Why our economy can afford to stand up to China with Belt and Road veto

The federal government has vetoed Victoria’s controversial Belt and Road agreement with China. China’s embassy has predictably warned this will only cause bilateral relations, already deep in the doldrums, to worsen further.

Over the past year Beijing has hit Australia with a barrage of politically motivated trade sanctions affecting numerous exports, from coal and copper to barley and beef. The latest spat therefore raises the obvious fear it could trigger even more of China’s trade wrath.

The cancellation of Victoria’s Belt and Road Initiative deal with China was an early test of new Commonwealth powers to veto state government agreements with foreign governments. Credit: Alex Ellinghausen

Beijing might well roll out additional measures. We will have to wait and see. But it’s worth keeping in mind a few important things as this all plays out. All in all, the Australian economy is quite resilient to China’s coercive trade sanctions. But that does not mean we should go around unnecessarily poking Beijing in the eye.

China is by far Australia’s largest export market. However, one key lesson from Beijing’s recent trade sanctions against Australia is that the damage has been far smaller than many initially feared.

That’s because China has generally targeted areas where it deems the cost to itself as acceptably small, largely because it can find alternative suppliers. But that also tends to mean Australian exporters can find other buyers too. Indeed, although Beijing’s trade sanctions have so far cut Australian exports to China by about $10 billion in annualised terms, most of this has been successfully offset by redirecting exports to other markets.

Of course, this redirection is not costless. The disruption to industries is real and export prices will tend to be lower and costs higher in serving other markets, reducing profit margins. But the key point is that the economic damage to Australia is far less than many might otherwise have feared.

Looking ahead, because China still wants to limit the economic cost to itself, Beijing is essentially running out of things it can hit in a big way. It cannot go after Australia’s most important exports – iron ore and liquified natural gas – without doing enormous damage to itself given limited alternative global supplies. And while Beijing has already made threatening noises against Australia’s tourism and education industries, this is basically irrelevant for now while the borders remain shut.

China could certainly tighten the screws on other Australian agricultural and mining commodities. But it is running out of options to do so at low cost to itself. And, as before, Australian exporters will in many cases be able to redirect their exports to other markets anyway, limiting the damage.

While we wait to see how China responds, it is important not to panic or otherwise overstate the potential impact of China’s trade sanctions. That does Beijing’s work for it and ignores the economic realities of global markets.

What does this mean for how Australia manages increasingly tense relations with Beijing? The Australian economy’s relative resilience means the public and the government can feel more confident in our ability to act in line with our own national interests and values when dealing with Beijing.

Nonetheless, it is important to remember that China’s trade sanctions still impose real costs for many Australian businesses, workers, and communities. It is therefore not a license to indulge in unnecessary diplomatic provocations and insults.

One can reasonably argue that nullifying the Victorian Belt and Road agreement falls into this latter category. The agreement is almost completely meaningless other than creating a minor awkward inconsistency in Australia’s official stance towards China’s Belt and Road program. Yet the symbolism seems to be quite important to Beijing.

So while the Australian economy can probably handle Beijing’s trade tantrums, in this case it seems a problem we could have usefully done without.

Roland Rajah is the lead economist and director of the international economics program at the Lowy Institute.