Chinese consul-general for Victoria and Tasmania Long Zhou and Health Minister Greg Hunt. (Image: AAP/James Ross)

Many diplomatic arguments are abstract disputes over symbols, status or lines on a map with little impact on ordinary Australians.  

Not so the stoush over Australia’s proposal that there be an independent inquiry into the COVID-19 pandemic.

China is upset, and has threatened trade sanctions. The prospect of harsh diplomatic words becoming reality is a nightmare for Treasury.  

It is not a few big businesses that will suffer. Australia’s economy depends on China. We can find new markets, over time and considerable cost — and in the meantime lose billions of dollars.

The market for international students has been grabbing attention, but the bigger story is iron ore exports.

Chinese students account for around 38% of total international students. That’s too great a reliance on one country; a reduction will be a blow to university revenues.  

But it is nothing like our dependence on China for our biggest export, iron ore. Some 80% of Australia’s iron ore production is exported to China to feed that country’s enormous steel industry. It is far and away our biggest source of export earnings from China, worth over $63 billion a year in 2018-19.

There are alternatives — other countries could buy our iron ore. But moving into a new market is not easy. We can’t wander up to a potential customer and say, “I’ve got a load of iron ore in the truck, would you like a deal?”.  Iron ore is exported in bulk — more than 800 million tonnes — to very large smelters and refiners, often government-owned or controlled. Setting up contracts can take years of careful negotiation.  

A contrast with the international student market is that students come from families. Although the Chinese government could discourage them, it will be less inclined to risk internal dissension by outright banning parents from sending their children to Australia. Social pressure is a big influence in a one-party state, but not 100% certain.   

With iron ore, however, there are a relatively few buyers, and some of the largest are state owned. It is thus much more straightforward for the Chinese government, should it choose, to direct where and how these companies import iron ore.  

Small wonder then that Andrew “Twiggy” Forrest of Fortescue Metals — one of Australia’s large iron ore exporters — was prepared to risk a public bagging for inviting the Chinese consul-general in Victoria Long Zhou to share a platform with Health Minister Greg Hunt at a recent presentation. He was accused of “ambushing” the minister, an accusation he has denied.  

If those expressing concern were only the mining companies, it would matter less — they are big enough to look after themselves. 

What matters more is the impact on the economy and federal budget.

Iron ore is a big deal for Commonwealth government revenues. So much so that the budget papers have a large section (see box 4 of Budget Paper 2) devoted to assessing the sensitivity of GDP forecasts and the budget to iron ore prices.  

Last May the government’s projected return to surplus depended on iron ore exports — a key variable for the budget bottom line.    

Obviously a surplus is now off the table due to extra government spending — much needed and desirable.  

However, in an alternate universe where there had been no bushfires or COVID-19, but China decided not to buy Australian iron ore for a different reason, the surplus would disappear. Iron ore is that important to the budget bottom line.  

If there are trade sanctions it will be difficult to determine the damage bill.  We are likely to be entering a recession no matter what. While economists could calculate how much deeper and longer the recession will be if China imposes trade sanctions, such estimates would be open to debate and unlikely to fire up the public.  

So the government may feel the risk of a domestic backlash is low. Or it may feel that China is unlikely to follow through on the diplomatic rhetoric. 

Though it is puzzling why the government would want to take the risk at this time.

China — like any country — gets defensive if it feels criticised. Unlike most countries its trade policies matter to the health of our economy. 

Diversifying and reducing our dependence on China is a great objective for the long term. Right now that dependence is real. A provoked panda has a scary bite.        

Get Crikey for $1 a week.

Lockdowns are over and BBQs are back! At last, we get to talk to people in real life. But conversation topics outside COVID are so thin on the ground.

Join Crikey and we’ll give you something to talk about. Get your first 12 weeks for $12 to get stories, analysis and BBQ stoppers you won’t see anywhere else.

Peter Fray
Peter Fray
Editor-in-chief of Crikey
12 weeks for just $12.