Ian Zhou and Tessa Satherley, Economic
Australia is a small open economy heavily reliant on trade for its economic well-being. Volatility in global commodity prices, the international decarbonisation agenda, trade tensions with China, disruptions to global supply chains, and the return of economic nationalism present both risks and opportunities for the Australian economy.
The 47th Parliament may consider the adequacy of existing policies to manage these risks and opportunities.
Trade is central to the
Australian economy, and Australian exports represent over 20% of gross domestic
product (GDP). Approximately 65% of Australia’s two-way trade occurs with
countries in Asia (see the article ‘Australia’s
trade in figures’ elsewhere in this Briefing book). Australia’s
top 5 two-way trading partners are China, the US, Japan,
South Korea, and the UK, with more than half of Australia’s total
exports flowing to China, Japan, and South Korea (p. 16). This article surveys
some of the major upside and downside risks in those markets that may impact the
Volatility in commodity prices- upside and downside
Iron ore, coal, and natural gas are Australia’s
top 3 exports. Some economists worry Australia’s export profile lacks diversity and sophistication,
reflecting low ‘economic complexity’ and leaving the economy
vulnerable to trade tensions with China, changes in Chinese domestic economic
conditions, and swings in global commodity prices. However, Australia’s export profile
often also has significant upsides for government budgets and economic growth.
Elevated commodity prices have contributed
to Australia’s current account surplus for the past 2 years. Iron ore, coal,
and natural gas exports contributed $154.4 billion, $63.5 billion,
and $49.8 billion respectively to the nation’s
export revenue in 2021. The
2022–23 Budget noted that commodity prices (particularly for iron ore and
coal) at the time were at near-record levels, supporting strong profitability
in the mining and agricultural sectors, with some positive flow-through to the
broader economy and Australian Government revenue (p. 5).
Russia’s invasion of Ukraine has dealt a major
shock to commodity markets. Russia is a major exporter of raw materials, including natural
gas, coal, crude oil, and wheat. The war and associated economic sanctions
have disrupted supply of these raw materials and pushed up their prices.
Australia is a major exporter of wheat, coal, and
natural gas. Consequently, Australian exporters may benefit from these higher commodity
prices (though domestic customers also pay a cost- see the article,
‘Coal, gas and decarbonisation- challenges and policy choices’, elsewhere in this Briefing book).
exporting facilities are already constrained and could face bottlenecks exporting
Experts are divided on whether
commodity prices will remain at elevated levels. The Treasury
has cautiously forecast that elevated prices are temporary and will decline
from March to September 2022 (pp. 63–64).
The Treasury believes strict
COVID-19 lockdowns and an economic slowdown in China will depress both demand
for Australian goods and global commodity prices (p. 40). Despite the recent Evergrande
debt crisis that threatened to bring down the Chinese construction sector,
the Chinese Central Government continued an unrelenting regulatory agenda to reduce
the high level of indebtedness among property developers. The resulting
property sector slowdown, combined with the COVID-19 lockdowns, has depressed
demand for Australian iron ore. China is by far Australia’s largest trading
partner and accounted
for approximately 82% of the total value of Australia’s iron ore exports in
iron ore facilities in Africa could also add competition and further depress
global iron ore prices over the long-term.
If the Treasury forecast regarding commodity prices
is borne out, it will negatively impact on the Government’s bottom line,
considering that the Australian Government and states and territories receive
substantial resources royalties and have been recording windfall revenue gains.
Implications of the global decarbonisation
agenda for Australian exports
Although the global commodities price shock is
producing an unanticipated terms-of-trade and royalties windfall for Australia
over the short term, International
Energy Agency (IEA) head Dr Faith Birol has warned, ‘Nobody should imagine that Russia’s invasion can
justify a wave of new large-scale fossil fuel infrastructure in a world that
wants to limit global warming to 1.5 °C'.
Further, in addition to the impact on our domestic
coal, gas, and electricity prices (as explained in ‘Coal, gas and decarbonisation- challenges and policy areas’ in this Briefing book), the
current elevated prices make business more expensive for Australian coal and
gas exporters’ main overseas customers: coal- and gas-fired electricity
generators. It is possible that current high coal and gas prices may therefore trigger
or accelerate Indo-Pacific economies’ moves to prioritise energy independence
by developing their own fossil energy sources, or to shift to renewables,
to the disadvantage of Australian coal and gas exports.
