Australia is caught between two opposing forces. China is by far its largest trading partner, and yet its security comes from its relationship with the United States.

Not only has China been Australia’s major export market for goods and services for well over a decade, but also in recent years, China’s share of Australia’s trade has surprisingly increased further. With trade at about 180 exports and about AU$180 billion a year, China accounts for more than 40% of Australia’s total exports, roughly greater than Australia’s next five largest export markets. Effectively, Australia is dependent on the Chinese market.

How can Australia be so dependent on China’s trade and yet seem to have mishandled the relationship to an extent that it’s probably at its lowest point since diplomatic relations started in 1972? To understand what’s going on, we have to take a step back and look at the bigger structural forces in the world today. The U.S. is the world’s dominant power and decided in the past several years to resist the rise of China. Historically, this often happens — like when dominant power Athens attacked the ascendent Sparta.

The U.S. has decided to not concede strategic space to the ascendent power, and this is happening at a time of the greatest and most rapid power shift in global history from the U.S. to China. In Hugh White’s book The China Choice, he predicted that if the U.S. chose to resist China’s rise and deny it strategic space, it would create an almost impossible situation for Australia, which would be caught between the U.S. and China. How we would handle it would become the dominant issue in Australia’s foreign policy and indeed all our international relations. That is very much the situation we find ourselves in today, but it didn’t necessarily have to be this way. Many other countries in the region, allies to the United States, have managed their relations better than we have.

The Source of the Australia/China Conflict

About four years ago, the Australian government shifted its position on China from one of strategic cooperation to one of competition. It did so principally because of the choice that the U.S. made, and we find ourselves now glued to the hip of the U.S. in geopolitical and strategic policy terms, which has resulted in a downward spiral in Australia’s relations with China.

The downturn in relations can be traced to 2017, when several measures passed. One was Australia’s banning of Huawei, the first country to do so with a high-profile announcement. That was followed quickly by the Anti-Foreign Interference Law, which was about foreign governments influencing politics in Australia through various nefarious means, but it really was all about China. That’s been followed by a series of tit-for-tat exchanges, but the plunge occurred when Prime Minister Scott Morrison, ahead of any other leader, called in March for an inquiry into the origins of COVID-19 at a time when U.S. President Donald Trump called COVID-19 the “China Virus” and “Wuhan Virus.” In that hot political and emotional context, Morrison’s inquiry call made the Chinese leadership lose face and led to a sharp reaction.

The Chinese ambassador threatened student exchanges, tourism, and so on. More important, that was followed by measures against Australian beef, with five abattoirs that had been registered to export beef to China losing their licenses. Additional testing had been introduced for Australian coal at some Chinese ports, which had the effect of making coal traders nervous about taking shipments from Australian, lest they be held up at the ports. There’s been an 80% punitive tariff introduced on Australian barley, and China’s announced an anti-dumping case against Australian wine. Recently, Australian cotton groups said that China will soon target the industry. The major bright spot remains iron ore, but that’s tenuous as well.

Australia is supplying something near 80% of China’s imports in iron ore, which would be an unacceptable situation to Beijing even if relations were in good shape. If Chinese leadership wants to diversify and the opportunity arises with Brazil, there could be a substantial reduction in trade to China and a substantial reduction in iron ore prices. Chinalco (Aluminum Corporation of China) seems to be advanced at building the Simandou mine in Guinea, so there’s a big effort by Beijing to find an alternative supply.

An Unstable Economic Relationship

There is clearly an element of Chinese economic coercion going on that has further upset the Australian government, with officials deciding to find ways of hitting back at China. What we’ve seen since then is a number of actions, which have culminated with Australian journalists evacuated from China. It’s all part of an ever-more-poisonous relationship between Australia and China, and there doesn’t seem to be any floor to it at this stage.

As the U.S. moved from treating China as a country it looked toward cooperating strategically with to a strategic competitor, going on to adopt policies of containment, Australia developed a parallel, intellectual framework to shape policy to take us on that journey with the United States. Australian Strategic Policy Institute — which is funded by the Australian Department of Defence and U.S. companies such as Boeing, Westinghouse, and Raytheon — has been at the front line of that and worked across a range of issues from foreign interference domestically,  cybersecurity, and human rights abuse in China, notably in Xinjiang.

One tactic that has been effective is delegitimizing the economic interests in the bilateral relationship. In the past, business representatives and leaders have argued for better management of the bilateral relationship with China for identifying our interests as distinct and separate from those of the United States. But it’s a difficult situation.

Neither Australia nor China are likely to run up the white flag, nor should they. Unfortunately, official lines of contact all seem to be shut off because China’s put Australia in a deep freeze. But this year, because of COVID, we don’t have the usual round of summits. With a Zoom summit, Ministers can’t pull their counterparts aside and have private talks. In diplomacy those things are extremely important.

After the U.S. election, there may be some easing of tensions. But still, this view that China needs to be pushed back on is bipartisan in the U.S. The fear is that somehow the United States engaged China for 40 years, made it strong and powerful, and then China cheated the U.S. because it didn’t become a liberal democracy. It should not, however, be surprising that sometime in the next term the U.S. will recalibrate its relationship with China because it will be apparent that decoupling is not achieving its objectives and the costs to the U.S. are too high. If that happens, while it changes the macro context and in theory makes it easier for Australia to reestablish relations with China, China may then seek to punish Australia even more.

Clearly, if Australia continues to associate itself with the U.S. position, the official relationship won’t get any better. It could even get worse. It’ll be at Australia’s increasing cost if we don’t come to grips with this soon and try to get things back on course.

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About Geoff Raby

Dr. Geoff Raby was Australia’s Ambassador to China from 2007 to 2011. After 27 years in public service, he completed his ambassadorial term and resigned to establish Geoff Raby and Associates (GRA) in 2011. Based in Beijing, GRA advises senior executives on corporate strategy in China, provides policy and business intelligence from the “coal face” on the economic, political, regulatory and business environment, and leverages extensive networks and a deep understanding of large corporate and government stakeholders to help its clients succeed in China. Prior to his role as Ambassador to China, Dr. Raby was Deputy Secretary in the Department of Foreign Affairs and Trade (DFAT). He has held a number of senior positions in DFAT, including First Assistant Secretary, International Organisations and Legal Division, Ambassador and Permanent Representative to the World Trade Organisation, Geneva, First Assistant Secretary, Trade Negotiations Division, and APEC Ambassador.

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This article is adapted from the October 1, 2020, GLG teleconference “In Review: Australia-China Trade Relationship.” If you would like access to this teleconference or would like to speak with Dr. Geoff Raby, or any of our more than 700,000 experts, contact us.