Learning the right lessons from Chinese sanctions on Australian imports

Author: Shiro Armstrong, ANU

From May 2020 Beijing blocked the import of roughly a dozen Australian goods for which China was the major market, cutting imports worth around AU$20 billion (US$13.4 billion) annually. The deteriorating political relationship between Canberra and Beijing was the proximate cause but a trade deal between Beijing and Washington involving increased Chinese imports of US agricultural and other goods was also a factor.

Such large disruptions to trade are costly and threaten economic security. But retreat from openness and economic engagement is not the answer — that’s a pathway to a poorer and much less secure world.

Australia’s exports to China remained steady in 2020 and grew by 14 per cent in 2021 and 6 per cent in 2022, all while the global economy suffered from COVID-19 lockdowns and economic downturns. Australian exports of iron ore, which could not be readily sourced by China from elsewhere, and the rapid growth of other commodities like lithium exports, led the way. China accounted for over 40 per cent of Australian goods exports during that time and helped Australia weather the economic effects of the COVID-19 pandemic.

Australia is no stranger to having one country dominate its international trade shares. In the past Japan, the United States and the United Kingdom have accounted for around as much as China does today. This geographic specialisation is a sign of Australian success in utilising its economic endowments and taking advantage of opportunities internationally. Australia has put in place institutions and economic policy settings to manage these highly interdependent economic relationships and successfully dealt with occasional shocks in their fortunes.

Chinese trade sanctions caused Australian exporters — especially of wine and lobster — huge losses. But most exporters quickly found other markets as Chinese imports of barley, coal and other commodities did not slow and opened up other demand. Flexible markets in Australia helped but the crucial external source of resilience was an open multilateral trading system which ensures that trading options remain open. Contestable markets crowd out the effects of weaponised trade but there are adjustment and political costs.

Australian exporters found other markets mainly due to a multilateral trading system which ensures that trading options remain open. Neither exporters nor the Australian government knew exactly where those markets would be ahead of the event. The redirection of trade was led by market opportunities. At the centre of that system is the WTO, which despite its weaknesses, holds together the trading system with a patchwork of WTO-plus free trade agreements built around it.

Two dozen WTO members, including China and Australia, have signed onto the Multi-Party Interim Appeal Arbitration Arrangement so that WTO rules are enforceable even while the United States holds the system hostage with its veto of the appointment of arbitration judges. Australia has cases against China in the WTO that will be enforceable through China’s commitment to the MPIA. Japan has also joined, a major development that signals Japanese commitment to take a lead on international economic rules.

As the world’s largest trader, China has a huge stake in the existing multilateral trading system. China’s non-observance of the spirit of multilateral trade rules, like that of the United States and Europe, and its gaming of the system are not reasons to give up on the WTO. Chinese efforts at economic coercion have almost entirely failed and in every case its actions have backfired economically or politically.

It is possible to find ways to mitigate and diffuse trade risks by deepening involvement and strengthening rules, rather than by avoiding engagement. Economic engagement builds national wealth and power — and when combined with multilateral rules, broadens the range of strategic policy options available to national policymakers.

A China that is much less integrated into the global economy is one with far fewer political constraints and thus is much more of a security risk.

Russia’s strategic use of gas supplies against Europe is sometimes cited as a counterpoint to the argument for interdependence. But Russia was not integrated into European supply chains and European energy dependence on Russia is qualitatively different from economic interdependence in East Asia. Interdependence underpinned by multilateralism effectively diffuses risks.

Nowhere is the power of multilateralism understood better, and is it exercised…

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