(Bloomberg) –

Australia’s economic resilience following China’s efforts to punish it for its diplomatic slights prompted some Down Under to declare victory. They may be speaking too soon.

Former Prime Minister Malcolm Turnbull said last month that China’s campaign to “make us more compliant” had “completely backfired.” The pressure from Beijing, he added, “has shown China that it can pull all these levers and that it does not really work.”

Exports continue to hit record highs even as China has blocked or restricted an increasing number of imports from Australia since May 2020. Yet dispute – China accuses Australia of taking a hostile approach on issues ranging from the crackdown on foreign investment to questions about the origins of Covid-19 – casts a shadow over the future.

Even though Beijing left the iron ore sector immensely profitable until recently, it is focusing on Australian products that would be the backbone of future trade, such as lobsters and wine, and warns its students against studies there.

“Going forward, that’s where the growth will be, all of that middle-income stuff, and that’s unfortunately what’s impacted in this conflict with China,” said Bob Gregory, professor at the Australian National. University that has studied economics for half a century. .

This is a radical change from 2014, when President Xi Jinping visited Australia and agreed to sign a free trade agreement aimed at expanding Australian exports and creating jobs.

Now hopes for bigger markets and more jobs are in tatters as tariffs raise the costs of some products and Australia’s reputation in China collapses. The flow of investment has also declined, at least in part due to Canberra’s new hostility to Chinese corporate money.

Longtime Bonanza

Australia had enjoyed the Chinese windfall for nearly two decades, reaping windfall profits from mineral exports and income gains from cheap imports. This continues for now, with China’s punitive trade actions targeting commodities from coal to barley, lobsters and wine, but leaving the iron ore intact.

Yet as the metal has hit new highs this year, pushing imports to a record $ 15.2 billion in July, China is now restraining its steel industry and the price of iron ore has fallen 39% per compared to the May peak. Demand is likely to decline further as the Chinese economy places more emphasis on services and Beijing attempts to diversify iron ore supplies and reduce carbon emissions.

Relations have deteriorated since 2018, when Australia banned Huawei Technologies Co. from building its 5G network, and went into free fall last year as Prime Minister Scott Morrison led calls for an independent investigation into the origins of the coronavirus which first appeared in China.

Chinese Foreign Ministry spokesman Zhao Lijian made it clear in July that the trade sanctions were in retaliation for Australia’s actions.

“We will not allow any country to reap profits by doing business with China while baselessly accusing and defaming China and undermining China’s fundamental interests,” he said.

Block investment

While at least one major Australian wine producer tries to ensure that the money spent on developing the Chinese market is not wasted, the image of Australian wines has taken a hit.

Chinese tariffs that have made Australian wine more expensive are weighing on demand, but beyond that there are also “a lot of people who are very loyal to central government decisions, so they are following the line,” Eddie McDougall said. , an Australian winemaker and importer based in Hong Kong. “People just lost interest in Australian wine, and very quickly. “

In turn, Canberra has denied a growing number of Chinese investment and acquisition proposals. Treasurer Josh Frydenberg said earlier this year that he rejected investments that would have been approved in the past, arguing that China had changed under Xi.

Chinese investments in Australia fell 27% last year to their lowest level since 2007, when the mining boom began, according to a report by KPMG LLP and the University of Sydney. The government is currently reviewing the 2015 decision to lease the port of Darwin to a Chinese company, opening up the possibility of retroactively canceling this and other agreements.

Outlook

Diversifying trade away from China will not be easy for Australia. The potential for a limited trade deal with India will give exporters some hope, but India is unlikely to fill China’s economic shoes.

Optimists argue that Australia’s relations with China are bound to improve, citing experiences from Japan and South Korea: And South Korea reached a compromise deal after a dispute with China over American missile systems deployed in the country.

But Australia’s position is weaker than that of Japan, and neither Canberra nor Beijing has shown a willingness to compromise. China has made it clear that it is waiting for Australia to take the first step, while Trade Minister Dan Tehan has said Australia is ready to “pay an economic price” to defend its sovereignty.

Foreign Minister Marise Payne said in August that China had indicated it would only engage in high-level dialogue if Australia met certain conditions, highlighting a list of 14 grievances China had with Australia which was released last year.

“We cannot meet the conditions,” she said.

This means Australia’s economy, already facing the risk of a double-dip recession as Covid closures shut down the country’s largest cities, may soon see the trade tailwind fade as well.

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