The Australia-China trade relationship is currently under significant strain. In the long run, increased protectionism would not improve Australia’s economic welfare.
In light of the COVID-19, disruption to supply chains, calls are being made for Australian industries to become more self-sufficient, which implies protection against Chinese imports. Protectionist measures would stymie economic gains to be had from continuing to pursue trade opportunities that accord with Australia’s comparative advantages. The COVID-19 crisis also raises the important question of how much will China’s earlier economic recovery assist Australia’s recovery in light of China’s status as Australia’s single largest trading partner.
Australia-China Trade and the Macroeconomy
China is well in front as Australia’s number one trading partner, accounting in 2018-19 for around 26 percent of total two-way trade. Japan is second at 10 percent, and the US third at 9 percent. Breaking down that two-way China trade, goods and services account for 33 percent of Australia’s total exports and 19 percent of total imports.
Is this share disproportionately large? If so, relative to what? In terms of relativities, consider Canada’s trade situation. Canada is an Asia-Pacific mid-sized economy roughly comparable to Australia in terms of level of development and has a strong trade relationship with the United States, a regional and global economic superpower. Two-way trade between Canada and the US accounts for 75 percent of Canada’s total two-way trade, some three times more than Australia-China two-way trade. Meanwhile, Canada’s two-way trade with China is a mere 5 percent of its total trade. By Canada’s standard, there is nothing unusual about the scale of Australia’s trade with a proximate economic superpower, especially given its complementary nature. Indeed, it’s what David Ricardo’s classic theory of comparative advantage would predict.
What then of the macroeconomic significance of Australia’s trade with China?While dynamic economic gains arise from increased specialisation in production and expanded international trade, these gains accrue over the longer term. Many commentators are wont to say Australia’s short-term macroeconomic performance is also inextricably linked to China’s. But the claim that the Australian economy’s quarterly GDP performance is essentially “Made in China” is exaggerated. While China may account for 33 percent of the country’s exports, Australia’s exports in total account for 22 percent of its GDP. China therefore only directly affects around 7 percent of Australia’s aggregate demand via the export channel.
Please click here to read the full “Whither Australia-China Trade?” article published by Australian Institute of International Affairs, written by Griffith Asia Institute researcher, Professor Tony Mankin.