Are China and Australia engaging in a new trade dispute or a new Cold War? The two sides may have to pick their poison. The world has been busy these last few months, grappling with a global health crisis and an economic recovery that is proving to be inflationary. But Beijing and Canberra have been tussling among themselves for the last year, following Prime Minister Scott Morrison’s request for a worldwide inquiry into COVID-19's origins. The move perturbed China, triggering a war of words that quickly metastasized into economic mayhem, impacting multiple parties: businesses, consumers, exporters, and importers. Beijing is now discussing giving its trading partner the silent treatment, but high iron ore prices might keep them together.
China is the Victim?
The National Development and Reform Commission (NDRC), China's chief economic planner, recently issued a short statement that confirmed it had "indefinitely suspended" all activities under a seven-year-old bilateral economic strategy agreement to enable greater cooperation. Officials accused the Commonwealth of initiating "a series of measures to disrupt normal exchanges and cooperation" that is born out of a "Cold War mindset and ideological discrimination."
Speaking to reporters, a Chinese foreign ministry spokesperson noted that the move was a critical response to Australia's "abuse," adding that the Land Down Under "must bear full responsibility."
Australian Federal Trade Minister Dan Tehan called the diplomatic attack "disappointing." But the government confirmed that it would keep its Ministerial doors open for fresh talks and engagement.
Although relations were strained in 2018 when Australia became the first nation to publicly prohibit Chinese technology juggernaut Huawei from its 5G network, tensions escalated when the prime minister demanded an independent probe into the origins of the coronavirus. This forced China's government to publish a warning against people visiting Australia over racism and discrimination of Asian ethnicities. But the Australians posted a reprisal, telling citizens to be cautious about arbitrary detentions.
The Morrisson government has been more bellicose in recent weeks, with several senior officials discussing the possibility of war with China over the country's intention to reclaim Taiwan. Opposition Leader Anthony Albanese has described the events as "unfortunate" and "regrettable," urging the leadership to maintain dialogue with Beijing.
The quarreling and the NDRC statement led to a currency selloff as the Australian dollar declined sharply by 0.6% against the greenback. However, the Australian Securities Index 200 has endured the mess, rallying 7.5% year-to-date. Perhaps markets are confident that relations will, once again, be as strong as iron.
Ironing Out the Details
Despite the diplomatic tensions, Australia still exported $115 billion worth of goods to China in the 12 months to March. Iron ore represented a bulk of these shipments, thanks to Beijing's insatiable appetite for the mineral substance. China imports 60% of its iron ore needs from Australia, making it the world's largest steel consumer.
Iron ore prices recently topped $200 per ton, making it a lucrative component for the commodity-rich Australian economy. Australia is currently the globe's biggest iron ore producer, mining close to one billion metric tons, doubling Brazil's output. Since China is moving ahead with a $500 billion infrastructure spending plan, it needs steel to proceed. Beijing has been looking elsewhere to import iron ore, including Rio De Janeiro, but no other market can satisfy its demand like Australia can.
"We believe the iron ore trading relationship between Australia and China will remain ring-fenced in relation to current political tensions between the two nations,” Atilla Widnell, the managing director at Singapore-based Navigate Commodities Ptd Ltd, told Reuters. “This is a co-dependent relationship whereby either party cannot survive without the other."
But while this commodity is the primary factor, there could be other economic consequences that might widen the gap in Australia-China relations. Last year, Chinese investment in Australia cratered 62%. The government also slapped exorbitant duties and restrictions on various products, including timber, lobsters, sugar, copper, wine, and barley.
In the end, Australia may have the upper hand as it can always sell its basket of commodities to other economies. Conversely, China needs the Aussies for the enormous iron ore inventories.
The Tit-for-Tat Game
How much longer will each government play this tit-for-tat game? Neither side is willing to concede an inch, which is rather unfortunate for the marketplace, especially during these uncertain times. So far, reports suggest that it has been all quiet on the commerce front, with Rio Tinto confirming that business has largely been unimpacted by the geopolitical strife. But anything can happen at this point, even, supposedly, military conflict. At this point, perhaps it is best for the countries to call it quits, an amicable breakup that only requires the bare bones of any relationship in the form of importing and exporting iron ore. Or maybe Australia is enjoying the deteriorating relations since it has elevated iron prices to all-time highs. Controversy ostensibly creates cash, but there is always a price to pay for these gambles.
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Read more from Andrew Moran.
