CLYDE RUSSELL: China’s U-turn on Australian barley tariffs shows folly of sanctions

Launceston — One of the main tools of statecraft in recent years has been trade sanctions or tariffs, but with China taking another step to normalising its trade relationship with Australia, the main lesson is these actions seldom work.

In fact, they are more likely to backfire on the nation imposing the trade action, especially if it is unilateral and not supported by significant players in the rest of the international community.

China’s ministry of commerce said on August 4 that antidumping and antisubsidy tariffs on Australian barley will end, with the move coming about three years after the 80.5% duties first cut off what was once as much as an A$1.5bn ($986m) annual trade in the grain widely used for brewing.

The action against imports of Australian barley was followed by an unofficial ban on Australian coal in mid-2020, which effectively cut off imports from what had been China’s second biggest supplier of the fuel used to generate power and make steel.

There were also tariffs and other measures imposed on Australian forestry products, wine and lobsters as Beijing expressed its displeasure with a series of issues with Australia, including Canberra’s call for an international investigation into the origins of the Covid-19 pandemic.

On the surface the catalyst for the ending of trade actions on barely and coal is the warming of relations since Australia elected the centre-left Labor Party last year, ending nine years of rule by the right-wing Liberal-National coalition.

The new government allowed for a reset of relations without either party being seen to lose political face.

It also allowed for Beijing to retreat from a policy that clearly hadn’t worked, insofar as Canberra didn’t bend to its diplomatic will and Australian farmers and miners were able, after an initial period of adjustment, to find new markets for their products, often at higher prices.

Left untouched

For the new Labor government, Beijing’s pragmatism allowed for a more co-operative approach to its largest trading partner, while stressing that China and Australia will continue to have differences regarding issues such as human rights and their general views of world affairs.

But China’s two main imports from Australia, iron ore and liquefied natural gas (LNG), were left untouched throughout the dispute.

That alone is a sign that Beijing thought it could punish Canberra by hitting what it thought were less important, or more easily substituted commodities, while leaving alone the two that were most important.

China gets about 70% of its iron ore from Australia and about one-third of its LNG, some of it under a low, fixed-price contract signed two decades ago.

The calculation seemingly made by Beijing was that it could pressure Australia by ending the trade in coal and barley, as well as some more minor products, because these were commodities that could be secured easily from alternate suppliers.

That calculation was only partially correct as China was able to buy more coal from Indonesia, Russia and the US.

But the disruption to Asia’s seaborne coal flows caused price increases, especially for Indonesian and Russian cargoes.

This in turn boosted the price of Australian grades as well, meaning that as Australia’s exports to China plummeted to effectively zero, shipments to countries such as India and Vietnam increased, resulting in no loss of export volumes.

When Beijing ended its unofficial ban on Australian coal earlier this year, it took a little while for the trade to resume, but it has since recovered to levels close to before the ban being imposed.

Take longer

China imported 6.4-million metric tonnes of Australian coal in July, according to data compiled by commodity analysts Kpler, which is 27% below the 8.72-million in July 2020, the last full month of imports before the ban took place.

It may take a little while longer for the barley trade to reach prior levels given that Australian farmers and Chinese buyers are likely to have entered into medium-term deals with new partners.

But overall it would seem that the ending of Beijing’s trade actions against Australia will be net positive for both countries.

The surprising thing is that China thought it was a good idea to impose them in the first place.

This suggests Beijing didn’t learn the lessons from the trade tariffs imposed on it by the US administration of former president Donald Trump.

Those tariffs failed as they neither lowered the US trade deficit with China nor did they cause a major increase in Chinese purchases of US goods.

There was some uptick in China’s imports of US crude oil and LNG, though this was largely driven by price advantage rather than policy.

Rather, the Trump tariffs raised political tensions, which remain to this day, and imposed higher costs on the US economy.

While internationally co-ordinated and supported trade actions may deliver some results, such as lowering Russia’s earnings from its energy exports after Moscow’s invasion of Ukraine, the takeaway from the disputes involving China and Australia and China and the US is that unilateral bans and tariffs fail.

Reuters