Just like Trump's tariffs, China's trade attack will backfire

China’s effective bans on a widening range of Australian products in retaliation for the effrontery of Australian politicians in calling for an independent investigation into the origins of the coronavirus, among other opinions it has taken exception to, are China’s version of Donald Trump’s tariffs.

Trump’s pretext for his initial burst of tariffs was “national security,” although they were imposed even on imports from some of America’s longest-standing allies. Were Canadian steel and aluminium imports really a threat to America’s national security?

China is more creative, using everything from investigations of contamination in our lobsters, to environmental standards that have hurt coal exports, to the dumping allegations against our wine exporters or the combination of dumping and subsidisation charges against Australian barley producers.

China has announced tariffs of up to 200 per cent on Australian wine.Credit: Qilai Shen

Chinese diplomats in Canberra, of course, made it very clear that China’s war on Australian exports is due to the Morrison government’s commentaries on the virus, Hong Kong, Taiwan, the South China Sea. As well as China’s spying and influence programs in Australia and its banning of Huawei from the 5G rollouts and blocking proposed acquisitions of Australian companies and agricultural assets.

Trump’s tariffs, particularly those he placed on China’s exports to the US during last year’s American-instigated trade war, were initially misconceived – they were the product of Trump’s lack of understanding of international trade and the significance, or otherwise, of trade balances – and then morphed into a broader and more complex attempt to damage China’s ability to challenge America’s economic, technological and geopolitical leadership.

China’s actions are punishment for Australia’s outspokenness and an attempt to intimidate the Morrison government and prevent it from airing its opinions and inciting a broader western consensus and alliance that could have a material impact on the issues whose visibility Australia has raised.

Like Trump’s tariffs and assaults on the multi-lateral organisations that America had played a pivotal role in creating, which alarmed America’s traditional allies, China’s attempt to intimidate Australia is likely to be counter-productive and force other western nations to consider what China’s new belligerence might mean for them.

Just like Trump’s tariffs, there is also a cost to China’s companies and consumers from its actions.

The Trump trade war might have damaged China, although it largely redirected the exports affected by the tariffs, but it was paid for by US companies and consumers in the form of higher prices. Similar outcomes could be expected from China’s bans on Australian products.

Australia, apart from its proximity, has become one of China’s major trading partners because it is reliable, its products are high-quality and its prices are competitive.

Take coking coal. Australia – mainly BHP – supplies roughly half the metallurgical coal China’s steel mills import. While China has a massive domestic coal industry, its steel mills need the premium coal Australia produces.

Higher quality raw materials make the mills more productive, lower energy costs, produce less environmentally-damaging emissions and help contribute to higher quality end-products.

Since China first canvassed the ban on Australian coal, about 7 million tonnes – an estimated $US700 million ($950 million) worth of coal - has been left stranded, awaiting unloading, in Chinese ports. The ex-Australia coking coal price has slumped to about $US100 a tonne, its lowest levels for four years and nearly 30 per cent lower than the price two months ago.

BHP is the biggest Australian exporter of coal to China. Credit: Peter Braig

That would suggest the “ban” – China says the curbs on imports of Australian coal are because many Australian producers have failed to meet environmental standards – is working to hurt Australia.

Chinese domestic coal prices, however, have risen sharply – they’re now about twice the price of imported coal – and the prices of the US and Canadian coking coal that is being substituted for the Australian product have also spiked.

So, Chinese steel mills are paying a lot more for lesser quality coals that reduce the productivity of their operations, produce more environmentally harmful emissions and lead to lesser quality products.

The market for coking coal is far more diversified than for, say, iron ore where China takes up to 80 per cent of Australia’s production. Japan, South Korea, India and even Europe are existing customers. India, in particular, is experiencing something of a steelmaking boom and has been buying more Australian coal.

Thus, to punish Australia China is damaging its own steel's competitiveness by providing its competitors with access to more high quality but lower-priced raw materials that self-evidently meet the Japanese, Korean and Indian environmental standards.

The massive tariffs on Australian wine for supposed dumping – selling products below the cost of producing them – is as absurd, although the cost of that action will be borne via reduced choice for Chinese consumers.

Australia is the biggest exporter of wine to China and Treasury Wine Estates is the heavyweight among those exporters. The 169.3 per cent tariff on its wines will effectively price them out of the market.

Maybe the targeting of Australian wine and coal is as much a protection racket as it is punishment for Australian politicians offending Chinese sensitivities.

If Treasury is dumping wine in China, however, it’s not at all obvious in its financials. The Treasury EBITS (earnings before interest, tax and the accounting treatment for its wine inventories) margin in Asia, where China generates more than two-thirds of the division’s earnings, is a touch under 40 per cent.

That compares with a margin of 22.5 per cent in Australia, 13.8 per cent in the US and 14 per cent in Europe, the Middle East and Africa and looks more like profiteering than dumping.

China is trying to revive its domestic wine industry, where production has more than halved in the past three years. There’s also been a spate of defaults on corporate bond issues by Chinese state-owned coal producers.

Maybe the targeting of Australian wine and coal is as much a protection racket as it is punishment for Australian politicians offending Chinese sensitivities. In any event, while it will harm Australian producers, there’ll be some self-inflicted harm, too. Just like Trump’s tariffs.

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