Australia Risks Getting Dragged Into U.S.-China Spat, Economists Say
Australia Risks Getting Dragged Into U.S.-China Spat, Economists Say
(Bloomberg) -- Australia must nimbly navigate tensions with China to avoid being dragged into the escalating dispute between Washington and Beijing, said economist John Edwards, who sat on the board of the Reserve Bank until 2016.
The developed world’s most China-reliant economy triggered a response from Beijing when it sought an independent review into the origins of the coronavirus pandemic. China accused the Morrison government of following the U.S., as the call came after the Trump administration demanded an inquiry.
“The real danger is not the Australia-China dispute, but that we will get caught up in the U.S.-China dispute, which is almost certain to get worse as America’s presidential election progresses through to November,” said Edwards, a senior fellow at the Lowy Institute in Sydney. “These are circumstances in which we need to tread quite carefully.”
The calls for the probe occurred in a context that “lent itself to an interpretation by China that Australia was advancing this in concert with the U.S.,” Edwards said.
China has barred meat imports from four Australian slaughterhouses and slapped tariffs of more than 80% on Australian barley to demonstrate its displeasure. It is also considering targeting more Australian exports, including wine and dairy.
The restrictions will hit hard those producing farmers, but will have a minor impact at a macro level. Deutsche Bank AG estimates that it takes just three days of iron ore exports to match Australia’s annual exports of barley, and 40 days for beef. Iron ore is Australia’s biggest export and China is the biggest consumer.
James McIntyre, economist for Australia at Bloomberg Economics, said that that the Australian goods targeted align with components of China’s CPI basket that are experiencing weak or declining inflation pressures. That suggests the impact would help counter disinflation and the impact on Chinese consumers would be muted.
Balancing Relationships
Foreign Minister Marise Payne told Australian Broadcasting Corp. radio Wednesday that Australia would be “disappointed if there was any process of conflating” trade and the virus investigation. Trade issues should be dealt with on their own merits, she said.
Edwards maintains there’s been no crossing of the Rubicon in Australia’s relationship with China, the situation is completely salvageable. Yet, it again raises the concern about Australia’s ability to balance the relationships of its largest trading partner, with its ally partner.
The trade agreement, signed at the beginning of the year, between the U.S. and China generated optimism that tensions would dissipate, but were again ignited due to the coronavirus.
“It’s clearly very much against our interests to have an intensification of a dispute between our major security partner and the market that accounts for more than 30% of our exports, with whom we have a free trade agreement,” said Edwards, who worked as an economic adviser to former Prime Minister Paul Keating. “I think it’s the No.1 problem facing Australian foreign policy and that means when we move in this area, we need to do so with thought.”
Saul Eslake, an independent economist who has observed Australia’s economy for four decades, says this is a difficult task for government.
“We are incredibly reliant on China, certainly by the standards of advanced economies, but even by the standards of other economies in our region,” said Eslake. “The question is, what price are we prepared to pay for upholding our core beliefs, and our identity as a nation. Ultimately, it’s impossible to put an economic value on something like that.”
Edwards is more sanguine, arguing Australia needs to be nimble and sensible.
“If we’re guided by the simple rule that we conduct ourselves with a view to our own interests, we can’t go far wrong,” he said. “One of our interests is in a long-term relationship with China and of course a long-term relationship with the U.S. We’ve just got to navigate between the two.”
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