Political tensions with China unsettle the Australian economy

The Australian economy not only has to find a way out of the Corona crisis, but also tackle problems with China at the same time.

China is Australia’s most important trading partner. The resource-rich country exported more than a third of its exports to China last year. Chinese companies have invested in Australian mining, agriculture and real estate. Australian universities are relying on the high tuition fees of the 160,000 Chinese students currently stuck in China as Australia has closed its borders because of the pandemic. However, it is not only the Corona restrictions that threaten the financial foundations of universities, but also the rapidly deteriorating political relations between Australia and China. The Chinese government has warned against travel to Australia – because of “racist attacks against Chinese and Asians.” This has also affected tourism. Until the outbreak of the pandemic, over 1 million Chinese had traveled to Australia each year. Australian tourism organizations had hoped that tourists from China would help to revive their industry, which had been hit by the pandemic.

Political relations between Australia and China hit their first low point in 2018 when the government barred Chinese telecom equipment supplier Huawei from building Australia’s 5G mobile network over security concerns. New laws have led to stricter scrutiny of Chinese investment projects in Australia and measures against Chinese influence on Australian companies, political parties and universities. Now Australia is calling for a thorough investigation into the origin and spread of the coronavirus in China. In addition, Canberra is not holding back with criticism of the new restrictive security laws in Hong Kong.

At the same time, the Australians are upgrading militarily. In the midst of the Covid 19 recession, the country is increasing its defense spending. Australian Prime Minister Scott Morrison warned of a more insecure and dangerous post-Corona world, similar to the situation in the 1930s before the outbreak of World War II. Tensions between China and the U.S. in the South China Sea could lead to strategic blunders and conflict. Just last week, the Chinese navy had an “encounter” with five Australian warships on their way to maneuvers with the American fleet in the disputed sea region.

Still, Australian National University security and defense expert John Blaxland believes a military confrontation is unlikely: “Chinese tactics are aimed at an opponent’s surrender without military confrontation, through ever-increasing political and economic pressure and clear demonstrations of power.” Australia must counter this and offer a credible deterrent, he said. The example could also encourage other countries in the region not to be intimidated by China, he said. Trust in the reliability of the great U.S. ally has fallen considerably with Donald Trump’s unpredictable foreign policy, he said. Australia is now trying to get closer to neighbors such as Indonesia and countries like South Korea and Japan.

But at the same time, the Australians continue to work economically with their most important trading partner. The country wants to benefit from the Chinese recovery after the Corona crisis. Economic goods are transported in high volumes. Companies like Pallets Sydney profit from this. It’s not easy, says defense and international economics expert Stephan Fruehling of the Coral Bell School of Asia-Pacific Affairs. “Direct investment by Chinese companies in particular is a problem. Many large companies have ties to the Chinese army. Chinese companies cannot be separated from the state.” If the Australian government or the media make critical comments about Chinese policy, Beijing likes to react with economic punishments: ships with raw material deliveries suddenly have to wait twice as long for clearance in Chinese ports; without warning, tariffs are imposed on agricultural products or beef imports are restricted.

Nevertheless, economic cooperation in some areas that are important to China is still going surprisingly well: The large Australian mining companies, for example, were allowed to continue operating during the lockdown. Corona outbreaks were prevented in remote mines in Western Australia and Queensland. Exports continued – albeit at lower volumes in some cases. The major commodity groups BHP, Rio Tinto and Fortescue Metals were even able to increase their iron ore deliveries to China in May 2020 – at a high price level of more than US$100 per ton.

China needs the ore for economic reconstruction after Covid-19, and the world’s second-largest economy is dependent on Australia for this. Australia’s only major competitor, iron ore exporter Brazil, has had to cut its production significantly because of uncontrolled corona eruptions. In this case, China is apparently acting pragmatically despite its harsh tone toward Australia. Australians hope that this pragmatism will prevail in other areas of economic relations between the two countries.