Long-term, global momentum
towards decarbonisation has challenging implications for Australia’s current
export profile. Australia exports
90% of its black coal production and 74% of its natural gas production.
Most is bought by customers in Indo-Pacific countries, in particular Japan,
China, South Korea, and India (see the article ‘Australia’s
trade in figures’ elsewhere in this Briefing book). All have made significant
commitments to reach net zero, including (most recently) India.
The roles of coal and gas in a global transition to
net zero are contested. The Intergovernmental Panel on Climate Change (IPCC)
has reported that approximately 30%
of oil, 50% of gas, and 80% of global coal reserves can never be consumed if warming is to be
limited to 2 °C (p. TS-53). The IEA’s Net zero by 2050 report envisages reductions
of 90% in coal production, 75% in oil production, and 55% in natural gas
production, and no new fossil fuel development beyond projects committed in
Consistent with these warnings, coal-fired
power project cancellations in Asia have increased sharply- largely because
of the need for international financing in an environment in which China, Japan,
and other members of the G7 have pledged to end financing for unabated
coal-fired power projects. The World
Bank claims it has made no new coal investments in over a decade and
provided ‘zero’ fossil fuel financing in 2021, while the Asian
Development Bank has announced a plan to help retire Asian coal-fired power
In March 2022, the Council of the European
Union approved a proposal for a carbon border adjustment mechanism (CBAM). The CBAM, nicknamed a ‘carbon
tariff’ by some Australian news outlets, will impose a carbon
border levy on certain imports into the EU from ‘less climate-ambitious
countries’. If legislated, the CBAM
will likely affect Australia’s trade with the EU, particularly in coal, steel, and aluminium. The CBAM is expected to enter
into force as early as 2023 in a transitional form, and the associated border
levy may fully apply from 2026. In the US, the Biden
administration is considering a similar mechanism.
Recent years have also seen increased
global investment flows into renewable energy industries, in light of the
declining cost competitiveness of coal and gas for electricity generation as
the cost of renewables has plunged.
Against this international policy and global
finance backdrop, some Australian economists warn of the
potential for Australian job losses in fossil fuel-dependent, trade-exposed
export industries if other nations continue to pursue their decarbonisation
policies- even if Australia imposes no further emissions restrictions
While the global pursuit of decarbonisation carries
obvious potential downsides for Australian coal and gas exports, as well as iron
ore exports, it opens other opportunities- for example green
steel (made using hydrogen rather than coking coal). Supporters of a pivot
into clean energy-focused exports argue Australia
has extensive renewable energy resources that could be exploited to help
advance global decarbonisation. Furthermore, they argue that although job
losses in fossil fuel industries are inevitable, the Government
could implement policy measures to compensate those affected.
The Morrison Government made significant
investments to begin positioning Australia to capture some of these global
clean energy opportunities. It sought to nurture a local clean hydrogen
industry under the National hydrogen strategy crafted
in partnership with the states and territories, and to grow the critical
minerals sector- which provides key inputs for electric vehicle batteries, solar
panels, and other technologies- through the Critical
Minerals Facilitation Office and Critical
minerals strategy. Its National
Manufacturing Priorities included ‘resources technology and critical
minerals processing’ and ‘recycling and clean energy’ as sectors of strategic
importance in which Australia has a comparative advantage.
In contrast, supporters of continued coal and
natural gas production believe
the fossil fuel industry will remain a significant contributor to the
Australian economy well beyond 2030. They believe new coal-fired and gas-fired
power plants that are under construction in Asia
will create significant locked-in demand for Australian fossil fuels, notwithstanding
trade partners’ commitments to reach net zero around mid-century. Fossil fuel
export proponents have also argued that if
Australia were to withdraw coal and natural
gas exports from the Indo-Pacific market, customer
countries would simply use more polluting alternatives (though opponents
dispute these claims).
Some stakeholders also argue that advances in
carbon capture and storage (CCS) technology will make
coal ‘cleaner’ and hold the potential for zero-emissions
gas-fired power. This could allow Australian fossil fuel industries to
‘have their cake and eat it too’; to profit from ongoing exports and address
environmental concerns simultaneously.
