Author: James Laurenceson, UTS
The share of Australia’s total goods exports going to China fell to 27 per cent in June 2022, a sharp decrease from 46 per cent just a year earlier. While some commentary has heralded this as a success for Australian diversification away from China, it is more accurately described as a redirection of trade flows.
‘Australia’s trade diversification away from China picks up pace’ was the narrative that the Australian Strategic Policy Institute chose to spin. Pointing to the same data, other analysts trumpeted that ‘Australia found other markets’ after Beijing disrupted access for Australian barley, coal, wine and other goods in 2020.
Taken as further evidence of desirable ‘diversification’ is an increase in trade with regional partners considered more strategically aligned with Australia. During the same period, Japan’s share jumped to 17.8 per cent — up from 11.6 per cent — while India’s reached 6 per cent (up from 3 per cent).
Looking ahead, free trade agreements (FTAs) including the Australia-India Economic Cooperation and Trade Agreement and ‘friend-shoring’ initiatives like the Biden administration’s Inflation Reduction Act are viewed as cementing the shift. The latter allows US-based manufacturers to claim a tax credit if they source a specified proportion of critical minerals contained in batteries domestically or from a country where the United States has an existing FTA.
But such tales cannot explain recent changes in trade shares. Changes in China’s trade share can be explained by movements in the world price of iron ore. Iron ore consistently accounts for more than 60 per cent of the value of Australia’s total goods exports to China. During 2020 and the first half of 2021, iron ore prices experienced an unprecedented run-up. Trade data indicates that this caused China’s trade share to be 12 percentage points higher. China’s trade share still rose by 6 percentage points even as Beijing was disrupting a range of Australian exports.
But iron ore prices began unwinding in July 2021. By December 2022, China’s trade share was in line with what would have been expected if iron ore prices had remained at their level in January 2020.
It is misleading to contend that trade share changes stem from Australian exporters ‘diversifying’ away from China and towards other markets. Diversification is a firm-level strategy that involves making costly investments in marketing and logistics to gradually cultivate new markets while generally striving to retain existing ones.
In contrast, the experience of many Australian exporters hit by Beijing’s trade disruption in 2020 was redirection of production at low cost to open and competitive global markets. The redirection of coal has been particularly significant as it accounted for 70 per cent of the AU$20 billion (US$13.8 billion) in Australian exports hit with disruption.
But redirection is not diversification.
If Beijing removes the disruptive measures, global markets may well redirect Australian exports back to China. Indeed, this process appears to have already begun as coal trade between Australia and China resumed in January 2023. Another implication is that the geopolitical risk from exposure to the Chinese market has proved to be limited, making the business case for many firms to invest in diversification much weaker than is often suggested.
Some affected Australian exporters were not protected by open and competitive global markets, particularly those selling differentiated products like those in the wine industry. These firms have been forced to begin the gradual and costly diversification process. At the end of 2019, markets for Australian wine other than China were worth AU$1.7 billion (US$1.2 billion). By the end of 2022, this had grown to AU$1.9 billion (US$1.3 billion).
But this was against sales to China collapsing from AU$1.1 billion (US$760 million) to just AU$12 million (US$8.2 million) and wiping out many exporters in the process. Particularly hard hit were smaller-scale exporters with insufficient resources to entertain the possibility of selling into multiple markets. In 2019, there were 1457 wine exporters selling fewer than 50,000 cases to China. In 2023, this now stands at just 45.
As the global transition to net-zero carbon emissions unfolds, the impact of ‘friend-shoring’ initiatives like the Inflation Reduction Act on trade shares are likely to be swamped by economic reality.
Bloomberg estimates that last year China invested AU$784 billion (US$545 billion) in…
Australia’s troubled EU trade deal still second best
The proposed trade agreement between Australia and the EU is in trouble due to EU protectionism, particularly in agriculture. This offers lessons for both parties and poses a potential threat to the Asia-Pacific region’s trade diplomacy.
Trouble in the Australia-EU Preferential Trade Agreement
Author: Ken Heydon, LSE
After five years of intense negotiation, the proposed preferential trade agreement (PTA) between Australia and the European Union is in trouble. On 29 October 2023, talks were suspended, with little immediate prospect of resumption. This setback, plus other recent developments in EU preferential trade policy, offer some broad lessons — for both Australia and the region.
Issues and Challenges
The failed negotiation is, in part, a victim of current times. With liberal trade policy in retreat, government-fuelled industrial policy is on the rise, and, according to the Eurobarometer Poll of July 2022, the majority of Europeans now view protectionism positively. The immediate cause of breakdown in the talks was, unsurprisingly, agriculture. This is the sector that, given EU intransigence, was a key factor in the failure of the Doha Development Round of multilateral trade talks.
Implications and Lessons
Australia’s particular concerns during negotiations with Brussels arose from EU resistance to opening up its market to Australian beef and sheepmeat, and protective geographical indications that would restrict the labelling of Australian feta cheese and prosecco. As highlighted by the WTO Trade Policy Review of the EU, the number of products subject to EU ‘geographical indication protection’ continues to rise. Looking ahead, there are still some broad strategic factors that might favour a deal. For the European Union, this includes gaining secure access to Australia’s critical minerals, such as lithium and copper.
