Australia–China Trade Relations and Foreign Policy Strategy

Introduction

International trade is an important economic tool for countries around the world — one that catalyzes the achievement of various macroeconomic objectives of a government. These objectives include increasing output and Gross Domestic Product, achieving positive economic growth, earning greater foreign exchange, maintaining a positive balance of payments, raising standards of living, and allowing consumers wider choices of goods and services. International trade may encompass both visible (physical) goods and invisible goods such as services.

Since international trade takes place across geographical boundaries, foreign relations between countries and transnational treaties play a direct role in increasing or decreasing a country's trade flows. This means that the responsibility of developing favorable international trade and foreign policy rests on the shoulders of a country's political leadership.

During the past several decades, China has emerged as an important and highly competitive economy in the international market. China is currently among the fastest-growing economies in the world. It enjoys a significant competitive edge over other economies due to an abundance of natural resources and cheap labor and energy, which enables it to keep production costs low and charge lower prices to importers than competing economies can. Over time, China has undergone a rapid transition from the primary sector of the economy to the secondary sector, marked by rapid industrial growth and phenomenal structural change.

China is a major trading partner of Australia. A large proportion of Australian exports — mainly primary and mineral resources along with some tertiary exports — are consumed by the Chinese economy. In return, Australia imports value-added industrial commodities from China. What poses a great concern for the Australian economy is that it exports primary resources of relatively lower monetary value while importing industrial and value-added goods and technology of considerably higher monetary value. The ultimate effect of this trade structure on Australia's balance of payments is that the country experiences negative pressure on its current account. For this reason, it has become important for Australia to devise a trade and foreign policy toward China that helps to curtail these negative pressures.

Australia must be especially intelligent in crafting this policy because China is an indispensable trade partner. Any policy that jeopardized Chinese interests would risk losing that partnership and leave Australia in far more severe economic conditions. Australia must therefore rule out pro-protectionist measures such as tariffs, quotas, or import duties. Such measures would not only provoke China to retaliate in kind, but would also make Chinese goods more expensive in Australia, raising production costs for Australian industries that rely on Chinese raw materials.

To counter these imbalances, Australia can follow an economic model similar to India's — importing basic technology from China while developing its own industrial goods domestically. Australia should also explore newer markets for risk diversification, and, given its comparative edge in the tertiary sector, it can increase tertiary sector exports to China.

Ever since the concept of specialization emerged in economics, international trade has been recognized as a vital economic objective. In order to achieve its targets, any economy requires finances. While direct and indirect taxes are the major domestic sources of revenue, foreign exchange is equally important: it not only earns income for the economy but also helps to appreciate the currency's standing in international markets.

A key objective for any economy is to maintain a positive balance of payments. This means that the economy aims for its exports to exceed its import bill. Exports exceeding imports indicate that the country is selling more in international markets than it is buying, resulting in greater net inflows into the economy.

In order to maintain a positive balance of payments, many countries have introduced barriers to international trade in the form of import duties, tariffs, and quotas — physical and monetary restrictions on imports. The primary aim was to make foreign goods less affordable in the domestic market so as to protect domestic producers. However, as globalization intensified, the concept of free trade emerged and came to overshadow the rationale for trade barriers.

While all economies aim to maximize exports and minimize imports, many countries fail to do so even when their export volumes are large in physical terms. It is the monetary value, not the physical quantity, that matters in economic accounting. For example, exporting large quantities of low-priced goods in exchange for small quantities of high-priced commodities can result in an import bill that exceeds export revenues — a negative balance of payments. This problem is especially acute for countries whose major imports include oil. Free trade is generally favored over protectionism because contemporary economists argue that free trade promotes specialization and competition, which in turn leads to greater efficiency and better resource utilization; inefficient businesses are thus naturally displaced from the market (Lipsey & Chrystal, 1997).

There is little doubt that China has become a dominant force in global markets, producing everything from everyday consumer items to air conditioners and motor vehicles. Chinese manufacturers have exploited international markets very effectively through competitive pricing. China has disrupted established producers in many sectors — for instance, Chinese mobile phone companies such as BenQ and China Mobile have pressured established manufacturers in mobile technology by offering very low-priced handsets. China's ability to offer cheap products stems from its large pool of low-cost labor, which is not readily available in countries like Australia or in European nations.

The rise of Chinese industry has contributed to the decline of competing industries worldwide. Even Middle Eastern markets have been flooded with Chinese products, shifting consumer choice decisively toward price over quality. It is not only Australian exports that have suffered from Chinese goods flooding global markets — this is the experience of nearly every country that has been unable to offer something substantially different from what China offers the world.

China's competitive pressure has been so significant that the United States government pressured China to revalue its currency in line with its increasing exports. Currency revaluation would make Chinese exports less cheap in international markets, giving goods from other countries a better chance to compete.

References

Adam, P. & Fan, M. (2005). Modelling the potential benefits of Australia–China trade and foreign policy. Centre of Policy Studies.

Gordon, B. (2003). A high risk trade policy. Foreign Affairs, 82(4).

Gygnell, A. & Wellsley, M. (2007). Making Australian foreign policy. Cambridge University Press.

Hale, D. & Hale, L. (2003). China takes off. Foreign Affairs, 82(36).

Kreh, W. (2008). Money, debt and wealth of nations. COMER Publications.

Lanteigne, M. (2009). Chinese foreign policy: An introduction. Routledge.

Lipsey, R. & Chrystal, K. (1997). An introduction to positive economics. Oxford University Press.

McDougall, D. (2009). Foreign policy studies in Australia. The Australian Journal of Politics and History, 55(3).

Mediansky, F. (1997). Australian foreign policy: Into the new millennium. Macmillan Publishers.

Rodrick, D. (2001). Trading in illusions. Foreign Policy, 123(1), 54–62.

Thomas, N. (2004). Re-orienting Australia–China relations: 1972 to the present. Ashgate Publishing.

Zweig, D. & Jianhai, B. (2005). China's global hunt for energy. Foreign Affairs, 84(5), 25–38.