Two thirds of exports at risk in China conflict, report warns

Any kind of China conflict would devastate the economy with two-thirds of Australia’s exports and 40 per cent of its imports at risk of coming to a halt, warns a new report.

A cargo ship transits the busy Strait of Malacca between Indonesia and Malaysia.

The federal government should underwrite war-risk insurance for shippers and set out plans to charter commercial vessels in a conflict, according to a new report warning a US-China war would likely close Australia’s vital trade routes through the Indonesian archipelago.

In an analysis of the nation’s shipping routes, the Australian Strategic Policy Institute warns two-thirds of the nation’s exports and 40 per cent of its imports could be brought to a halt by the blocking of key regional choke points, including the Malacca, Sunda and Lombok Straits.

While protection of the nation’s trade is a key argument for Australia’s decision to buy long-range nuclear submarines, the report warns “the greatest risk to the security of our trade routes lies relatively close to home”.

“The entry points to the Indonesian sea lanes are obvious choke-points and are relatively close to the Australian mainland,” it says.

The report warns 40 per cent of Australia’s liquid petroleum supplies are derived from Middle East crude that passes through the Malacca Strait between Indonesia and Malaysia.

Its author, ASPI senior fellow David Uren, says US rather than Chinese forces would be likely to close the key Indonesian waterways in the event of a conflict over Taiwan, under longstanding American plans for a “distant blockade” of China.

“China is highly dependent on the passage of shipping through those waters, so they could become the focus of a US blockade in any conflict between the two powers,” he says.

The closure of the key Indonesian trade routes would force Western Australia’s mineral exports to North Asia to take a 10,000km detour, travelling around southern Australia, up the nation’s east coast, and east of Papua New Guinea.

The South China Sea – often thought of as a potential flashpoint – would be “relatively easily avoided” by commercial vessels, the report says.

Australia’s $184bn worth of exports to China would inevitably cease in the event of a US-China conflict, an economic hammer blow to the nation.

But the report says trade would likely continue to allied nations, as it did in World War II, despite risks to commercial vessels.

While the Albanese government has proposed a strategic fleet” of 12 merchant vessels, the report warns the vessels will only be sufficient for Australia’s domestic coastal trade, leaving the nation reliant on the global shipping industry in a crisis.

Despite the threats, trade remains surprisingly resilient in times of conflict, the report says, pointing to the continuation of commercial shipping through the Red Sea despite Houthi attacks, and the ongoing trade with Ukraine in the face of Russian threats.

A cargo ship sails off the coast of Djibouti in northern Africa in January, amid surging attacks on commercial ships by Yemen's Houthi rebel group. Picture: Getty Images

But it warns the government must make it clear to commercial operators that it will underwrite war-risk cover to ensure they are prepared to take the necessary risks.

“In times of conflict, a key issue for shipping companies is the availability of war-risk insurance, and there’s a role for government in supporting that,” it argues.

“The Treasury should review the experience of other countries in supporting the provision of war-risk insurance and develop policy for responding to a crisis affecting the willingness of ship operators to travel to Australia.”

The government’s ability to requisition ships in times of conflict also needs to be re-examined, Mr Uren argues.

Under Australia’s Defence Act of 1903, “the owner of any vehicle, horse, mule, bullock, aircraft … boat or vessel” can be compelled to hand over their property to the government in times of war.

Given the absence of a significant sovereign fleet, Mr Uren says the government needs to be prepared to “pay whatever is required” to charter such vessels in times of national crisis.

“The government did this to secure the continued availability of airfreight during the Covid-19 pandemic, when passenger aircraft, which carry the majority of airfreight, stopped flying,” he says.

“It was also the chosen approach, rather than requisitioning, when merchant shipping was needed during the East Timor crisis in 1999.”