China called Australia called “gum” stuck to their shoe

China called Australia called “gum” stuck to their shoe

A few weeks back we started putting our thoughts on paper regarding the Australia/China trade relationship and its impact on New Zealand. With recent conversations Nanaia Mahuta has been having this conversation seems more important than ever.

I reference a quote later in this email that came to mind when I heard her talk on ZB "If you’re going to become dependent on a country for trade, don’t poke them with a stick." Hoping this isn’t what she’s about to do anymore than she already has by the sound of it.
That’s all we have on this now, but will be following closely as we prepare for any potential backlash down Godzone.

The statement in the subject of this email is from China’s state-run Global Times. It was written around the time of Australia’s demands for an independent inquiry into the source of COVID-19.

It sums up China’s rage towards Australia pretty well.

It’s no secret that the two countries have been having some major disputes recently. China’s been slapping tariffs and restrictions on Australia’s key industries. It’s put tariffs of between 100-200% on Australian wine, 80% on barley, and has restricted trade for Australian timber, red meat, and seafood. There was even a case where tonnes of live Australian lobster were left in port, because the officials wouldn’t let them through. In today’s newsletter, I wanted to briefly look at what’s going on with the two countries and give you my take on it.

Why did the conflict start in the first place?

If you look at official Chinese sources, they’ll say that they’re restricting Australia’s trade because Australia is the bad guy. They’re accusing them of ‘dumping’ their imports to hurt Chinese industries. I don’t think this is the case. Most experts think the reason for this conflict is because of a few key political attacks Australia’s government made on China.
There were three main ones from what I have seen.

The first was Australia excluding Huawei from the 5G rollout. This gives off a stern message, but what made it worse was that Australia encouraged other members of the Five Eyes Alliance to do the same. Then there was Australia’s mirroring of America’s foreign policy at the time (when Donald Trump was still president,) which was anti-China. For example, Morrison followed Trump’s example and questioned China’s status as a ‘developing nation’ in the World Trade organization.

Those two events hurt relations, but what I think was the real kicker was Morrison’s request for an independent inquiry into COVID-19’s origin. The implication was that the Chinese Government had possibly covered-up what really happened – like if COVID came from a lab in Wuhan or not.

Entire industries are now hurting because of this.

Like I said at the beginning, there are a few key industries that have been targeted by China’s tariffs and restrictions. Those industries are suffering as a result, but Australia’s economy hasn’t been widely affected.

Well, that’s unless China goes after Australia’s iron ore. Australia exports around 153 billion dollars worth of goods and services to China, but around 40% of that is iron ore alone. Iron ore is the key ingredient in steel, which is why disruptions here can affect so many industries. The danger is that China will go somewhere else for its iron ore. If that happened, it would massively damage the Australian economy. China gets around 60% of its iron ore from Australia.  

This obviously isn’t an easy switch for China to make. They’ve been looking at places in West Africa to help supply them with iron ore, but even with huge untapped deposits, it’s estimated it’ll take years and billions of dollars of investment before they’ll be able to supply China with what they need. Yet this should be concerning for everyone who could be affected. China’s been known to play the long game, so if their relationship continues to decline, they could ramp up their plans to get iron from elsewhere.

That’s not to say that there haven’t been issues with iron at present. There’s been massive changes in the market. The price of iron is soaring, reaching highs of around $175 USD per ton. That’s a change of 50-75% from prices in 2019 - it’s never been that expensive before. The reason for this price increase is a combination of supply issues and China’s rising demand. There are even worries there could be a shortage. The recent issues between Australia and China have also played their role in the unstable prices.

We’re even starting to feel the pain here in New Zealand. Ocean Freight is one thing, but the price of steel has been steadily rising for months now. With the new financial year ticking over earlier this month, prepare to notice price rises if you haven't already. I know several competitors of ours have implemented price increases, and if they haven't yet, it's only a matter of time.

Politics is upstream from business growth or failure

The reason I’m writing about this whole debacle is because it highlights how politicians can hurt businesses. A lot of experts think that Australia has made blunders with how they’ve dealt with China. Aside from whether they are ‘right’ or ‘wrong,’ it looks like they haven’t had a clear strategy. They’ve been talking aggressively and making China angry, but at the same time, China is their biggest trading partner.

It’s a worry how politicians can hurt businesses, even without stupid policies. A few remarks can end in entire industries being punished. Australia’s wine and barley industries are certainly feeling it.

What bothers me here is the lack of strategy. China, for instance, has a deep culture of ‘face.’ I’m not here to comment on what’s right or wrong, simply observing that reputation in China is hugely important at a cultural level and to insinuate that someone has been dishonest is not something taken lightly.

So, when Morrison went after China when he asked about the COVID-19 investigation, he caused China to lose face on an international level. This was why the Chinese Government looked for ways to get back at Australia. To me, it looked like Morrison didn’t ‘get’ China’s culture and put his country in a bad position.

If you’re going to become dependent on a country for trade, don’t poke them with a stick.

Again, China is Australia’s biggest trading partner. It means that even if you disagree with a lot of what China does you have to find a balance. The fact is, Australia’s economy is heavily dependent on China.

Our politicians haven’t made the same mistakes (yet), but there’s always that risk. The fact is, China is a one-party state with an entirely different culture to ours. It doesn’t place the same value on the freedom of the individual, it’s far more concerned with the success of the whole. If our politicians aren’t careful, we could end up in a crisis because of a few misspoken words.

The fact is, we’re talking about a country that is planning 500 years ahead, not just for their next political election. We need to be considering that foresight in our relationship with them.

I’d love to hear your thoughts on all of this. Again, it’s a tough one because on one hand China’s so important to international trade, on the other hand they have a different  cultural operating system that we don’t always understand. How do you balance between looking after your economy and standing up for your different values and beliefs?