The Guardian - China-The PM is heading to China and the relationship with Beijing has thawed But will trade ever return to normal

Anthony Albanese’s upcoming China visit will be the first by an Australian prime minister since Malcolm Turnbull in 2016.

Much of the media attention will be on irritants in the relationship, such as the four-year detention of the Australian writer Yang Hengjun and rising tensions in the South China Sea.

But economic ties will also feature highly, with the prime minister scheduled to attend the China International Import Expo in Shanghai.

How important is two-way trade?

China dwarfs all other nations when it comes to Australia’s trade, accounting for almost a third. China buys more Australian exports than the next three biggest markets combined.

In the year to June, two-way goods trade was $303bn, or 30% of Australia’s total, according to Department of Foreign Affairs and Trade data. It was up 11% on 2021-22. (Services trade is still being calculated; it was worth $21bn in pre-Covid 2019.)

Trade is typically heavily in Australia’s favour. Of the top five exports, iron ore and concentrates were worth $105bn in 2022-23 – almost the value of all imports from China alone.

Other big exports were gas worth $21bn, crude minerals worth $20bn, gold shipments worth $8bn and coal $4bn.

Topping the list of imports were $10bn of telecom equipment and parts (think smartphones), computers worth $8bn, and passenger vehicles tallying $6bn (many of them electric vehicles). There was also $4bn of furniture, mattresses and cushions, and a similar value of prams, toys and sporting goods.

China also ranks as Australia’s sixth-largest source of foreign direct investment, with $44.8bn invested as of 2022.

Chafta’s troubled chapters

The China-Australia free trade agreement – dubbed Chafta – came into force in December 2015, with the then Turnbull government boasting it would deliver “enormous benefits to Australia, [enhance] our competitive position in the Chinese market, [and boost] economic growth and creating jobs”.

Those hopes suffered a severe setback in 2020, when the Chinese government took offence at a call by the Morrison government for an investigation into the origins of the Covid pandemic.

Australia was labelled by state media as the “gum stuck to the bottom of China’s shoe”. Beijing also slapped restrictions on products such as barley, beef, cotton, coal and wine, and issued warnings to its citizens against travel to Australia based on claims of an elevated risk of racist attacks.

Initial estimates put the cost to Australian exports of about $19bn a year, although big-ticket commodities such as iron ore and gas were little affected.

Sino-Australian relations began to thaw after the election of the Albanese government in May 2022. Export restrictions have gradually eased, with lobster restrictions among the remaining hurdles.

Cause to whine

Australian wine shipments to mainland China reached almost $1.2bn in 2021 before tariffs reaching 218% were abruptly imposed. Exports tumbled to just over $7m in the most recent year to September, WineAustralia data shows.

Last month China agreed to review the wine tariffs – but said it would take five months to do it – in exchange for Australia holding off on taking the dispute to the World Trade Organization.

Local producers are gearing up to re-enter the Chinese market but are cautious about the prospects.

“It’s unlikely we get back to $1.2bn [a year] any time soon,” Lee McLean, the chief executive of Australian Grape & Wine, told Guardian Australia. French, Chilean and American suppliers have moved in and local producers had expanded, while China’s weak domestic demand meant “the market has changed”, he said.

Australia is not without its own trump cards, though. China will need Canberra’s support (and that of other members) if it is going to be allowed into the region’s biggest trade pact, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

How do China’s future prospects stack up?

Chinese officials encourage Australian suppliers to focus on the long run.

“It is expected that by 2035, China’s current 400m middle-income population will have doubled to 800m, adding advantages to China’s market scale,” said Xiao Qian, China’s ambassador to Australia, to a gathering in Sydney in September.

Xiao dismissed international reports that China’s economic outlook had lately dimmed, weighed down by a weaker-than-expected rebound from Covid and a deflating – if not imploding – property bubble. A shrinking population doesn’t help.

“China’s economic data have presented some fluctuations, yet some western media selected certain data to judge the overall situation of China’s economy, exaggerated the challenges faced by China’s economic development, and even chanted China’s collapse,” he said.

The International Monetary Fund last month listed a further slowdown in China’s growth (now at about 5% a year) as its top risk to global growth.

“Recent developments shift the distribution of China’s growth forecast risks to the downside, with negative implications for trading partners,” it said.

Kristy Hsu, director of the Taiwan Asean Studies Centre at the Chung-Hua Institution for Economic Research in Taipei, said China needed better relations with nations like Australia, not least because its exports had been falling.

China faces “a huge potential economic decline”, with significant outflows of capital as foreign investors exit and private Chinese money flees.

“It has to find a way to get back the momentum for economic growth,” a task made harder as the US and other bigger importers scramble to find alternative suppliers, Hsu said. “You should take advantage of this timing to get as much as you can.”

Iron ore ‘confusion’, trade pacts and all that

Gerard Burg, a senior NAB economist, noted China was also responsible for “an outsized share of activity within Asia”, so any sustained slowdown “would really have a ripple effect” on a region taking 80% of Australia’s exports.

NAB predicts China’s GDP will expand by 4.5% next year, a “pretty poor” outcome by historical standards. As a major part of households’ wealth, falling property prices mean Chinese consumers could be in a funk for years.

About 80% of Australia’s iron ore is exported to Chinese steelmakers, with about 55% of their metal ending up in buildings, Burg said. A lot of other uses will have to be found for the red dirt.

However, iron ore prices have so far remained about $US110 ($A173) per tonne, or higher. “[W]hat’s been happening with iron ore prices has been completely baffling to me,” he said. “I really don’t know what’s happening there.”

In the meantime, there is a side benefit for Australia as the price of Chinese exports tumbles. “As the [Reserve Bank] is seeking to see rates returning to come normal, it’s good to have a few deflationary pressures,” he said.