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Economics & Markets

Econosights: Impacts to Australia from Chinese trade restrictions

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney, Australia

Key points

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The total value of Australian exports to China impacted by trade disputes (which started in 2019) is $23bn (4.5% of total exports or 1% of GDP).

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The impact to the Australian economy from Chinese trade bans has been mild because the value of affected exports is low and as most sectors have been able to find alternative export markets.

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Coal, beef, copper ore, cotton, barley, wheat and sugar exports have found alternative markets outside China and exports are higher compared to 2019 levels. But, wine, timber and lobster exports are still below 2019 levels.

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The Australian trade surplus has exploded since mid 2019, nearly doubling to $123bn on an annual basis. This is because of a 30% surge in goods export prices as commodity prices have skyrocketed. Total goods volumes are still down by around 2% since 2019 which also reflects Covid disruptions.

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Despite some of the trade restrictions with China, we expect the Australian trade surplus to remain large because of high demand for commodities and a recovery in service exports as the global economy continues to re-open from the Covid-19 pandemic. A higher trade surplus is good for Australian national income.

Introduction

The trade relationship between Australia and China has deteriorated over the past three years because of heightened political tensions. China started imposing new trade restrictions on some Australian goods in 2019 while Australian tariffs on Chinese goods, include steel, aluminum and chemicals have been in place for years.

Since early 2009, China has been Australia’s largest two-way trade partner with 41% of Australian exports going to China and 32% of Australian imports sourced from China. The start of trade tensions between the two nations in 2019 led to concern about the outlook for the Australian economy, given the significant role China plays as a market for domestic production.

This Econosights looks at the impact to the Australian economy from the trade restrictions in place since 2019.

Australian goods subject to trade restrictions
On our calculations, over $23bn of Australian goods exports have been subject to Chinese trade bans which is worth 4.5% of total exports or 1% of GDP (see the next table).

Source: ABS, Macrobond, AMP Capital
Source: ABS, Macrobond, AMP Capital

Looking at headline trade data, any impacts from these trade bans are not very obvious. The headline trade surplus has nearly doubled, from $68bn in late 2019 on an rolling annual basis to $123bn at the moment (see the chart below).

Source: ABS, AMP Capital
Source: ABS, AMP Capital

Total goods exports to China are up by 21% since late 2019. But, this is deceiving because the price of commodities has skyrocketed (goods export prices are up by 30% since late 2019), which is lifting the value of exports. This means that the volume of exports to China fell between 2019-2021 (although the volume of total global exports was also down). The trade balance has also been boosted by a fall in imports (espeically for services) because of the disruption from Covid-19.

Impacts on export sector subject to trade restrictions
Here we outline the impacts to each sector from trade restrictions.

Coal - Total monthly coal exports collapsed by 56% from the 2019 high to the 2021 slump (see the chart below) with exports to China falling to zero. However since mid 2021, coal exports have roared back with total monthly exports now higher than pre-trade dispute levels. Higher exports to Japan and India have more than offset the decline to China. Longer-term, coal exports are likely to decline as the world becomes less reliant on fossil fuels.

Source: ABS, AMP Capital
Source: ABS, AMP Capital

Beef - Beef exports plunged by nearly 60% from late 2019 until mid-2021 but have been recovering strongly over recent months and are tracking close to pre-trade dispute levels. More exports are now directed to Korea and Japan continues to take a large share. Beef exports to China are nearly 50% lower compared to 2020.

Copper Ore – While exports to China are now zero, a higher share of exports to Korea and India have more than offset this loss and total copper ore exports are still trending up.

Wine – Alcoholic beverage exports (the breakdown for wine is not available) are still down by 24% to November 2021. Exports to China are 90% lower compared to pre-trade dispute levels. While the UK and US are still big markets for Australian alcohol, the lost exports to China have not been made up by other countries.

Cotton – Cotton exports are back up to 2018 levels with higher trade with Vietnam and Indonesia more than offsetting the lost trade with China.

Barley – Barley exports are back up to 2018/19 levels with exports to Japan, Phillipines, Thailand and Vietnam growing significantly.

Timber – Timber exports are still more than 70% below pre-trade dispute levels despite some increase in trade with India and Malayasia.

Lobster – Lobster exports are down by around 45% since late 2020. Higher exports to Hong Kong and Vietnam have taken some of the share from China.

Wheat – Wheat exports suffered in mid 2020 but have recovered and are tracking at multi-year highs. Despite the trade tensions, exports to China are back up to normal levels.

Sugar – Sugar exports are back up to normal levels after a slump in early 2021, with Korea taking a larger share.

Services – While there are reports that there have also been unofficial “bans” on Australian service exports to China (Chinese tourists and students), so far making any sense of services export and import data is impossible because of the pandemic and border closures. People movement will become clearer through this year.

Looking through the detail of the impacted export sectors shows a mixed picture. The majority of impacted sectors have managed to find an alternative export market outside of China, but that has not been the case for all industries. This may reflect the highly fungible nature of Australian commodity exports which are easy to re-route to other markets. The trade restrictions have taken place around the same time as the Covid-19 pandemic which has itself caused disruptions to global shipping, trade and demand. So, perhaps it is just a matter of time for all affected sectors to find new export markets.

Impacts to Australian economy and implications
Chinese trade restrictions on Australian exports to China have had less of a negative impact on the Australian trade balance (and therefore the Australian economy) than initally feared as many exporters have sourced alternative markets. However, trade restrictions still cause short to medium term disruptions to individual producers until new export arrangements are organised which is negative for economic activity in the short-run.

Some goods meant for export may also be diverted to the local market (has anyone else been enjoying lobster lately?). This can often be negative for producers (if the produce is sold at a lower price) but a benefit for consumers.

The value of Australian goods subject to Chinese trade restrictions is still small at 4.5% of total exports. If a larger share of goods was impacted (like iron ore which is worth 27% of total exports), it would have a larger negative short-term impact on the economy. But this would also impose a greater cost on China.

  • Economics & Markets
  • Econosights
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While every care has been taken in the preparation of this information, neither National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM) nor any other member of the AMP Group makes any representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This email has been prepared for the purpose of providing general information, without taking account of any of your objectives, financial situation or needs. You should, before making any investment decisions, consider the appropriateness of the information in this email, and seek professional advice, having regard to your objectives, financial situation and needs.

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