The Australia-China trade war: Vale the ‘grand bargain’?

For several decades, a ‘grand bargain’ has underpinned Australia-China ties. Recognising economic opportunities exist alongside diplomatic friction points, both sides sought to maintain a separation between the political and economic domains of the relationship. But with the recent outbreak of a COVID-19 dispute, which has led to a bilateral trade war over barley and beef, the separation looks increasingly untenable. Has the Australia-China grand bargain begun to unravel?

The political-economic ‘grand bargain’

The deepening of the Australia-China relationship over the last two decades is a significant achievement for both countries. Beginning with a mineral resource trade in the mid-1990s, the two economies have since become intertwined, with dense connections also growing across the agriculture, technology and education domains.

This economic relationship was of unquestionable mutual benefit: Australia developed globally-competitive export industries generating hundreds of thousands of jobs, while China accessed resources and services needed to advance its economic modernisation.

But there has always been an uneasy political undercurrent. Outside of the economic domain, the Australian and Chinese governments fundamentally disagree on many issues of substantive importance. The matters have evolved over time: where it was once focused on social issues such human rights or the plight of minority groups, it has since evolved to geopolitical questions over the South China Sea dispute, foreign interference activities and more recently the COVID-19 crisis.

This has long posed a fundamental challenge in Australia-China relations: How to shelter mutually-beneficial economic ties from political winds that periodically blow in the opposite direction?

In the past, a solution was found in an implicit grand bargain, under which the economic and political relationships were effectively triaged into separate tracks. Both sides had an interest in ensuring political disputes would not undermine critically-important economic developments. The historical origins of this grand bargain can be debated, but it had clearly coalesced by the time of the Howard Government.

In the intervening years, the grand bargain has proven remarkably resilient to political shocks. Disputes over visas for human rights activists, the detention of Rio Tinto executives on espionage charges, Chinese investments in Australian critical infrastructure, allegations of ‘foreign interference’ within the Australian political system, island building in the South China Sea, and infrastructure competition in the Pacific Islands have at times marred political relations.

Yet none of these derailed steady progress in bilateral economic ties. In 2019, two-way trade reached a record $229 billion, more than double the level a decade earlier. The completion of the China-Australia Free Trade Agreement in 2015 — despite steadily growing diplomatic disputes — appeared to show that both sides would put politics to one side when it came to mutually-beneficial economic opportunities.

From COVID- to trade-warfare

However, unexpected developments in the first months of 2020 may indicate that the grand bargain is beginning to unravel.

The COVID-19 crisis — arguably the most significant global crisis in at least a generation — was the catalyst. Internationally, a heated debate quickly emerged over the Chinese government’s approach — particularly over its initial handling of the outbreak domestically, and subsequent diplomatic activities as the pandemic spread around the globe. These tensions were greatly amplified by the response of the Trump Administration, which adopted a remarkably confrontational (and largely un-evidenced) stance towards China. These disputes are global, by no means Australia’s own.

But the Australian Government’s decision in April to make calls for an ‘independent’ international enquiry into the origins of COVID-19 brought the dispute home. This caused extraordinary displeasure within the Chinese government, which was quick to denounce Australia’s call as an affront and political witch-hunt. Chinese state media accused the Australian Government of prosecuting an anti-China campaign on behalf of the US.

In previous times, this would have been the end of the matter, at least as far as the economic relationship went. But the COVID-19 dispute has proven to be no ordinary crisis.

On April 27, explosive remarks by the Chinese Ambassador to Australia Cheng Jingye were published in the Australian Financial Review. The remarks intimated at Chinese consumer boycotts against four exports (beef, wine, education and tourism) due to the Australian position on a COVID-19 inquiry. This reprised a diplomatic tactic used against South Korea in 2017, during a bilateral dispute over the deployment of a missile defense system. The Australian Foreign Minister responded strongly, which elicited a further backlash from the Chinese Ministry of Foreign Affairs.

The threat then appeared to turn into reality soon thereafter.

On May 17, it was revealed that China would apply massive retaliatory duties to Australian barley exports, as the result of a long-standing anti-dumping investigation. These duties will effectively shut-down a trade which is routinely worth $1 billion annually. Three days later, it also announced that four Australian abattoirs would have their export licensing revoked due to technical violations surrounding labelling provisions. With these abattoirs accounting for a third of Australia’s approximately $3 billion beef exports to China, this could wipe off another $1 billion from bilateral trade a year.

China claims that it has adopted these measures because Australia’s trade practices were in breach of relevant WTO or Chinese rules. The Australian Government, and affected agricultural industries, have categorically denied that. Coming only a fortnight after trade threats were made by the Ambassador, it would be hard to conclude the trade measures are not in part a political move to punish Australia for its responses around COVID-19.

Australia now finds itself in a trade war — its first in perhaps a century — with its largest trade partner.

Vale the grand bargain?

The Australian debate has since turned to the apportionment of blame. Several business leaders have accused the federal government of mismanaging the China relationship, as has the Premier of Western Australia and the Shadow Agricultural Minister. Others place blame with China, pointing to its use of trade coercion against other countries to suggest Australia is far from alone, and therefore not responsible.

Whatever the merits of either view, this Australian blame game misses a much more important point regarding the character of its relationship with China. Never before has a diplomatic dispute spilled over into actions that directly and concretely affect economic ties. The firewall carefully erected between economics and politics — the key underpinning of the relationship for several decades — is no longer sacrosanct.

In the short run, Australia will need to find ways to de-escalate the dispute and see the barley and beef trades resumed. While a step-back from its position on COVID-19 is unlikely, official statements have been carefully calibrated to leave an ‘off-ramp’ for a negotiated settlement. Both sides can still cut some kind of deal and walk away without losing face.

But in the longer-term, the grand bargain between Australia and China is now in question. The firewall has been breached once, and could yield to political crises again. This is therefore not a garden variety trade dispute, nor is it really about barley or beef anymore. It potentially heralds a new era in the bilateral relationship, where economic interactions are conditional on the maintenance of certain political positions. In an increasingly contested global system, this augurs very poorly for the future of Australia-China relations, with adverse consequences for both sides.