The third working group of the IPCC (which focuses
on emissions mitigation options) is likely to report that
fossil fuels could play a role in climate change mitigation if strategically
deployed with CCS, though most global fossil fuel reserves could
still never be consumed, to limit their environmental impact (p. 6-45). A role
hydrogen’- produced from natural gas via steam methane reforming coupled
with CCS- is also contemplated in the Morrison Government’s 2020 and 2021 Low
emissions technology statements and the National
The 47th Parliament will need to balance competing domestic
interests, while assessing whether fossil fuel export industries have a future
in the Australian economy and, if so, what roles they should play (see ‘Coal, gas and decarbonisation- challenges and policy choices’ in this Briefing book).
Trade tensions with China
Despite China being Australia’s largest trading
partner, trade tensions fuelled by geopolitical rivalry have threatened to
derail the relationship. Over the past 3 years China has banned or increased tariffs
on a wide range of Australian goods and services, while seeking alternative
sources of iron ore and coal.
The Australian Government’s trade policy to date
has been to avoid direct retaliation by encouraging exporters to pivot towards
alternative markets and negotiating new free trade agreements (for example with India and the EU).
In June 2022 Prime Minister Anthony Albanese declared
that Indonesia is central to Australia’s trade diversification away from
China, and called on Australian businesses to find opportunities in Indonesia.
A continuation of policy and financial support for domestic
critical mineral and manufacturing projects will also serve to reduce
Australia’s reliance on China. On the global stage, both
Australia and China have initiated disputes (regarding anti‑dumping
and countervailing duty measures) against each other at the World Trade
The deterioration of Sino-Australian trade
relations underscores the fact that geopolitical rivalry can threaten trade and
investment links. Put simply, China has used trade sanctions to ‘make
an example of Australia’. As Australia becomes more involved in the AUKUS
alliance and the Quadrilateral Security Dialogue, the Chinese leadership will
almost certainly view Australia as a geopolitical opponent and be more inclined
to use economic coercion.
Beijing has shown a pattern of targeting industries
that could hurt Australia while causing minimal harm to itself. This poses
risks for Australian industries that have historically been heavily dependent
on the Chinese market, such as the international education and tourism sectors.
Analysts warn a significant reduction in trade with China could result in a
reduction in living standards for Australians.
In the 2021 parliamentary inquiry into diversifying Australia’s trade and investment profile, many stakeholders argued the Australian Government should do more
to help exporters diversify, especially considering that alternative markets
may not deliver the same scale of demand and premiums as the Chinese market.
Looking ahead, incoming Opposition Leader Peter
Dutton has argued Australia should defend its liberal values and be prepared to confront Beijing militarily and economically over geopolitical issues, including the
defence of Taiwan (officially known as the Republic of China). Australia’s
trade relations with China will almost certainly deteriorate further if Australia
intervenes in issues that Beijing considers to be its ‘core interests’.
Some stakeholders are hopeful the new Albanese Government will reset relations with Beijing. They believe China
is ‘too big and too central to be ostracised’, and Australian
policymakers can learn from countries such as Japan or Indonesia in terms of maintaining
trade relations with China whilst negotiating over ideological differences. Others are less hopeful, believing a geopolitical
showdown is probable or at
least plausible, and that Australia should act now
ties with China.
The 47th Parliament will need to balance
Australia’s near-term economic interests with security concerns to weigh the best
Disruptions to global supply chains
Over the past several years, global supply chains have
struggled to cope with COVID-19 lockdowns. Prior to the pandemic, global supply
chains were generally constructed to maximise efficiency and profit by
minimising or eliminating the storage of reserve inventory (known as ‘just-in-time’
Interruptions to the supply of critical intermediate
and final products during COVID-19 have prompted public debate about the
trade-off between efficient and resilient supply chains. For example, recent COVID-19 containment measures in Shanghai (home to the
world’s largest container port) have exacerbated logistics bottlenecks as ships
are delayed from unloading and picking up cargos, with flow-on effects across
China accounts for about 28% of
Australia’s total imports, including many parts used in Australian manufacturing.
The potential for further COVID‑19 outbreaks in China’s port cities means
Australian businesses dependent on Chinese inputs risk longer delays and
increased transportation costs.
parliamentarians have argued these disruptions to
global supply chains highlight the need for Australia to pursue greater supply
chain diversification and resilience, with a particular focus on reducing Australian
dependence on Chinese inputs. Proposed solutions include ‘onshoring’ and ‘friendly-shoring’, in which businesses would swap ‘risky’ foreign suppliers for suppliers
from Australia or allied countries, regardless of any
On the other hand, some economists warn that it
would be tremendously difficult and expensive to reorganise global supply
chains to bypass China, considering how deeply China
is integrated in the global economy.
