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.

Analysis of International Competition from China

The competition that China presents to its international rivals has been formidable. China is now the world's third-largest trader and second-largest exporter, while simultaneously being a major importer of fossil fuels, coal, and other raw materials. The rapid economic growth China has experienced in recent decades has presented governments around the world with a tough challenge: they must draft foreign policies that allow them to trade with China on the basis of mutual advantage rather than being exploited by China's dominant market position.

Only a few decades ago, China was a struggling economy. It is relatively new to the free-market system, given its communist history. China, with its enormous population, put its resources to their best possible advantage — a factor that contributed to the country's rapid growth. China possesses some of the cheapest labor and energy resources available for production. As a result, its industries can achieve economies of scale and significantly reduce the cost of production, giving China a considerable absolute advantage over competitors. Importers around the world have recognized that sourcing goods from China is far cheaper than importing from other developed economies, and those cheaper imports allow for greater profit margins. Moreover, given the fragile economic conditions and declining purchasing power that have characterized recent decades, consumers frequently prefer cheaper Chinese products over more expensive alternatives from Japan, the United States, or Germany.

The extremely low cost of Chinese goods has driven significant economic growth, as using Chinese commodities provided an easy solution to the economic problems of many countries. Nations struggling with rapidly declining balance of payments due to expensive imports from established economies like Germany and Japan were effectively forced to turn to Chinese products. The economic crisis and the urgent need for cost efficiency worldwide overshadowed one significant weakness of Chinese commodities: quality management.

Chinese economic policy revolved around volume-based production. The country initiated its economic growth through large-scale, labor-intensive manufacturing that achieved extremely low average costs per unit and, in turn, higher profits. However, quality was sacrificed in the process — something that established economies such as Japan, the United States, Germany, and other European nations treat as a priority. The recessionary environment ultimately worked in China's favor, as many importers were forced to choose cost efficiency over quality in order to survive. As economic conditions stabilized, this weakness in Chinese commodities was gradually exposed, forcing China to take quality management more seriously. While China has begun working toward meeting international quality standards, it has not yet fully achieved them. This weakness is something that Australia can leverage to boost its own economy.

Australian Trade with China

The importance of China to Australia is immense: China is Australia's largest trading partner. Nearly 23% of total Australian exports go to China, amounting to approximately AUD 46,448 million in fiscal year 2009–2010. On the import side, approximately 18% of total Australian imports originate from China, amounting to around AUD 36,368 million in the same period. Major Australian exports to China include iron ore and concentrates, coal, copper ore and concentrates, and wool and other animal hair. Australian imports from China are dominated by clothing, computers, telecommunications equipment and parts, and toys, games, and sporting goods. Beyond goods, Australia directs 11% of its total services exports to China, while only 3% of its total services imports come from China.

Australia and China also maintain substantial investment ties. Australian investment in Chinese markets amounts to AUD 6,327 million, while Chinese investment in Australian markets is approximately three times greater, at AUD 16,637 million as of 2009–2010. To strengthen these ties, Australia signed a free trade agreement with China on 18 April 2005, an agreement projected to deliver significant economic benefits to both economies (McDougall, 2009).

Australian trade has generally benefited from China's rise: statistics show that Australian exports to China grew by an outstanding 50 times over the past three decades, with growth of around 28.3% in 2007–2008 alone. China is a resource-hungry country in constant need of inputs such as wood and fuel, and Australia, as a resource-rich nation, has benefited greatly from strong export demand and rising commodity prices. Due to Chinese interest in Australian resources, Chinese investors have committed heavily to the Australian market. At the end of 2008, Chinese investment in Australia amounted to AUD 35 billion, up from AUD 6.2 billion the previous year. This dramatic increase was largely driven by the Chinese resource extraction company Chinalco purchasing shares in the Anglo-Australian mining conglomerate Rio Tinto.

China's rise has also boosted Australian services exports. Australia hosts more Chinese students than any other country, a reflection of rising incomes and the rapid growth of the Chinese economy (Hale & Hale, 2003). Growing student enrollment brings associated benefits for Australian tourism as well.

Despite these positive trends, the statistical picture implies a structural problem: Australia's major exports to China consist of primary resources and raw materials. Although rapid industrial expansion in China has dramatically increased demand for Australian raw materials — contributing to 18% trade growth — the net balance of payments effect depends on the monetary value of both export and import flows. While Australian export volumes to China may exceed Chinese export volumes to Australia in physical terms, China holds a clear monetary advantage. Australia exports raw materials and primary resources, while importing high-end technology and finished industrial goods. Finished and technological goods are considerably more value-added and therefore more highly priced than raw materials in which little value has been added to the natural resource. Thus, Australia may be exporting a greater physical quantity of goods while receiving a much lower monetary value in return.

One significant exception is energy exports. Australia exports liquefied natural gas (LNG) to China, which represents one of its major high-value exports. Given China's rapidly increasing industrial growth, it is in dire need of energy supplies (Zweig & Jianhai, 2005). With oil prices fluctuating globally and considering the comparative cost efficiency of LNG relative to oil, China imports a substantial amount of energy from Australia.

Conclusion

Since 2007, the global economy has experienced significant turbulence. The intensified effects of globalization have meant that the economic difficulties of one country are felt by others. Considering this reality, the most viable long-term solution for securing both political and economic stability is to increase self-sufficiency and reduce dependence on other economies (Kreh, 2008).

China built its economic growth on cost efficiency while compromising on quality. It succeeded because its cheap goods arrived at precisely the moment when businesses worldwide were struggling with rising costs and industrial inefficiencies. As global economic conditions stabilize, however, international economies will shift their focus back toward quality management and research and development. If China fails to pivot in this direction and continues to prioritize low-cost, high-volume production at the expense of quality, its economic potential may become increasingly fragile.

Being a significant trade ally of China, Australia is well positioned to take advantage of this dynamic and lay the groundwork for strong economic growth. Australia can adapt the already successful Indian economic development model to suit its own circumstances — importing basic technology from China while developing higher-quality products of its own. Australia's strength in education offers immense potential for advances in research and development. In parallel, Australia can expand its exports of services and invisible goods to China in order to minimize adverse pressure on its import bill and build a more balanced and sustainable long-term trade relationship.

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