Living in each others pockets: Why China is Australia’s most important friend?

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China’s economic stability: Australia’s future depends on them

By ELIZA BAVIN:

China recently experienced a crash in its financial markets raising concerns regarding Australia’s economy.  China is Australia’s biggest trading partner, in terms of imports and exports, with a quarter of all trade being done with China. Financial analysts have been focusing on a number of failing companies within China, and the possibility that it may be the beginning of a major financial downfall.

In February this year, China’s exports fell 18 percent. This was unexpected, as a 5 percent increase was predicted. For the first two months of 2014, China had its worst financial showing in five years. With a rare trade deficit last month of $23 billion, and the stock market dropping to an eight-month low these figures spurred collateral damage in the commodity markets, particularly for Australia, with copper, iron and soybean prices plunging.

According to financial analyst from Deloitte’s, Annie Watson, “Australia sold a record $7.4 billion worth of goods and services to China during March last year, highlighting Australia’s economic reliance on China, which now accounts for almost a third of all exports.”

“Australia’s reliance on China is massive.  Last year Australia’s trade returned to surplus for the first time in 16 months, which means the value of exported goods and services surpassed the value of imports.  China accounts for 25 percent off all Australia’s trade.  Think of what Australia would lose if China were to no longer import our goods,” she said.

China’s $7.4 billion expenditure on Australian goods and services represented a 22.8 percent rise in 2012. China, being the world’s second largest economy, is now the destination of 30.7 percent of Australian exports.  This means it has doubled its share of Australian sales over the last four years.

Just less than 25 percent of all Australian trade, including both imports and exports, is now done between the two countries, meaning that Australia has never had a stronger reliance on China, or possibly with any other country in history. If China’s economy does crash, Australia faces the possibility of losing a third of its trade.

Professor Hugh White from Australian National University is an expert on Australia-China relations.  He believes Australia’s reliance upon the Chinese economy is the most important relationship our country has experienced in history. “China is the most important trading partner, that is as a proportion of our trade imports and exports, it is the most important trading partner Australia has ever had in its history except for Britain at the height of the British Empire.  So it is exceptionally important to us economically,” he said.

“It is also the most important source of future economic opportunities for Australia.  That is not to say that China is the only place we can look in the future for more economic opportunities, but because China’s economy is so big and it has continued growing so quickly it will be the most important place where we will look for future opportunities over the next decade or two.”

“So, both in terms of its current position and our future prosperity, it is literally true that no country is more important to us than China is today.”

Although the idea of the Chinese economy crashing is one that places many people in a state of concern, Miss Watson believes the Chinese financial system is continually underestimated in terms of recovery. “Chinese government assets increased by [AU]$16.6 trillion this year.  So although a crash, in which they experienced would have had a terrible influence on some other nations, China has built a safety blanket of saved money to help in these situations,” she said.

Professor White agrees, “I don’t think we ought to be too pessimistic about that [China’s economic hit], China’s economy is now growing at around 10 percent, but even if it were growing at 7 percent it is still adding huge economic wealth to it’s economy every year.” “It [China] still is producing extra economic activity each year, more than any other country in the world.  So, I still think that even if its economy continues to go more slowly it still will be the principal source of economic opportunity for us [Australia].”

One of the most important aspects of Australia’s continued economic relationship with China relies heavily on the United States relationship with China.  Professor White warns that should the relations between those two countries fall sour, Australia will be forced to make a difficult, and potentially economically damaging, decision. “The more contested the United States/China relationship comes, the more they become rivals, the harder it is for Australia to manage those relationships as we’d like, and the more we are going to be forced to make a choice between them.”

“If that happens, I think the risk is how we will be unable to develop the economic relationship with China, we will be forced to sort, of swerve more closely with the United States and that I think would be a very bad outcome for us and the policy, the proscription, that flows from that is that Australia should do whatever it can to help prevent the emergency of that kind of escalating rivalry between the US and China,” he said.

Australia’s leaders have long been preparing for Asian economic transformation over the next few decades.  This is an appealing assumption, as the past four decades have been so prosperous for Australia in terms of protection, trade and economics.

The extent to which Australia began to bend to Chinese expectations became clear in October 2003 when John Howard invited both George W Bush and Hu Jintao to visit Canberra on consecutive days to address the parliament. Hu was the first foreign leader, other than a US President, to ever be invited to address the Australian parliament.

