Just five years after Australia and China’s groundbreaking free trade agreement took effect, diplomatic relations between the two nations are at a low. As disputes rage over Chinese imports of Australian barley, coal and other commodities – and with the World Trade Organization now called upon to intervene – John Basquill examines how business has stalled between two Asia Pacific powerhouses.
In late 2015, officials in Australia and China were optimistic about the prospects for trade between the two countries. With a free trade agreement coming into effect on December 20 that year, Australia’s then-trade minister Andrew Robb hailed the deal as a “historic agreement with our biggest trading partner”.
Australian exporters would face “enormous opportunities” from easier access to a market of 1.3 billion people, Robb said, while Chinese President Xi Jinping greeted the agreement as a platform for “close win-win cooperation”.
By August 2018, however, tensions were rising. The Australian government had banned Chinese company Huawei from providing technology to support the rollout of 5G wireless internet, citing concerns that the company could “be subject to extrajudicial directions from a foreign government” and prompting anger from Beijing.
In November the same year, China launched an anti-dumping investigation into barley imports from Australia, reportedly due to suspicions of below-market pricing enabled by state subsidies.
Despite those issues, trade between the two countries continued to grow during 2019, by which point China had become Australia’s largest partner in goods and services trade. Bilateral trade totalled US$178.5bn that year, an annual increase of over 17%.
But the Covid-19 pandemic proved a tipping point. The Chinese government reacted with fury after Australian officials called for an investigation into its initial handling of the outbreak in the city of Wuhan, and since then, relations have dramatically worsened.
In May, China imposed an 80% tariff on Australian barley imports, citing its anti-dumping complaint, and in August launched another investigation into imported wine containers. Australian trade minister Simon Birmingham described that move as “deeply troubling, concerning and perplexing”.
Since then, restrictions of various kinds have been reportedly extended to a range of hard and soft commodities, including copper, sugar, lobsters, beef and timber.
Barley: Australia appeals to WTO
Australian barley producers could have expected a good year in 2020, with output reaching a four-year high after an increase in rainfall left farmers with a bumper crop. But with more than two-thirds of Australia’s barley exports sent to China, the new tariffs have hit the industry hard.
Grain Producers Australia, an industry group, says the new rates “are expected to cost the Australian barley industry A$2.5bn (US$1.9bn) over the next five years”, with chairman Andrew Weidemann adding: “The reliance on a single market for a significant portion… of our barley was unsustainable and has been a wakeup call.”
Chinese commerce minister Zhong Shan said at the time that the decision was taken after investigators concluded Australia’s barley supplies had been “dumped and subsidised, which caused substantial injury to China’s industries”.
Song Wei, an associate research fellow at the Chinese Academy of International Trade and Economic Cooperation, says in an article published by China’s state-owned Global Times that selling barley below its market price has harmed domestic growers and traders, and is in breach of chapter two of the 2015 free trade agreement.
Those claims are disputed by Australia’s barley industry. GrainGrowers, another trade association, says the industry “has been fully cooperative and provided all necessary information through the options available to date, yet this has done little to change the outcome of the tariffs”.
For trade minister Birmingham, the measures constitute a breach of that free trade agreement and potentially of the terms of China’s membership in the World Trade Organization (WTO).
“Whilst Australia respects China’s right, as with any nation, to undertake domestic investigations into anti-dumping matters, we do not agree with China’s decision to impose anti-dumping and countervailing duties on Australian barley,” he said in a December 15 statement.
“We will now engage in formal WTO consultations with China with a view to resolving the disagreement before the matter proceeds to adjudication before a panel. We stand ready to work with China at any stage to resolve this issue in a cooperative manner, as we have previously done with other nations.”
Birmingham added that WTO dispute resolution processes are “not perfect and take longer than would be ideal”, but would provide independence and transparency he claims is lacking from China’s approach.
The WTO confirmed on December 21 that Australia had formally requested dispute consultations with China.
GrainGrowers chairman Brett Hosking says the organisation supports the WTO complaint and urges the government to “prioritise strengthening trade relationships and market access for Australian agriculture and our barley industry”.
But in a video statement recorded after Birmingham’s announcement, Global Times editor-in-chief Hu Xijin says Beijing “has prepared for this and is confident it will win the suit”, describing China’s approach as “a trade issue” that has been politicised by Australia.
Australia currently has 106 anti-dumping and anti-subsidy investigations ongoing related to Chinese products, compared to just four being carried out on Australian products by China, he says, adding: “The examples of the US and Western countries publicly imposing sanctions for political reasons are ubiquitous.”
Coal: stranded at sea
Australian coal exports to China have emerged as another flashpoint in the trade dispute. In November, the International Transport Workers’ Federation (ITF) issued a statement about Jag Anand, a bulk carrier that had been due to dock in China in mid-June but remained anchored in the Bohai Sea months later.
Its 23-man crew was “in need of urgent relief and are mentally and physically exhausted due to an unprecedented prolonged stay on board”, the ITF said, adding that some have been serving continuously for nearly 20 months.
