Failure of China’s trade sanctions in the numbers

Productivity Commission analysis of China’s misguided trade bans against Australian producers demonstrates clearly how important free trade and open markets are to the nation’s economic wellbeing. It is a timely reminder as protectionist tendencies come back into vogue under the guise of taking action on climate change. Another lesson to be gleaned from the Productivity Commission research is that using sanctions to bully neighbours can backfire, diplomatically and economically.

For Australia, the results of the analysis are a big tick for resilience. Producers were able to find new markets, proving fears that we were too dependent on China were overblown. Trade was able to adjust to the disruptions of China’s refusal to take Australian produce and although some industries might have incurred significant costs as they adjusted, economy-wide and globally the effects were limited.

According to the Productivity Commission, a simulation of China’s trade bans against Australia showed the value of our exports to China fell by 6.701 per cent but the value of our total exports fell by 0.194 per cent. This was because reduced demand from China made the targeted exports more attractive to other trading partners, which increased demand for Australian exports by 2.192 per cent. Overall, there was no appreciable net effect on trade but there was some reallocation as China’s imports from other sources increased.

In short, lower production of exports to China was offset by higher production of exports to other destinations. The resulting inflow of foreign capital offset the decline in gross domestic product that would have occurred had there been no reallocation to other destinations. This meant Australia’s real GDP was affected by only 0.009 per cent. As Tom Dusevic writes on Tuesday, by denying its citizens the pleasure of Australian wine, lobster and beef the Chinese Communist Party had scored a spectacular own goal. The impact for China is likely to be long-lasting because other free nations have rallied around Australia and shown themselves unwilling to be intimidated by Sino trade aggression.

Australia was able to draw the world’s attention to China’s bullying behaviour, which stemmed from its displeasure at Australian government actions. First was the Turnbull government’s 2018 decision that effectively banned mobile network operators from using Huawei equipment in their 5G network on national security grounds. The stakes were raised when the Morrison government led a global call for China to co-operate with investigations into the origins of the Covid-19 coronavirus. Other countries have experienced similar treatment, resulting in a more co-ordinated effort to counter Chinese ambitions.

The upshot for China of its wolf warrior diplomacy and trade sanctions has been a loss of prestige and global trust for no discernible impact on the country it had targeted. The truth of this is reflected in China’s decision to turn down the rhetoric and seek to re-engage with foreign powers in a more co-operative way. This also is guided, no doubt, by the foolish decision to declare a no-limits pact with Russia’s Vladimir Putin immediately before he plunged into an illegal and catastrophically ill-considered invasion of Ukraine. The other big lesson has been the importance of energy in matters of global trade. It quickly became apparent that rejecting Australian coal was a costly strategic mistake for China.

As the world realigns around trade in strategic minerals, Australian companies must remember the lessons of diversification – just as government must remember the importance of remaining a dependable trading partner, particularly in the area of energy. It also should reflect on the need for quality independent analysis and advice from the Productivity Commission, which has been firmly in Jim Chalmers’ reform sights. The Treasurer announced on Monday that Chris Barrett, a former chief of staff to Wayne Swan and a Victorian Department of Treasury and Finance deputy secretary, will be the new Productivity Commission chairman.