Australia’s economic system after Covid-19 pandemic

The national flags of Australia and China are displayed in front of a portrait of Mao Zedong overlooking Tiananmen Square.

Frederic J. Brown | AFP via Getty Images

Australia’s economy has been hit hard by escalating trade tensions with China – and it is possible that even after the pandemic ends, growth “will never return to pre-virus levels,” according to research firm Capital Economics.

China is by far Australia’s largest trading partner, accounting for 39.4% of goods exports and 17.6% of services exports between 2019 and 2020.

But Beijing has been targeting a growing list of imported products from Down Under for months – tariffs on wine and barley and suspension of beef imports.

Australia’s gross domestic product (GDP) could continue to shrink if Beijing continues to pile tariffs on more Australian imports, its chief economist Marcel Thieliant said in a note last week.

Goods and services already “in the line of fire” are worth almost a quarter of Australia’s exports to China – 1.8% of economic output, according to the research company.

But it can’t end there.

“That number could climb to around 2.8% of GDP if China targets other products for which it does not depend heavily on Australian imports,” Thieliant said.

While Australia should be able to reroute some shipments to other countries, the escalating trade war is another reason the Australian economy will never return to its pre-virus path, even after controlling the pandemic.

Marcel Thieliant

Economist, capital economy

Canberra-Beijing bilateral relations deteriorated earlier this year after Australia backed a growing demand for an international investigation into China’s handling of the coronavirus pandemic.

Other restrictions from Beijing could come, including exports of gold, aluminum oxide – a type of material for industrial use – and “a wide variety of smaller goods,” the report said.

“While Australia should be able to reroute some shipments to other countries, the escalating trade war is another reason the Australian economy will never return to its pre-virus path even after the pandemic is controlled,” Thieliant said.

Overall, the country’s gross domestic product could lag its pre-virus level by about 1.5 percentage points by the end of 2022 – and additional trade restrictions from China could exacerbate this shortage, Capital Economics said.

The pain could be alleviated, however, as “Australia may find other destinations for its exports,” said the economist.

A ray of hope for Australia

Australia is the world’s largest producer of iron ore, another commodity that was in the spotlight as tensions between Australia and China increased.

But there is a ray of hope for Australia: iron ore exports would likely continue to be spared as Australia supplies half of China’s needs.

China imports 60% of its iron ore from Australia and is heavily dependent on the commodity from which steel is made.

Analysts say the lack of available alternatives could be the reason iron ore has so far been spared the tariff war.

Iron ore prices recently rose as demand from China increased and were further fueled by dwindling supply and disruption caused by storms in Australia.

“We still believe that iron ore exports will be spared … Without Australia, China would not be able to meet all of its current needs,” Thieliant wrote.

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