New US–China working groups bridging bilateral gaps
US-China economic and financial working groups established in September 2023 aim to stabilize relations and prevent economic decoupling, addressing trade imbalances and fostering dialogue between the world’s largest economic powers.
US–China Economic and Financial Working Groups
The establishment of the US–China economic and financial working groups in September 2023 marked a significant turning point in the often uneasy relations between Washington and Beijing. In the midst of increasing tensions due to great power rivalry, these working groups have the potential to promote greater stability between the world’s two largest economic superpowers.
Challenging the Notion of ‘Decoupling’
While ‘decoupling’ has become a popular term representing the United States and China’s efforts to separate their economies, the establishment of the working groups challenges this idea to a certain extent. Policymakers on both sides understand the risks associated with complete economic decoupling, as bilateral economic ties are characterized by intrinsic interdependence.
Promising Benefits and Potential Challenges
The working groups, supported by high-level officials from both countries, offer a structured channel for ongoing dialogue. They have the potential to promote trust, transparency, and direct communication while also addressing challenges such as structural trade imbalances and intense rivalry in high-tech competition.
Rethinking Indonesia’s nickel policies to power economic growth
Indonesia is a major player in the global nickel market, but may face challenges as the EV battery industry shifts away from nickel-based batteries. Cultivating relationships with the US and EU is crucial.
Author: Cullen Hendrix, PIIE
Calling Indonesia ‘the Saudi Arabia of nickel’, one of the metals underpinning global steel production and ambitions to decarbonise energy and transport systems, would be an insult to Indonesia’s market dominance.
Indonesia’s mines accounted for nearly half of global nickel production in 2022. It has banned raw nickel exports since 2020 as the country pushes to move up global value chains for renewable energy. Indonesia is a G20 member, a developing democracy and has an enormous potential home market for both steel and electric vehicles (EV).
But despite the seeming centrality of nickel to net-zero ambitions, Indonesia may find itself in a situation eerily similar to that of Saudi Arabia and its oil reserves — sitting atop plentiful resources whose value is set to wane as the EV sector booms. The challenge lies in navigating two landscapes, one geopolitical and one chemical.
In a shifting geopolitical environment, Indonesia is attempting to secure a more prominent place in the EV battery supply chain. This involves moving beyond mining ore and benefaction to battery assembly at a time when major EV battery importers like the United States and the European Union (EU) are onshoring battery assembly.
In the United States, these attempts include enticing tax credits in the Inflation Reduction Act (IRA). In Europe, they include government loans via the InvestEU program, independent member-state initiatives and an anti-subsidy investigation into Chinese automakers. The investigation aimed to prevent Chinese EV makers who source nickel from Indonesia from flooding the European market with cheap imports. In both instances, Indonesia’s reliance on Chinese manufacturers and finance in the nickel sector creates vulnerabilities for its EV ambitions.
The second challenge is more fundamental. Indonesia’s nickel reserves and industrial ambitions are at risk of being rendered less valuable by changes in battery chemistry, or the combination of materials and technologies used in the batteries themselves. Nickel is a key component in nickel-manganese-cobalt (NMC) batteries, which currently dominate the market due to advantages in range and power-to-weight. But this dominance may be fleeting.
As with most things EV-related, Tesla is the bellwether. In 2021, Tesla adopted lithium iron phosphate (LFP) batteries, with nearly half of its production models using them by the first quarter of 2022. In August of this year, Tesla CEO Elon Musk announced that the company would be transitioning most of its entry-level vehicles — Model 3 and Model Y — and its shorter-range semi-trucks to using LFP batteries. For a regional hub, Tesla chose to set up shop in neighbouring Malaysia rather than in the nickel giant.
Tesla did not invent or even bring to market the first EVs, but it popularised and democratised them. Its move toward LFP batteries is one major reason that S&P Global forecasts that after 2030 the dominance of NMC batteries will wane in favour of LFP batteries. LFP batteries offer less range and high-end performance. But they are also less prone to catching fire and are made of much more globally abundant and cheaper raw materials. For most EV users, LFP batteries provide more than enough range and power.
This forecast does not include the effects of potentially market-disrupting frontier technologies like sodium-ion and solid-state batteries, upon which Toyota has placed a heavy bet. These technologies would further depress the relative demand for nickel. There will still be a market for NMC batteries in performance-oriented EVs offering pavement-wrinkling torque and acceleration. But the global market in the future may be smaller than the current one – and with technology, disruption is rarely linear. The market may change even more quickly than S&P anticipates
For Indonesia to sustain nickel as an engine for growth and development within these landscapes, its priority should be to cultivate closer relationships with the United States and the EU. These markets and their comparatively affluent consumer bases will drive an appetite for higher-performance, NMC-based EVs. Indonesia’s relationship with the EU is seemingly on track to expand, with shared ambitions to conclude negotiations on a comprehensive Indonesia–EU free trade agreement (FTA) before Indonesia’s 2024 election.
The outlook regarding the United States is less straightforward. In September, Indonesian President Joko Widodo proposed a critical minerals trade agreement with the United States during talks with Vice…
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