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China and Australia's relationship is souring but not weakening

COVID-19 and politics are driving them apart but trade keeps them together

| Australia

Natasha Kassam is a Research Fellow at the Lowy Institute and a former Australian diplomat.

China and Australia's bilateral relationship, already fraught, has reached new lows in recent weeks.

First, China's ambassador to Australia floated the possibility of a consumer boycott in response to Australia's call for an independent investigation into the COVID-19 outbreak. In mid-May, China threatened tariffs on Australian barley, following an 18-month investigation that claimed Australia violated World Trade Organization rules. And after these threats, it imposed an actual ban on some Australian meat producers.

What started as a diplomatic spat between Australia and China is looking like a trade war. It remains unclear whether China's moves represent a newfound willingness to incur costs for political reasons or if these are a warning to convince Australia to toe the political line.

But one of the unforeseen consequences of several years of difficulties in the bilateral relationship is that a new resilience has emerged.

Australia has been here before. Similar short-term slowdowns have hurt Australian exports in the past: coal and wine have been delayed or slowed at various entry points into China. China is more likely to threaten Australian goods and services which are cheap for Chinese buyers to substitute but expensive for Australian sellers to redirect to other markets. Finding alternative suppliers for iron ore is a challenge; tourism and higher education less so.

Iron ore from Australia is unloaded at Rizhao Port, China: finding alternative suppliers is a challenge.   © Reuters

The tertiary education sector is watching this trade spat unfold with anxiety: having likely lost billions in revenue through COVID-19, the prospect of Chinese students not returning to Australia may deal some institutions a fatal blow.

As much as Beijing would prefer that Canberra did not release public statements on the situation in Xinjiang, where more than a million people are detained in "re-education" camps, or the prolonged detention of Australian citizen Yang Hengjun on charges of espionage, its complaints have not appeared to shift Australia's position.

Australia has tried to separate the recent economic issues from its call for an investigation into COVID-19. "An investigation around the handling of COVID-19 has no relationship whatsoever to Australian exports of beef or barley," said Australia's Trade Minister, Simon Birmingham.

China is Australia's largest trading partner by a significant margin. Previous chills in the bilateral relationship have not prevented the dramatic expansion of two-way trade: 21% year-on-year growth in 2018-19, for example.

But even before Australia's calls for a COVID-19 investigation, public opinion in Australia toward China had been on a downward trajectory: only 32% trust China to "act responsibly in the world," a 20 percentage point decline from 2018, and three-quarters wanted Australia to be less economically dependent on China.

In recent months, Beijing has sought to focus on its successes in virus management and its so-called mask diplomacy, but Australians remain unconvinced, perhaps thinking more about China's early mismanagement and cover-up of the crisis.

In a poll released last week, which I directed, more than two-thirds of Australians said that China's handling made them "less favorable toward China's system of government." Less than a third of Australians said China had handled the coronavirus outbreak well. By contrast, 92% said Australia had handled COVID-19 well.

Some level of decoupling was already underway before COVID-19, for example Australia's decision to exclude Huawei Technologies from its fifth-generation, or 5G, wireless network. More decoupling in particular industries may come in limited areas as Australia considers sovereign manufacturing in critical areas.

But as much as Australians want to reduce economic interdependence with China, the global economic downturn limits both the will and ability to drive such a difficult policy shift. With China edging back toward normal life, and still the globe's largest consumer market, few political leaders and consumers will be in a position to consciously avoid China's market.

Despite recent animosity, the pathway to recovery suggests that Australia and China's economic interdependence may only grow in the coming period -- even though their citizens will not like it.

Today, Australia and China are two of the few countries in the world that are reopening their economies having got the COVID-19 pandemic under control. For the anxious tertiary education sector, Chinese students looking for English-language education post-COVID have few options outside of Australia and New Zealand, as the U.S. and U.K. struggle with the virus.

China's threats and thinly veiled economic coercion will accelerate the souring of Australian views toward China. But disputes in the past have not dampened demand, nor convinced the Australian government to take a softer line on human rights or national security issues.

The two countries are inevitably major elements of each other's economic recovery. Politics is unlikely to change that.

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