Australia-China trade surges to record high as tariffs are lifted

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Trade between Australia and China has surged to record levels over the past year as relations have recovered from a toxic spat sparked by the coronavirus pandemic, despite rising security tensions across the region.

Official Australian government data showed total trade with China would reach A$219 billion (US$145 billion) in 2023, a record high and up from A$168 billion in 2019, the last year before the outbreak of the pandemic and the imposition of Chinese tariffs and sanctions.

The importance of the trade relationship was on full display this weekend when Chinese Premier Li Qiang began a four-day visit that included Australia’s mining and wine regions. The visit underscores the importance of Australia’s goods to the Chinese economy, at a time when the Australian government welcomes strengthened security ties with Washington.

The visit, the first by a senior Chinese official since former Premier Li Keqiang’s visit in 2017 and following high-level talks including visits by Australian Prime Minister Anthony Albanese and Foreign Minister Penny Wong, has seen Beijing and Canberra seek to repair frayed ties in their lucrative trading relationship.

The recovery in trade volumes was driven by higher prices, particularly for iron ore, Australia’s most important export, and a recovery in the services sector after a drop in travel and tourism during the pandemic soured relations.

“Despite all the noise, the economic relationship between the two countries is very strong and growing,” said Hans Hendrischke, professor of Chinese business and management at the University of Sydney.

Diplomatic ties between the two countries have been at their most tense in decades since China imposed punitive tariffs, sanctions and informal bans on about A$20 billion worth of Australian products, including coal, barley and wine, in 2020 and detained Australians.

China imposed the tariffs in response to then-Prime Minister Scott Morrison’s call for a public inquiry into the origins of the coronavirus and after Australia became the first country in the world to exclude Chinese vendors, including Huawei, from its 5G telecommunications network.

Mr Albanese’s election in 2022 was seen as a catalyst for detente, but Australia has been able to weather the sanctions thanks to higher global commodity prices during the pandemic and diversification into other markets.

Meanwhile, Australian iron ore and lithium – key ingredients in electric vehicle batteries and central to Beijing’s new technology push – continued to flow into China, keeping Australia’s economy resilient.

Lobster is the only remaining export item subject to trade restrictions for 2020. But Australia’s Trade Minister Don Farrell said last week he was “very confident” barriers to the crustacean would soon be lifted.

Mr Farrell added that A$86 million worth of wine was exported to China in April, the month after the tariffs were lifted, and said he was optimistic that trade would “fully recover”. Before the tariffs were imposed, Australia exported A$1.2 billion worth of wine to China annually.

The Chinese premier’s visit to Australia also includes stops in Adelaide, where oversupplied winemakers are welcoming the resumption of trade, and the mining and minerals hub of Perth, where Li and Albanese will hold a business roundtable with BHP, Rio Tinto, Fortescue and Chinese mining companies operating in Australia.

Earlier, Premier Li Keqiang paid a three-day visit to New Zealand over the weekend. During his visit, he announced visa-free travel and called for support for China’s inclusion in the CPTPP trade agreement. He also reciprocally extended visa-free travel to Australian citizens at a joint press conference with Foreign Minister Albanese in Canberra on Monday. The two countries are members of the US-led Five Eyes security alliance.

Li will also visit Fortescue’s green energy research facility outside Perth and the largest lithium hydroxide smelter outside China, run by China’s Tianqi and Australia’s IGO, which are struggling to ramp up production. The company’s headquarters is built in the style of a Chinese water garden, decorated with giant stone lions and Chinese friezes.

Hendrischke said the lithium facility visit was a “signal of pressure” from Australian authorities over their critical minerals ambitions. Australia this month ordered a Chinese fund to cut its investment in a rare earth mining company, citing “national interest” reasons.

“Australia has to work with China on these minerals whether we want to or not,” he said. “The United States will be against it, but they don’t have the technology.”

As security rifts in the Indo-Pacific region deepen and Australia seeks to build up critical minerals processing supply chains to counter China, some observers are questioning the Australian government’s strategy to not only restore but expand trade with Beijing.

In November, Australia said an Australian navy diver was injured when a Chinese frigate used sonar, and last month Foreign Minister Albanese protested after Chinese fighter jets fired flares into the path of an Australian navy helicopter over international waters.

Australia has also promoted its security alliance with the United States and the United Kingdom, and significantly increased its defense spending in response to China’s increasingly aggressive actions in the region.

One former government adviser said Canberra’s approach had fallen victim to “cakeism”.

“We want a full military deterrent against China, but we also desperately want access to the Chinese market for iron ore and wine,” the adviser said.

“Stabilizing relations was necessary, but what does it mean to stabilize relations with China? It will become more difficult as time goes on.”