China-Australia relations: iron ore miners to escape Beijing’s ‘punitive trade measures’ as small exporters scramble for new markets

Su-Lin Tan
·5-min read

Relations between China and Australia have become fraught over the past year after Canberra pushed for an international probe into the origin of the coronavirus without diplomatic consultations beforehand, and Beijing eventually responded with a number of trade blocks on wine, barley, cotton, copper, coal, sugar and lobsters. We look at the issues in this series.

Smaller export products victimised in a year-long conflict between China and Australia will struggle to find new markets in the short term, while economically codependent trade in commodities such as iron ore will be spared disruptions, analysts say.

As frayed relations pass the one-year mark, Australian exporters of goods including barley, wine and coal see new trading opportunities in countries such as Vietnam, Indonesia and Mexico, but these markets will not be able to absorb excess trade immediately, research firm IBISWorld said.

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Using barley as an example, Matthew Reeves, a senior industry analyst at IBISWorld, said finding replacement export markets is not always a simple task.

“The Australian barley industry’s progress since China introduced the tariffs last year reveals the resilience of Australian exporters, who have pursued diversification strategies. However, shifts to new export markets can take months to achieve, and will do little to ease disruption in the short-term,” he said.

What’s happened over the past year, and what’s the outlook?

China imposed total anti-dumping duties of 80.5 per cent on Australian barley last May after an 18-month investigation that started before the conflict escalated, rendering the grain uncompetitive in China.

Barley was not the only casualty of tensions between the two countries, which escalated when Canberra pushed last April for an inquiry into the origins of the coronavirus pandemic without consulting Beijing. On Wednesday, tensions stepped up a notch when the Australian government tore up Victoria state’s non-binding Belt and Road Initiative agreements with China, along with two older agreements with Iran and Syria under new foreign relations law.

While Canberra says the law was not aimed at China, it was enacted soon after a political furore over Victoria’s actions.

Since then, China has also imposed unofficial bans on coal, log timber, lobsters and wine. Anti-dumping duties were levied on cheap Australian wine late last year and formalised last month, effectively pricing it out of the Chinese market.

IBISWorld identified Vietnam, India, Mexico and Indonesia as potential new export markets, citing shared trade pacts like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – of which Mexico, Vietnam and Australia are signatories – as springboards for more trade.

Tariff reductions as a result of the CPTPP will bolster Australia’s economic relationship with these countries, Reeves said.

Australia is also cultivating bilateral trade deals with India and Indonesia that have growing economies and can soak up exports like coal and food products such as meat, dairy and grains. Vietnam will also have an appetite for food, minerals, and metals, IBISWorld said.

Last November, as the unofficial Chinese ban hit Australian lobsters, Australian agriculture minister David Littleproud espoused the virtues of Vietnam as a possible lobster export market. Early this year, tariffs for seafood exports to Vietnam dropped to around 8 per cent and they will be completely eliminated by 2022 as a result of the CPTPP.

“And we’ve given you [exporters] other free trade agreements in which to sell your product. And in fact, lobsters, before the free trade agreement came in place, 93 per cent of our lobster market went to Vietnam, and Vietnam still remains a very strong and close friend of Australia,” Littleproud said as he asked exporters to remain calm following the ban.

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But replacing China with Vietnam as a lobster market will have its challenges. Export numbers from the Australian Bureau of Statistics show that in 2019 China imported over A$800 million (US$618.5 million) of live and processed crustaceans, including lobsters, while Vietnam imported next to nothing.

In comparison, before the China-Australia free trade agreement was signed in 2015, China imported A$32 million worth of the product while Vietnam imported about A$700 million.

While smaller exporters will have challenges finding new markets, Australian iron ore miners have little to be concerned about, ratings agency Fitch Ratings said.

In a new analysis on Thursday, Fitch said economically codependent trade such as iron ore is likely to be spared from the bilateral conflict. Iron ore is Australia’s largest export to China and critical for the nation’s “industrial policy apparatus”, Fitch said.

“We do not expect China will cease iron ore purchases. Iron ore plays a critical role in China’s industrial development, as the main ingredient in steelmaking. Its importance has only risen over the past year, as China’s fiscal policy response to the coronavirus shock includes a large infrastructure programme,” Fitch Ratings’ Jeremy Zook, Andrew Fennell and Kathleen Chen said in a note.

We would expect China to exclude iron ore from potential punitive trade measures on Australian goods, given Australia’s outsize role in the global iron ore trade


“We would expect China to exclude iron ore from potential punitive trade measures on Australian goods, given Australia’s outsize role in the global iron ore trade and a limited number of alternative suppliers.”

But if there are more punitive measures towards Australia’s exports, they would be levied against smaller export sectors that did not have an impact on China’s near-term growth prospects, the analysts said.

Overall, the trade actions in the past year have not had a material impact on Australia’s economy due in part to the continued strong exports of iron ore to China. As a result, Fitch says Australia’s sovereign credit rating is unlikely to be affected by the trade tensions with China, at least for now.

“Trade actions have been damaging for affected industries at a micro level, but these industries do not comprise a significant portion of overall exports, apart from coal,” Fitch analysts said.

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