Economic co-dependencies between Australia and China will restrain Chinese policymakers from targeting products such as iron ore that are core to the bilateral trade relationship, even if political and trade frictions between the two countries continue to escalate, says Fitch Ratings.
We expect any further punitive trade measures imposed by China to target Australia’s smaller export categories. This would reduce the risk of adverse effects on China’s labour market or near-term growth prospects, in contrast to targeting products like iron ore – Australia’s largest export to China – which are critical inputs for China’s industrial development. This suggests that the potential economic spillovers to Australia’s growth outlook from Chinese trade restrictions would be modest.
Company-level risks for Australian firms in sectors targeted by Chinese measures may be more serious. Some sectors hit by Chinese actions, such as barley, copper and coal, have been able to find alternative export markets, but others with more limited diversification prospects, such as wine, have been more affected.
Australia’s education and tourism exports to China fell in the year ending 30 June 2020, but it is hard to disaggregate the impact of bilateral tensions from that of the Covid-19 pandemic. China faces geopolitical disputes with other major English-language offshore education centres, such as the US, UK, and Canada, which may mitigate the risk of a steep drop in Chinese student arrivals in the medium-term.
In the longer term, Australia’s commodity export competitiveness faces risks stemming from potential overseas supply increases and shifts in demand driven by environmental and industrial policies. Many of these risks are typical of commodity exporters generally, but tensions with China could play an important role in some of these dynamics.
