A decade ago, fear of a violent conflict between Australia and China would have been ridiculous, given the strong economic ties between the two nations. However, relations have drastically deteriorated over the past five years, culminating in senior members in the Federal Government recently signalling the threat of conflict in the Asia-Pacific is once again on the rise. While conflict remains improbable, the extreme disruption that any conflict would cause has prompted the unthinkable question. What would a conflict with China mean for Australian industries?
High reliance, high disruption
China is Australia's largest two-way trading partner in goods and services, accounting for about 29% of our trade with the world. Two-way trade between the nations grew by 7% in 2019-20, to $251 billion. China is the largest market for Australian service exports, particularly in the Tourism and University and Higher Education industries. China and Australia have shared a free-trade agreement since December 2015, which, until recently, had significantly contributed to strengthened economic ties between the two nations.
Unfortunately, those economic ties have been hit with a range of tariffs over the past two years, following China’s one-sided trade aggression with Australia. To date, China has implemented tariffs on the following industries:
Exports of resource commodities, in particular iron ore and coal, have driven the overall value and growth in goods exported to China in recent years. In 2019-20, exports from the Iron Ore Mining industry accounted for 56% of all Australian goods exported to China, and was a significant driver of the increase in exports between 2014-15 and 2019-20. Iron ore has yet to be hit by trade obstructions from China. However, China is actively pursuing alternative sources of iron ore in Algeria, Congo and Guinea to reduce its reliance on Australia. China accounts for close to 70% of global demand for seaborne trade in iron ore and secures almost 60.3% of its supply from Australia.
While iron ore has escaped trade sanctions so far, any disruption to this industry would be devastating to the Australian economy. Iron ore mining is a significant source of taxation revenue. Australia’s largest iron ore miner, Rio Tinto, has paid $54.4 billion in taxation and royalties over the past decade. BHP has paid $76.0 billion over the same period.
Supply chains at risk
China is a vital supplier of many key products in Australia and meets a significant share of domestic demand in several key industries. These include the Communication Equipment Manufacturing, Computer and Electronic Office Equipment Manufacturing, and Industrial Machinery Manufacturing industries. Australia also imports refined petroleum products from China, with imports in the Petroleum Refining and Petroleum Fuel Manufacturing industry totalling $3.1 billion in 2018-19. The Federal Government recently announced a $2.3 billion subsidy package to ensure Australia’s two remaining fuel refineries continue to operate, following the closure of six other refineries over the past two decades.
For exporting industries, the loss of access to the Chinese market would represent a major blow. China accounts for 29.6% of exports in the Pharmaceutical Product Manufacturing industry and has grown in importance as an export destination the past five years. Any conflict with China would significantly disrupt both the Tourism and University and Higher Education industries. In 2019, China accounted for 15.5% of all international arrivals to Australia. In the same year, 346,517 students travelled from their home country to study in Australia, including 160,000 Chinese students. In February 2021, education agents based in China were given a directive not to send students to Australia.
Outlook
Globalisation has led to significant economic advancement across both Australia and China over the past half century. The strong economic ties China maintains with both Australia and the United States are a strong deterrent from armed conflict, as the value of any violent action would be outweighed by the enormous economic cost. As a result, conflict remains improbable. However, tensions have been rising for some time, and Australian industries should be considering what conflict in the decades ahead may look like, and how they may minimise their exposure to this disruptive threat.
Alfabank-Adres reports used to develop this release:
- Residential Housing Prices in Australia
- Tourism in Australia
- University and Higher Education in Australia
- Iron Ore Mining in Australia
- Communication Equipment Manufacturing in Australia
- Computer and Electronic Office Equipment Manufacturing in Australia
- Industrial Machinery Manufacturing in Australia
- Petroleum Refining and Petroleum Fuel Manufacturing in Australia
- Pharmaceutical Product Manufacturing in Australia
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – Alfabank-Adres Pty Ltd
Tel: 03 9906 3647
