Learning the right lessons from Chinese sanctions on Australian imports

Visiting Fellow, RIETI

From May 2020 Beijing blocked the import of roughly a dozen Australian goods for which China was the major market, cutting imports worth around AU$20 billion (US$13.4 billion) annually. The deteriorating political relationship between Canberra and Beijing was the proximate cause but a trade deal between Beijing and Washington involving increased Chinese imports of US agricultural and other goods was also a factor.

Such large disruptions to trade are costly and threaten economic security. But retreat from openness and economic engagement is not the answer — that’s a pathway to a poorer and much less secure world.

Australia’s exports to China remained steady in 2020 and grew by 14 per cent in 2021 and 6 per cent in 2022, all while the global economy suffered from COVID-19 lockdowns and economic downturns. Australian exports of iron ore, which could not be readily sourced by China from elsewhere, and the rapid growth of other commodities like lithium exports, led the way. China accounted for over 40 per cent of Australian goods exports during that time and helped Australia weather the economic effects of the COVID-19 pandemic.

Australia is no stranger to having one country dominate its international trade shares. In the past Japan, the United States and the United Kingdom have accounted for around as much as China does today. This geographic specialisation is a sign of Australian success in utilising its economic endowments and taking advantage of opportunities internationally. Australia has put in place institutions and economic policy settings to manage these highly interdependent economic relationships and successfully dealt with occasional shocks in their fortunes.

Chinese trade sanctions caused Australian exporters — especially of wine and lobster — huge losses. But most exporters quickly found other markets as Chinese imports of barley, coal and other commodities did not slow and opened up other demand. Flexible markets in Australia helped but the crucial external source of resilience was an open multilateral trading system which ensures that trading options remain open. Contestable markets crowd out the effects of weaponised trade but there are adjustment and political costs.

Australian exporters found other markets mainly due to a multilateral trading system which ensures that trading options remain open. Neither exporters nor the Australian government knew exactly where those markets would be ahead of the event. The redirection of trade was led by market opportunities. At the centre of that system is the WTO, which despite its weaknesses, holds together the trading system with a patchwork of WTO-plus free trade agreements built around it.

Two dozen WTO members, including China and Australia, have signed onto the Multi-Party Interim Appeal Arbitration Arrangement so that WTO rules are enforceable even while the United States holds the system hostage with its veto of the appointment of arbitration judges. Australia has cases against China in the WTO that will be enforceable through China’s commitment to the MPIA. Japan has also joined, a major development that signals Japanese commitment to take a lead on international economic rules.

As the world’s largest trader, China has a huge stake in the existing multilateral trading system. China’s non-observance of the spirit of multilateral trade rules, like that of the United States and Europe, and its gaming of the system are not reasons to give up on the WTO. Chinese efforts at economic coercion have almost entirely failed and in every case its actions have backfired economically or politically.

It is possible to find ways to mitigate and diffuse trade risks by deepening involvement and strengthening rules, rather than by avoiding engagement. Economic engagement builds national wealth and power — and when combined with multilateral rules, broadens the range of strategic policy options available to national policymakers.

A China that is much less integrated into the global economy is one with far fewer political constraints and thus is much more of a security risk.

Russia’s strategic use of gas supplies against Europe is sometimes cited as a counterpoint to the argument for interdependence. But Russia was not integrated into European supply chains and European energy dependence on Russia is qualitatively different from economic interdependence in East Asia. Interdependence underpinned by multilateralism effectively diffuses risks.

Nowhere is the power of multilateralism understood better, and is it exercised more instinctively, than in Southeast Asia’s ten-member ASEAN grouping. There is an opportunity to keep the region free and open by working with ASEAN to build economic security through intensifying economic cooperation in RCEP, including with China.

Small and medium-sized powers are protected by international rules and markets. Open, contestable markets constrain big powers that skirt established rules and use economic leverage, without thought for ramifications. The primary lesson of Australia’s 2020 export experience was that the economic weapons China fired were blunted by the multilateral trading system. Even if big powers deviate from the rules, defending and extending the multilateral system is still the top priority for the rest of the world — not following them down that self-destructive road.

The strategic interest is still to lock China into rules, norms and markets. Australia and Japan should take China’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), or TPP–11, to serious negotiation and define the milestones in Chinese reform that are needed for it to attain membership. CPTPP membership can be expanded without eroding rules or standards.

The reality is that the United States has vacated leadership of the global trade regime and become a source of uncertainty as it deals with its own domestic challenges. The United States Trade Representative Katherine Tai’s comments disparaging the unfavourable WTO ruling over steel and aluminium tariffs in December 2022 makes advocacy for a rules-based international order that much harder.

But the rest of the world needs the rules-based international order for economic security. Japan’s leadership was crucial to the conclusion of CPTPP. The global economic situation has deteriorated since then, making the challenge much harder. Australia and Japan are actively shaping the Indo-Pacific Economic Framework to keep the United States locked into Asia, and the joint objective should still be to get the United States back into the CPTPP. These efforts should not come at the expense of the main goal of preserving and strengthening the multilateral trading system, especially the WTO.

Shiro Armstrong is Associate Professor and Director of the Australia-Japan Research Centre and the East Asian Bureau of Economic Research in the Crawford School of Public Policy at The Australian National University. An extended version of this article was first published here in the Research Institute of Economy, Trade and Industry.

April 16, 2023 East Asia Forum

September 4, 2023

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