2020 saw an increasingly belligerent China level tariffs against Australia in response to Prime Minister Scott Morrison’s opportunistic call for an investigation into the origins of COVID-19. So is a trade war brewing, or is it just a storm in a teacup?
“I think unfortunately last year the relationship between the two countries deteriorated somewhat… But overall the size of the tariffs and the size of the goods market is overall not that large – around 1 per cent of GDP, possibly even less, is the overall damage from the imposition of those tariffs,” said Vanguard senior economist Alexis Gray.
“We would need to see more tariffs to start to hurt – for example, if China were to put tariffs on the larger exports like coal and iron ore. The tricky thing is it’s hard for China to substitute for ways to purchase iron ore, because there aren’t many producers in the world that can meet China’s demand.”
China could find other ways to penalise Australia, but Ms Gray believes that there is currently a desire to come to an agreement and reconcile, saying: “The tone has shifted in recent weeks”.
However, the US-China relationship will remain contentious in the future and is “definitely less favourable” than in the past, said APAC chief economist Qian Wang.
“US-China relations will probably get better compared to the last four years, when you think about the new US president Biden – he’ll take a more balanced approach to competition and collaboration…but frankly speaking, the game is still on,” Ms Wang said.
“The US-China tension is a long term game in nature, given the fundamental discrepancies between the two countries on many critical issues…a multilateral approach means the US will work with its allies to contain China, and the focus will shift away from trade to other structural issues such as market access, technology, geopolitics and human rights.”
