The British aircraft carrier HMS Queen Elizabeth will be deployed to Asian waters as part of a ‘Magnificent Seven’ that will include US and Australian forces. Photo: AFP

Opinion

Abacus

by Neil Newman

Abacus

by Neil Newman

As China’s blockade unravels the Australian economy, everything is at risk

Not everyone plays by Aussie rules as Canberra finds out going head-to-head with Beijing
As the American, British and other navies plan a show of force in Asian waters, Beijing’s relations with Canberra are heading to a point of no return

Neil Newman

Published: 7:00am, 16 Nov 2020

Why you can trust SCMP

UNDER THE SHADE OF A COOLIBAH TREE

I have been a frequent visitor to Australia, taking in and enjoying the local culture. Even back home, I enjoy the occasional evening of Aussie TV news and interviews with their entertaining, front-footed, “no punches pulled” style.

When I started flying down to visit, just over thirty years ago, I was impressed at how Australia was largely self-sufficient when it came to food, manufactured goods and infrastructure. There was a clear pushback against imports, as there was against immigration, and a keenness to support local businesses and protect all things Australian.

However, like most developed economies, there has been a creeping rise in Australia’s dependence on manufactured goods from abroad. Aussie consumers seeking lower prices were eager to buy goods from countries with cheap labour, essentially exporting pollution to someone else’s backyard. Meanwhile, businesses and the government were perhaps too eager to sell off Australian assets to foreign buyers and focus exports on the globe’s biggest client, China.

Explained: China-Australia relations

The tide turning against Chinese goods in Australia did not come as a huge surprise given the shifting geopolitical winds, but I was taken aback that China fuelled this particular fire by enacting what could be interpreted as a trade embargo by blocking the imports of multiple Australian goods. If the countries stay this course, it would be a sharply negative development after they just five years ago signed the China-Australia Free Trade Agreement (ChAFTA), which had taken nearly a decade to put into place. The knock-on effect would be far more serious than just shutting down the trade agreement in a huff.

01:15

China-Australia trade: Beijing set to ban nearly US$400 million worth of Australian wheat imports

I WANT MONEY, THAT’S WHAT I WANT

The risk in relying too heavily on Chinese goods and supply chains so heavily reliant on China became apparent during the Covid-19 crisis, and is leading to a global rethink about what we buy, from where and at what price.

Untying such a trade relationship with China is tricky, though, because it is a two-way flow. Australia has become dependent on imported Chinese goods whilst China is its largest customer for raw materials and certain food products. China has the upper hand as there are many sources of the raw materials and foodstuffs it needs, while Australia can’t switch suppliers so easily and needs to find new buyers for its goods fast.

Why are Chinese-Australians having their national loyalty questioned?

In Australia the issue of reliance on China became even more raw with the realisation during the Covid-19 crisis that Australian manufactured medical equipment was being siphoned off and shipped out. Essentially, much of the country’s businesses and assets had been sold to the Chinese, presenting a potential national security issue as the Australians were no longer deciding where locally manufactured goods would be sold.

The Australian government has woken up to this and is now scrutinising foreign business acquisitions. But the recent blocking of the sale of Lion Dairy & Drinks by Japanese beverage group Kirin Holdings to China Mengniu Dairy is merely closing the stable door after the horse has bolted.

03:39

Australia’s last two accredited journalists in mainland China evacuated as diplomatic ties worsen

SET THEM FREE

Australia is taking issue with China on several fronts, and no punches are being pulled by the country’s commentators or politicians. One pressure point is Australia’s demand that China clarify what happened in the early stages of the coronavirus crisis when domestic flights from Wuhan were cancelled and international flights were allowed to continue. When China pushes back at Australia for having the nerve to even ask the question, Canberra interprets that as “punishment”.

Suggesting that Canberra “reflect on its own deeds”, China last week left 21 tonnes of live Australian lobster to die in Shanghai warehouses awaiting customs clearance. Chinese importers have been “advised” to stop importing barley, sugar, red wine, timber, coal, and copper ore and concentrates –and a ban on wheat is also expected.

A US flag outside the Chinese consulate in Houston. Photo: AFP

China can get its raw materials elsewhere. But as a friend of mine in Brisbane pointed out when trying get a water filter replacement and some kitchen storage boxes, she had only Chinese options. Australian consumers’ views were already shifting toward rebuilding local industry and reducing reliance on China, with an Australian Workers Union survey and a YouGov survey in June finding 90 per cent or so of respondents favour championing local products and pumping their money into the Australian economy to rebuild industry and local jobs.

China’s actions in response to the pressure asserted by the Australians for answers over Covid-19 have likely pushed the remainder over the edge, resulting in a more or less united Australian population pointing fingers. This is where it could get dangerous.

IN DER MARINE KÖNNEN SIE DIE SIEBEN MEERE SEGELN!

German defence minister Annegret Kramp-Karrenbauer signalled the intention for one of her ships to limp to the Indo-Pacific for joint exercises with the Australian Navy, and for Germany to possibly send officers to work with Australian naval units next year. The presence of German ships is not strategically significant – its navy is not in great shape, with few operational ships and its submarines confined to port. But as a show of solidarity it is noteworthy. Asia’s oceans will be home to a new “Magnificent Seven” working together: the US Seventh Fleet, the Japanese MJSDF, the Australian Navy, French navy, HM Royal Navy, the fabulously equipped Vietnamese Navy, and now the Deutsche Marine.

The British aircraft carrier HMS Queen Elizabeth. Photo: AFP

IN THE NAVY

Early next year, British Minister of Defence Ben Wallace will start to deliver on Britain’s promise to shoulder a greater share of the burden of international peacekeeping. A British carrier strike group will be placed in Asian waters, led by the Royal Navy’s largest ever warship, HMS Queen Elizabeth. At 65,000 tons it is home to a squadron of RAF F-35Bs, a squadron of US Marine Corps F-35Bs, and is accompanied by up to 10 other warships; destroyers, frigates, support vessels, subs and perhaps that guest from the German navy.

Australia sends signal to China as it joins Malabar naval exercise

I know all this is supposed to put my mind at ease, but I’m not sure it’s working.

Aircraft carriers are a cornerstone of global power projection, and send a strong strategic message to the region in which they’re deployed. Along with the US Seventh Fleet’s aircraft carrier based out of Yokosuka, the presence of the Royal Navy alongside the Australian Navy will undoubtedly provoke China further towards a point of no return with 25 million irate Aussies.

01:49

Australia suspends extradition treaty with Hong Kong, offers residency pathway for Hongkongers

HIGHWAY TO HELL

There is a growing feeling that trade relations between China and Australia could worsen with a new administration in the White House. Australians fear that in the absence of a combative Donald Trump having their back, China will be emboldened to make economic threats that could jeopardise the employment of many Australians.

On its present course, the ‘The Lucky Country’ is looking at very difficult times ahead and with its first recession in nearly 30 years and 1 million jobs lost to the coronavirus, 2020 is already a year most Australians would like to forget. There will be more job losses and business closures, and the Australian consumer will have to make some very difficult choices between sticker prices and the national interest.

The Aussies have forgotten that a diversified client base and not relying on one client is the only free lunch. When 98 per cent of Perth’s lobsters, 70 per cent of Aussie timber, 68 per cent of its barley and 65 per cent of wheat exports go to one client, it reveals a lazily made recipe for disaster. Australian politicians seem to only see problems and not solutions at the moment believing China should play by their rules, when they should be better served pushing to forge new trading relationships to mitigate risk – both import and export.

Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets

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