Export

China sanctions show Australia’s ability to adjust

Eric Barker, October 28, 2021

Australian exports of the nine commodities which have received trade sanctions from China in the past two years.

A NEW study has found a series of trade sanctions imposed by China has had little impact on the Australian grains industries.

Researchers Scott Waldren from the University of Queensland and Victor Ferguson and Darren Lim from the Australian National University have been looking at the economic fallout of trade sanctions made to several industries – including beef, cotton, barley and hay.

While many feared the sanctions would have wide-ranging impacts on both countries, the report found Australian industries adjusted well, considering the size of the Chinese market.

“China has been Australia’s most important export market for decades,” the report said.

“Comparative economic strengths and deep complementarities saw bilateral trade grow continuously after the Chinese market opened up in 1978, leading China to become Australia’s largest two-way trading partner in 2006 and the conclusion of ChAFTA in 2015.”

“Despite exports of many industries being concentrated in the Chinese market prior to disruption, by mid-2021, the net global trade effects from import sanctions were more modest than many feared.”

The report found Australian exporters managed to keep trading by using three techniques:

  1. Deflection – finding ways around the sanction to keep trading with China
  2. Reallocation – exporting to countries other than China
  3. Transformation – trading an entirely new product, like growing different crops

Sanctions on the beef industry started in March last year, with China suspending the export licenses of four Australian processors, citing labelling issues. Three more plants have since been suspended.

The report said finding small and often unavoidable technicalities like this were an “informal” trade sanction.

“Such mistakes on a small number of cartons are unavoidable in large volume trade and are often either ignored or resolved swiftly via unofficial channels,” the report said.

“However, they provide a flexible mechanism for sanctioning ‘informally’, because national customs agencies have significant discretion regarding how they handle plant certification and label violations.”

Barley and cotton reallocate to other markets

Strict sanctions from China meant Australia’s barley and cotton industries had to look elsewhere to sell bumper crops.

Barley exporters were slapped with an 80pc tariff in March last year, which virtually stopping the trade which accounted for 76pc of Australian exports at the time.

Australian barley exports since China’s import tarriffs. Click to enlarge image

For a short period after the tariffs, barley exporters were able to deflect into the market by selling to Chinese Special Economic Zones where the tariffs were not applied – a loophole which was stopped by Beijing.

“Other exporters filled the vacuum left by Australia’s exit from the Chinese market, especially Canada and France,” the report said.

“However, tight global supply meant that such adjustments left voids in the markets they previously supplied.

“Australian firms were able to exploit this, exporting to 25 markets in 2020, including malting barley markets in Thailand, Vietnam, Mexico and Japan, and the lower-value feed market of Saudi Arabia.”

While Australia harvested a record barley crop last year, there was some evidence to suggest growers had planted other crops.

“Some farm advisers found that consideration of the Chinese barriers did cause some growers to switch out of barley, but at a lower rate than expected because of other considerations, especially the high yields of barley, its value as a rotation crop and buoyant demand.”

Uniform product key to market reallocation

For cotton, China’s ministry of commerce and the national development and reform commission reportedly told state-owned mills, importers and storage companies to cease importing Australian cotton.

Exports of cotton since China reportedly told importers to stop buying Australian product. Click to enlarge image

China is the world’s largest importer of cotton and took about 70pc of Australia’s exports prior to the sanction.

The uniformity of the product meant reallocation was an easy option for the industry and cotton exports increased 150pc on the year before – with Bangladesh, Vietnam and Indonesia emerging as markets.

The report found reallocation like this was the only technique used by all industries.

“The market dynamics most conducive to reallocation were relatively low levels of sender demand concentration and high product homogeneity,” the report said.

“In general, the more homogenous the product, the more seamless reallocation into alternative markets appeared to be.

“In each case, global supply was relatively inelastic in the short-term, precluding the possibility that a third market could fill the void left by Australia.”

Beef industry less cut and dried

While the global market managed to adjust itself for the barley and cotton industries, the sanctions imposed and the reaction from the beef industry was less cut and dried.

With a global shortage of beef and demand from several other countries, the industry was able to find markets quickly – as it was already trading with more than 100 countries.

“Large markets included Japan, South Korea, and the USA,” the report said.

“While Australia was a prominent exporter, it did not dominate global supply. Other major exporters include Brazil, the US, and Argentina, who all expanded exports to China across 2020-2021.”

Australian beef exports to China and other countries. Click to enlarge image

While the alternative markets were handy for Australian exporters, the report found the “porous nature” of the sanctions allowed the industry to keep trading with China. Many processors were able to kill at plants, which still had licenses, and keep sending product to China.

“This strategy was particularly used for higher-value beef and was mostly available for conglomerates like JBS that manage several plants,” the report said.

“The Chinese beef market remained valuable to many Australian plants, because it took a wide range of cuts (in frozen form), which increases the overall average value that could be extracted from a carcass.”

Compared to the previous year the value of Australian beef exports to China decreased by 49pc and the total beef exports decreased by 21pc. But the report said the sanctions coinciding with drought-breaking rain in many parts of the country had complicated the figures.

“While the rain increased the supply of crops like barley, it constrained the supply of cattle as graziers re-built herds to take advantage of the feed base,” the report said.

“Given herd rebuilding is a productive enterprise that could mitigate the impacts of lost access to the Chinese market, it might be considered a novel form of transformation.”

 

 

 

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