Although, at that point, there had been no public announcement from Beijing on the matter, it had been widely reported that Chinese importers were under instruction to halt the purchase of coal from Australia.
On December 13, the Global Times published an article titled ‘Australia shut out of new China coal policy’, which appeared to confirm claims that restrictions were in place. The article said officials had met with 10 domestic power companies and granted permission to import coal without clearance restrictions from any country other than Australia.
However, within days, that article was removed from the Global Times website, and Birmingham has since said: “I tend not to believe everything that I read in Chinese state-owned media.”
Regardless of whether import restrictions have been formalised, Jag Anand was not the only coal carrier unable to dock in China in late 2020. According to analysis by Bloomberg, IHS Markit and Global Ports published in November, 15 giant bulk carriers had been waiting since June, and another five for at least a month.
As of press time, analysis of MarineTraffic data shows that all but five of those 20 vessels are still anchored in the Bohai Sea.
GTR has also identified two other bulk carriers destined for the Port of Jingtang that have not yet docked: Tay Keystone, which left Australia’s Abbot Point in May and had been due to deliver in June; and Jin Rui Feng, which left Hay Point in October and was due to arrive the same month.
Several other vessels have been anchored elsewhere in the same waters, reporting their destination as China’s Caofeidian District port. GTR identified at least 11 bulk carriers that left Abbot Point or Hay Point between June and November 2020, all of which were due to deliver before December but have not yet done so.
Though the financial sector has so far remained quiet on the issue – one source approached by GTR describes the situation as “sensitive”, and none of Australia’s big four banks agreed to comment when contacted – trade finance experts say the stand-off over coal shipments could have a knock-on effect on banks.
“There could be an issue if bulk shipments are stranded,” says Eric Chen, a director at Singapore-based fintech vCargo Cloud. “For example, a bank may have helped the supplier by issuing an import letter of credit or paying for the purchase of the cargo to be sold to China.
“Now, due to the import restrictions, the cargo cannot be discharged into China and so the buyer cannot take the delivery and make payment. That is going to be a problem for a bank caught in that situation.”
Chen tells GTR the situation is theoretically more straightforward for containerised shipments, rather than bulk, because it is cheaper to pay for the storage of underlying goods before diverting them to another destination.
“The demurrage involved and diversion of bulk shipments is very much costlier and logistically challenging,” he says.
Where next for commodities trade?
There have been suggestions from Australian politicians, including former resources minister Matt Canavan, that retaliatory action could be taken by imposing tariffs on iron ore transactions, which account for a significant proportion of Australia’s exports to China.
Iron ore prices exceeded expectations in late 2020, reaching US$150 per tonne – far higher than the US$55 forecast in the October budget. The result has been tax receipts from the iron industry being A$3.4bn higher than predicted, according to the Minerals Council of Australia (MCA).
Given the importance of the sector, the MCA has been quick to downplay the possibility of retaliatory tariffs, warning that a levy “would damage the competitiveness of our world-leading minerals companies and their reputation as low-cost, reliable producers and exporters of quality commodities”.
The council says it encourages the governments of Australia and China “to work together to resolve these issues and restore stability to the long-term trading relationship”.
However, perhaps inevitably, talk on both sides has turned to alternative trading corridors for both Australian exporters and Chinese importers.
In terms of coal, neither side is backing down.
The since-removed Global Times article suggested Chinese companies would prioritise imports from Mongolia, Indonesia and Russia, with power companies agreeing to share inventory and keep prices below US$98 per tonne.
And in Australia, Birmingham’s mid-December statement said: “It’s important to recognise that although China is a significant market, it’s not our largest market and we do have significant markets in Japan, in the Republic of Korea, with India, [and] strong growth recently in relation to Vietnam.
“Australian coal is around one and a half times more efficient in terms of energy production than most other competitor nations, including Chinese domestic coal. That means that to get the same level of energy generation, China will end up having to use more coal from other sources and generate more emissions from those sources.”
The row over Barley is proving worrisome, however. Grain Producers Australia says that if no resolution is found through the WTO the tariffs are unlikely to be removed before 2025, while GrainGrowers’ Hosking urges the government “to work with the grains industry to look at alternative markets for barley”.
More broadly, the dispute could be seen as part of a wider shift in power dynamics in the Asia Pacific region. Analysts have pointed to the re-emergence of the so-called Quad – an informal grouping comprising Australia, Japan, India and the US – as a sign those nations are becoming keener to counter the rise of China.
Talks between Quad members resumed in 2017 after a 10-year hiatus, with the first meeting involving Japanese Prime Minister Yoshihide Suga taking place in October 2020.
Though details of the meeting have remained private, then-US Secretary of State Mike Pompeo used the summit to accuse the Chinese government of “exploitation, corruption and coercion” according to a BBC report, which also suggested that the re-emergence of the quad is an attempt to address China’s increasingly assertive foreign and trade policy.
However, Suga told reporters ahead of the meeting that its aim remains to “build stable relations with neighbouring countries including China and Russia” and to “promote a free and open Indo-Pacific”.