Some analysts have raised the prospect that global
supply chains will split into 2 camps, ‘one
for China and those associated with it, and another for the US and their
friends’. In other words, supply chain disruptions and the US–China strategic
rivalry could prompt a fragmentation of the global economy into rival trading
blocs, as occurred during the Cold War.
The 47th Parliament will likely need to consider
the efficiency versus resilience debate regarding global supply chains, and
assess the benefits and costs of policy options for Australia to pursue greater
self-sufficiency in its supply chain management.
and the rise of economic nationalism
A general trend towards de-globalisation and
potential fragmentation of the current global trade system presents risks and
opportunities for Australia.
encompasses declining barriers to trade, migration, capital flows, foreign
direct investment, and technological transfers. De-globalisation refers to increasing
barriers to these relatively free flows between countries.
The current global trade system is upheld by
various multilateral institutions (for example the WTO) with the objectives of
promoting rules-based free trade and economic engagement between countries. Since
the end of the Cold War, the global trade system has enabled and facilitated a
globalisation of the world economy underpinned by unprecedented free flows of
goods and capital (and to a lesser extent, labour).
However, since the late 2000s there has been a notable
worldwide backlash against globalisation and free trade, driven by the concerns
of those who have been harmed or ‘left behind’. Widening inequality, job losses,
and lack of opportunities for domestic workers are frequently raised as the
negative consequences of globalisation. Internationally, the backlash manifested
most directly in ‘Brexit’ and President
Donald Trump’s 2016 electoral victory.
Many developing countries, such as India, have also
embraced a self-sufficiency philosophy, becoming disillusioned with the trade and
financial liberalisation policies of the ‘Washington
Consensus’. Rising protectionism in India threatens to derail the Australia–India
Comprehensive Economic Cooperation Agreement.
The COVID-19 pandemic and the war in Ukraine have
exacerbated the de-globalisation trend. Countries have resorted to economic
nationalism, enacting export restrictions in response to fears of an imminent global
energy and food crisis. Trade facilitation tools, such as the international payment
have been ‘weaponised’ and used as a means of sanctioning Russia. Some economists
warn that the global
trade system could break down under the pressure, with some multilateral
institutions supporting the system, including the WTO, already weakened by the unilateralism
of the Trump administration and the ongoing Sino-American trade war.
Australia is also experiencing an undercurrent of economic
nationalism fuelled by concerns over national security and Australia’s reliance
on the Chinese market. Some
parliamentarians have called on the Government to enact measures to protect
domestic industries. Proposed measures include a ‘Buy
Australian Act’, an export
tax on iron ore, the expansion
of subsidy programs for domestic manufacturers, and Australia’s
withdrawal from multilateral institutions.
The call for more protectionist measures has been opposed
by influential economists, who argue Australia stands to lose the most from
a breakdown of the global trade system. Their reasoning is that economic
nationalism in one country can trigger a rise in protectionism elsewhere,
leading to a ‘beggar-thy-neighbour’ situation.
As a small open economy, Australia relies on
foreign markets being receptive to Australian goods and services. Australia also
relies on international trade rules to compete with larger countries on an equal
footing. Consequently, advocates of free trade believe Australia
should ‘step up’ to lead vital reforms in the WTO to strengthen the global
trade system, rather than turning to protectionism.
Over the life of the
47th Parliament some key issues that may emerge for the Australian economy
- how to operate in a less globalised and potentially fragmented
- how to manage the perceived and actual negative consequences of
- whether there is an appetite to pursue and ratify further bilateral
or multilateral free trade agreements.
Department of Foreign Affairs and Trade, Trade and Investment at a Glance 2021, (Canberra: Department of Foreign Affairs and Trade, 2021).
Joint Standing Committee on Trade and Investment Growth, Pivot: Diversifying Australia’s Trade and Investment Profile (Canberra: Parliament of Australia, 2021).
Productivity Commission, Rising Protectionism: Challenges, Threats and Opportunities for Australia (Canberra: Productivity Commission, 2017).
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