Finance Finance News China export levy for iron ore would be bad for Australia

China export levy for iron ore would be bad for Australia

Matt Canavan's plan to punish China would be economic suicide. Photo: TND
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Calls by Senator Matt Canavan, a former resources minister, for a 1 per cent levy on Australian iron ore exports to China will only add more fire to the trade war raging between the two countries.

China watchers and economists who spoke to The New Daily said it was a ‘kamikaze’ option with suicidal consequences.

Senator Canavan stoked the trade war fires in an article for The Australian on Monday, in a move that was later hosed down by Resources Minister Keith Pitt.

Mr Pitt told The New Daily “Australia will continue to adhere to its WTO and bilateral trade commitments, and it is our expectation that our trading partners including China would do the same”.

It came just hours before China formalised import restrictions on Australian coal.

Trumpian politics

Senator Canavan’s call follows a number of outbursts by Coalition MPs in response to increasing Chinese bans on Australian exports.

Giovanni di Lieto, a trade economist at the University of Bolognia and formerly Monash University, said those calls seem inspired by US President Donald Trump’s actions that “made it look like a trade war is easy to win”.

US President Donald Trump took the fight to China. Photo: Getty

“That’s only true if you are big. For Australia, it would be a kamikaze measure,” Di di Lieto said.

Trade tensions have seen exports of wine, barley, coal, copper, timber, lobsters and beef blocked or hit with tariffs in recent weeks and there are fears that could extend to other products.

The most serious move would be for China to block iron ore exports, the rising price of which has improved our budget bottom line.

“The best we can hope for is to maintain the current low in the trade relationship,” said Professor James Laurenceson, director of the Australia-China Relations Institute at UTS.

“I see no prospect of things improving and they could get a lot worse.”

It’s about politics

Although the retaliations have been economic in nature, the relationship breakdown is driven by geopolitics.

“China believes Australia is aligning with the US to attack China and John Howard told (then leader) Jiang Zemin in 1996 we would never do that,” Professor Laurenceson said.

Senator Canavan’s call was “ridiculous,” he added.

“It would be a sure fire way to make things worse.”

Although there have been hits to specific industries, China’s importance as an export destination has grown in the past year.

Goods exports to China in October stood at $12.69 billion, or a whopping 41.6 per cent of Australian exports, compared to 35.6 per cent of the slightly lower total of $11.2 billion a year earlier.

China’s hardening attitude to Australia has been worsened by political outbursts due to cultural differences, said Melissa Conley Tyler, Research Fellow at the Asia Institute at the University of Melbourne.

“In the Chinese system people like Peter Dutton (Home Affairs Minister) and Andrew Hastie (chair of the Parliamentary Joint Committee on Intelligence and Security) are in very important positions and they would not freelance [speak out without permission],” Ms Conley Tyler said.

“When the Australian system doesn’t seem to take those positions seriously, the Chinese see that as very strange.”

“China would expect to see the Prime Minister and Foreign Minister distance themselves from some of the statements that have been made and that hasn’t happened,” said Professor Laurenceson.

Overcoming a trade war would not be easy, as past experience with other countries has shown.

“China punished Norway, leaving salmon to rot on the wharf and it took six years to repair the relationship,” said Peter Brain, director of the National Institute of Economic and Industry Research.

“For South Korea, it was three years after they bought an American defence system.”

China syndrome

China is such a large resource export market for Australia that replacing it would be very difficult if the relationship collapses.

“Exports to Japan and Korea are at maximum levels and India is not there to replace China yet,” Dr di Lieto said.

“It’s a delusion to think we can replace China with other markets.”

Although the government has walked away from Senator Canavan’s remarks, Senator Rex Patrick, an independent, took his side.

“I don’t always agree with Matt Canavan but this idea is worthy of consideration,” he said.

“I’d look at applying levies to other exports like lithium. The Chinese buy our lithium and sell it back to us for a large profit as batteries. The same thing happens with iron ore which comes back as steel.”

The senator said China was acting on geopolitical considerations and the government needed to act strategically.

“[Trade Minister] Simon Birmingham has responded to each occurrence as an individual action,” he said.

“The government has to step up with a comprehensive strategy that would take China to the World Trade Organisation over its trade breaches.”

Those breaches would be around using trade as a weapon for pursuing geopolitical objectives.

CORRECTION, DECEMBER 15, 2020: An earlier version of this article incorrectly referred to Senator Rex Patrick as a member of the Centre Alliance. He left the party in August 2020 and now represents South Australia as an independent.

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