Quantifying the impact of Chinese coercion on key Australian commodity exports

Recent news that China has removed its punitive sanctions on Australia's barley exports are welcome.

In the prevailing version of China’s trade restrictions on significant Australian exports like coal, copper ores and wine, the coercion bark is worse than its bite. Restrictions have been ineffective in imposing significant economic costs. And Australia shows the world that it is possible to stand up to Chinese bullying and still prosper.

This view has not gone unchallenged, including by the present authors. Based on detailed monthly Australian and Chinese trade value and volume data over several years, our work shows that Australia has escaped the worst from Chinese coercion thanks mainly to the good fortune of high international commodity prices. It also shows that coercion came at a considerable cost to Australian export revenue. Net losses after re-direction to third country markets are estimated in the order of A$11 billion in 2022 and around A$20 billion for 2020-22 at 2019 prices, with coal making up the majority.

These different interpretations of the impact of Chinese restrictions on Australian export revenue have profoundly different strategic, foreign and trade policy implications. If Australia largely sailed through sanctions as a model of resilience and pluckiness, why should we put real effort into pursuing a substantial, sustainable relationship with a country that many perceive as a bully and threat to our way of life? Conversely, if significant costs were only somewhat moderated through a combination of diversifying export markets and the good fortune of high international commodity prices for some sanctioned commodities, repairing relations with China takes on more urgency.

Against this background, the recent Productivity Commission’s analysis of Chinese sanctions on Australia is most welcome. Using a comparative static model and assuming that all factor and product markets fully adjust, the Commission finds a relatively limited impact on total Australian exports, with the value of exports to all destinations falling by about 0.2 per cent. The impact on real GDP and GNP is even smaller.

Models of this type do not give results for each year over time. In solving the model, the change to a new equilibrium occurs immediately. But in practice, adjustment would take some years. The Commission has been shy, in the past, about indicating the time frame that might be involved, but given that it involves full adjustment, including to capital stocks, a period of 5-10 years would be reasonable. The results of the Commission’s modelling therefore only apply in full over the period in the region of 2025-2030. They apply only partly to losses to Australian export revenue in Chinese, and gains in third country, markets in 2020-2022.

This basic point is misunderstood by some media and researchers who write as though the changes in GDP, exports, and other variables reported by the Productivity Commission have already occurred. The Australian (subscription required) fell into this trap using the Commission’s report as a basis for arguing that Chinese coercion had virtually zero impact on the Australian economy or on trade. And some researchers fell into it using the report to justify their ‘big bark, small bite’ analysis. This occurred despite the Commission finding that, even after adjustment, the impact on export volumes and production in industries affected by sanctions was likely to be substantial. For example, the volume of Australian coal exports to the world and coal production is projected to decline by around seven and six per cent respectively. Cotton exports to the world are shown as declining by 57 per cent and production by 47 per cent in volume terms.

The Commission’s work should only be taken as a broad guide to the kind of impact that might be expected. In models of this kind key parameters (such as elasticities of substitution) are not known with any certainty. In addition, the Commission’s model does not identify exactly the sectors that are affected by sanctions. And, as the Commission notes, the analysis ‘does not take into account the costs to those directly targeted businesses of seeking new markets’.

The real insight of the Commission’s work is that adjustments occur and have powerful effects on economic and trade outcomes over the medium-to-longer term: adjustments over 2020-22 are not considered separately. The Commission’s two big policy lessons are that a flexible international trading system facilitates adjustment to shocks like sanctions, and (implicitly) a flexible Australian economy is critical in adjusting effectively to shocks. Both would seem to be incontestable.

Authors: Mike Adams former Department of Foreign Affairs and Trade (DFAT) economist, Ron Wickes former Director of the Trade Analysis Section of DFAT 

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