China trade coercion had virtually zero economic impact, Productivity Commission says

Productivity Commission findings underline Australia’s resilience to future assaults as producers diversify away from our largest but increasingly unreliable trading partner.

China’s coercive trade restrictions on Australian goods have had a negligible impact on our economy. Picture: AFP

China’s coercive restrictions on Australian exports such as coal, wine and lobsters have had virtually zero impact on the economy, underlining the resilience of the nation to future assaults as producers diversify away from our largest but increasingly unreliable trading partner.

Despite initial fears that taxes and restrictions slapped on goods such as barley, wine and coal in 2020 would cost tens of billions of dollars in lost export earnings, modelling by the Productivity Commission estimates that the prohibitive sanctions on Australian goods over recent years have reduced real GDP by just 0.009 per cent, or about $225m.

The report found exporters were quickly able to find other markets for their goods, as banned lobsters were sold into Hong Kong, Taiwan and Vietnam, and coal to India and Japan.

Primary production sector output fell by 1.4 per cent, but manufacturing output was 0.4 per cent higher than would have been the case without the imposts, as capital flowed to other areas of the economy.

The report comes as a potential breakthrough trip by Anthony ­Albanese to Beijing remains under a cloud, with Chinese authorities yet to offer concessions to get the bilateral relationship back on track, despite a number of high-level meetings over recent weeks and months. With Australia’s relationship with its largest trade partner still hostage to unfair tariffs, PC commissioner Catherine de Fontenay said the successful and rapid diversification of exporters pointed to a greater than expected potential to diversify away from Chinese customers and boost resilience in an increasingly fraught global environment.

Analysts and policymakers have for some years fretted over Australia’s growing reliance on China to drive national prosperity as exporters, especially miners, have enjoyed unparalleled ­demand and prices for their goods as the massive Chinese economy has industrialised.

Ms de Fontenay said that while Australia was heavily reliant on Chinese demand for iron ore ­exports, more broadly trade was not “particularly at risk” from supposed overdependence on China.

“There’s a view that Australia’s trade is significantly under diversified relative to other countries, but that is not true,” she said.

Previous research by the commission has found Australia lies around the middle of the road in terms of share of exports going to top 10 trade partners.

The ability of exporters to find new customers quickly for their products showed that, despite rising concerns about the fragility of the global order, reports of the “death of global trade” were overstated. “There has been a lot of talk lately about decoupling, and certainly some of the political headwinds are concerning. But global trade volumes are at an all-time because countries get a lot of mutual benefit from trade,” she said.

“We are facing some challenging times and Australia, as a small exporting country, should do all it can to promote free trade.”

China in 2020 responded fiercely to perceived offences ­including the former Morrison government’s call for an inquiry into the origins of the Covid-19 pandemic, the ban on Huawei participating in the 5G network, and foreign interference laws.

This culminated in China’s infamous list of “14 grievances” published in November of that year. To express its displeasure, China placed restrictions on a range of goods. They included slapping ­additional taxes of about 75 per cent on barley sales and more than 200 per cent on wine.

Chinese authorities also raised spurious concerns about the quality of the products and put in place extra inspection measures in ports which in some cases effectively banned the sale of goods such as lobsters, coal and wheat.

Chinese abattoirs were told to stop buying Australian beef, and Chinese cotton mills to stop buying Australian cotton.

While the measures were far from costless – some businesses were and still are hugely impacted – the commission’s report concluded that Australian exports proved to be “mostly resilient”.

Coal sales to China collapsed from about $5bn-$10bn a quarter leading into the pandemic to virtually zero, but this was quickly replaced by sales to India and Japan. Climbing prices in 2021 further bolstered coal exports.

Lobster sales diverted quickly from mainland China to Hong Kong, Vietnam and Taiwan.

“The value of beef and wheat exports to China did not experience significant falls – likely due to the partial nature of the measure, which was limited to certain abattoirs and shipments,” the report said. “On the other hand, there were falls in exports of Australian lobsters and wine, affecting producers whose exports were concentrated on the Chinese market.

“That said, after initially ­increasing exports to their original markets, wine exporters developed new markets. In the case of products with limited perishability, like wine, the costs to exporters might be from deferred sales, rather than not being able to sell the good at all.

“And some exporters may have even enjoyed an increase in the value of stock that ages well.”

China has since begun to ease its restrictions on some goods, ­allowing some coal imports from early this year, while timber sales restarted in May. Reports suggest Australian lobsters have begun to make their way back into China.

Crippling tariffs on wine and barley, however, remain pending World Trade Organisation reviews. At a G20 meeting in India last week, Jim Chalmers met his Chinese counterpart, Finance Minister Liu Kun, in the first face-to-face meeting of its kind in four years. The Treasurer said he had received positive feedback about the potential easing of remaining trade restrictions.

Dr Chalmers said on Monday China’s stuttering economy post-pandemic lockdowns was a topic of conversation among assembled officials.

“Obviously, this was part of the conversation with my ministerial counterpart too, Minister Liu, and that’s something that we’re monitoring very closely but our expectations for our economy have not changed,” he said.

CBA senior economist Belinda Allen said massive iron ore export earnings had swamped the dollar impact of Chinese trade sanctions.

The measures had not ­prevented Australia’s trade surplus reaching “staggering” levels, Ms Allen added.

Over the 12 months to May the trade surplus was close to $150bn, according to the Australian Bureau of Statistics, or 10 times the peak achieved during last year’s so-called mining boom.

Nonetheless, Ms Allen said that “when the Chinese sanctions hit there was a lot of trade diversion that happened”.