of these tensions. Australia has always been keen for a productive, open, respectful, mutually beneficial partnership with China and we've put a lot of effort into that over a long period of time as have, as have the members of the BCA who sit around this table and so many outside. Australia has not changed, our view is the same. Our view about our national interests, our view about securing those interests, whether it's on foreign investment or technology or communications or wherever it happened to be, our Ag sector, how our polity runs, how our freedom of our press, our parliaments, our views on all of these things haven't changed they're exactly the same but I, I had not seen before say, 10 or 20 years ago, and I often have these conversations with former Prime Minister Howard. It was a very different China back then. You wouldn't have seen a list of alleged grievances come out of the Chinese Embassy that we've seen in the last 24 hours. You wouldn't have seen that list 15 years ago. That was not the outlook that was there about Australia but Australia is no different to back then. Australia's democracy, what we stand for how we stand up for those things when we speak out, what we believe is important, the integrity of our systems. These are things that we won't compromise and I understand that others understand this as well. It struck me, as I said on the media this morning, that the tension is based on Australia just being Australia. Now, some suggest that this all could be fixed by a phone call. I think that doesn't really appreciate what's really at stake here. Australia has never, at any stage, not been willing to have a meeting or pick up the phone but I'll tell you what I'm not prepared to do. I'm not prepared to agree to a meeting on the condition that Australia compromise and trade away any of those things that were frankly listed in that, in that unofficial list of grievances. Some of them were misconstrued. The other thing that we struggle with and I've mentioned this in some of my national international speeches this year, is it's important that people understand, those who are dealing with Australia, that we set our own agenda, that we have our own interests and we make our own decisions. We don't make decisions at the behest of other countries. Never have, never will. We make our own decisions. If people or countries are unhappy with decisions Australia has made, that's not because someone else told us to do it. It's because we've decided to do it. So we're the ones who can talk about it and we can sit down and help to build understanding about the decisions we’ve taken. I think that's very important. Australia's relationship with both the US and China can't be seen through the prism of China's relationship with the United States or the US's relationship with China. That's their relationship. Where they've got issues in that relationship, that's up to them. We have relationships with both of them, just as Japan does where I was just yesterday and the day before and so it would be, I think, unfair to look at Australia's decisions and Australia's policies as somehow a function of our relationships with other countries and so I would hope that we can make this point, that we remain always very keen to continue to pursue a mutually beneficial relationship but if Australia just being itself, is the cause for tensions, then that's not something that we can change and so we need to be able to push through that and continue to hold to those perspectives in a polite and respectful way as we can but it's, being Australia is something we should never apologise for. Now, it's important that we work through the technical issues that are raised in relation to trade. Now, the Chinese government rejects any notion that, I assume, that the issues that have been raised as the source of the tension is is is the product is being worked out through these trade, these trade issues. That's a matter for them. But we just have to practically work through those through the channels we've got and we will and if others are introduced into that for whatever reason, then we'll just have to practically and patiently work through that as well. But you know, the Indo-Pacific will benefit from trading relationships like the RCEP we agreed to last weekend, where partners can deal openly and confidently with each other and in a transparent way, and where there are tensions and I said this at the RCEP meeting on the weekend that where there are issues that arise, then leaders and ministers have to be prepared to talk to each other. Now, I'm very prepared to do that but all it takes is for that to be arranged. 

I have quoted this in full despite it's length because it is a quite important foreign policy response. 

As I said, we cannot control China, only our responses. 

My personal view is that China's so called "wolf diplomats" have overreached.  They have mixed together too many messages, in so doing ensuring that their apparent external aims cannot be achieved. This is a big topic, so I just want to focus on one thing, trade.

In a piece in the Conversation, Rod Tyers and Yixiao Zhou argued that an all-out trade war with China would cost Australia 6% of GDP. I actually think that Australians might accept that just at present, but it's not as clear cut as that. 

We have seen with President Trump that trade restrictions are a very imperfect weapon. As a simple example, according to the Hellenic Shipping News the diversion of high grade Australian coking coal from China to India and Japan as a consequence of trade blockages has already delivered China an own goal by giving the Japanese and Indian steel industries a price advantage over their Chinese competitors. 

Still, for the purposes of discussion, let's assume that over the next few years China moves to cut Australian imports to zero. It won't happen, but it's a good working assumption. The arguments about relative costs and benefits assume, correctly enough, that Australia is a small economy relative to the size of China's and that Australia will therefore suffer more. It's not quite as clear cut as that. 

Take coal as an example. The loss of the Chinese market to Australia coal will open the Chinese market place to others. That coal will be sourced from local Chinese higher cost producers, that imposes a cost on China,  or from other other producers. As coal is sent to China from other sources, that will open a market for Australian coal in other markets, The end result may be lower prices for Australian coal, but this is actually not clear. 

Or consider all the imported inputs in Australian production that come from China. Australian producers or importers would shift from China to other sources such as Vietnam. Australian is not a huge market in global terms, between one and three percent, but it's not insignificant. The shift of Australian demand to other suppliers would give those suppliers a scale advantage in competing against China. 

As I said, a total trade ban is not likely, but Chinese trade restrictions can only really hurt Australia in the short term. Perhaps more importantly, China is still proclaiming its support for an open trading order. It can only impose so much cost on Australia before its claims become absurd. 

So in all this, I think that we can just take a cool head, at least in trade terms. China can hurt, but it's economic power is more limited than people realise.