Howard openly acknowledged the speed in which Australia’s relationship with China was growing, and speaking of the importance of the US-China relationship to Australia he said, “Our aim is to see calm and constructive dialogue between the United States and China on those issues which might potentially cause tension between them.  It will be Australia’s aim, as a nation which has different but nonetheless close relationships with both of those nations, to promote that constructive but calm dialogue.”

Australia has a vast reliance upon China for the future of our trade, and therefore economic stability for the country.  In 2005, Australia and China agreed to begin discussions on a Free Trade Agreement (FTA). Following a joint FTA Feasibility Study in early 2005 it was determined that there would be “significant economic benefits for both Australia and China through the negotiation of an FTA”.

The negotiations covered an array of issues, including manufactured goods, temporary entry of people, agricultural tariffs and quota, services and foreign investment. In 2003, Australian Trade Minister, Mark Vaile and Chinese Vice Minister for Commerce, Yu Guangzhou, signed the Australia-China Trade and Economic Framework agreement, following over a year of negotiations.

China vs US Bank Assets - Total and Change_0

China will overtake the US to become the richest economy in the world, by around 2030

Australia relies heavily upon these trade agreements with China, especially in relation to the mining industry, however should China grow fast enough to keep the Australian economy afloat, China will overtake America to become the richest economy in the world around the year 2030.

This rise may make China too strong to live under US leadership within Asia.  China may look to rule in its own right, and could lead to challenging America’s position.

The US and China have had a difficult and changing relationship over the past few decades, one that is still under careful scrutiny. In one of US President Obama’s first visits to Australia the issue of American control of Asia was expressed in a direct address to the Australian parliament.

Obama stated plainly in a blunt and forthright address that whatever the United States budgetary troubles they will remain in Asia. “As we end today’s wars, I have directed my national security team to make our presence and missions in the Asia-Pacific a top priority,” Obama said. “As a result, reductions in U.S. defense spending will not — I repeat, will not — come at the expense of the Asia-Pacific.”

America can withdraw from Asia, share power with China, or compete with it for dominance in response to the potential challenge from China.  By listening to the American leaders the least likely option will be America calmly withdrawing from the region.

The more China’s power grows, and the more it costs the US to maintain its dominance, the more seriously the leaders will have to think about whether playing a role in Asia is worthwhile.

“I think it is important that we don’t try and get between them, in a buffer zone kind of way, because we might get squashed,” said Professor White, “but I do think we ought to be able to do what we can as a country, and perhaps work with other countries because they have exactly the same interest as us, to encourage both of them to find a way to get on well with one another.”

“I think it is perfectly possible that they can do that, but I’m not sure they are on track to do that at the moment.  In fact, I think at the moment they are heading in the wrong direction,” he said.

How Australia will handle this delicate relationship relies solely upon the leaders of the country.  When John Howard was Prime Minster he made a purposeful effort to ensure relations between Australia and China were stable and profitable, however current Prime Minster, Tony Abbott, does not appear to be dealing with the relationship in quite the same manner.

Miss Watson said, “International economics are difficult to comprehend, and I often feel sorry for the Australian government, because so much of the Australian economy relies upon other nations.  It is a difficult line to toe, because should China’s economy crash, Australia would be toast.”

However, Professor White believes Prime Minster Abbott wants, but is unable, to handle the relationship with China in the same manner as those in the past, “I think Tony Abbott is doing a much less effective job of managing Australia’s relationship with China. than John Howard did.”

“I think Abbott would like to manage the relationship just the way Howard did, but there are two reasons why that’s not going to work.  The first is that I don’t think Abbott realises how clever Howard was, in particular how much Howard was prepared to make connections and accommodations with China on some elements of Australia’s national policy in order to win economic opportunities.”

“…The second is, I don’t think Abbott understands how much harder the environment is now than it was when John Howard was Prime Minister. I think because Abbott doesn’t understand those things he is not taking the steps necessary to make the relationship work.”

It is not known what the future holds for Australian relations with China, but one thing is clear; Australia needs to prepare for the loss of Chinese trade.  Whether this comes due to financial troubles, political struggles or not at all, Australia relies too heavily on China for economic stability to not prepare for a potentially damaging event.

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