Index > Briefing
Wednesday, September 22, 2021
The Evolution of Australia-China Relations and the Formation of a New Cold War Order

The deterioration of bilateral relations between China and Australia has become a reality. In retrospect, Australia, like Canada, was once regarded as a moderate Western country with relatively smaller population and vast territory. Australia and Canada are far away from China, but both had close economic ties with China, and their attitudes toward China were quite different from those of other Western powers. Today, things have dramatically changed as the two countries are going toe-to-toe with China in the geopolitical game.

Over the past year or so, Australia has emerged as the strongest supporter of the Quadrilateral Security Dialogue (QUAD) framework. Compared with Japan's stuttering defense policy reform and India's wavering between America and Russia, Australia is rapidly rearming itself. Australia announced in January 2021 that it will significantly increase its naval expenditure, focusing on developing its long-range strike and maritime combat capabilities. In March this year, Australia announced that it would jointly develop medium- and long-range missiles with the United States. On September 15, Australia even formed AUKUS, a new three-nation alliance with the United States and the United Kingdom, and began to build nuclear submarine forces with the help of the two. All things considered, Australia seems serious when it comes to standing up to China.

Why has the seemingly "peaceful" Australia-China relations evolved into the current impasse? What policies and measures are worth reflecting on during the deterioration of the relations?

Researchers at ANBOUND believe the changes in Australia-China relations involve a complex "Cold War Order". It should be emphasized that the "Cold War Order" was not formed through negotiations, but by continuous and serial conflicts and competitions. This has happened in the past, so will it happen again in the future. We would like to point out that the geopolitical game in today's world has not reached the level of the Cold War, but the changes and formation of the "Cold War Order" do exist. From the perspective of the formation of the "Cold War Order", it is not difficult to find the existing problems and "rules" in the changes of Australia-China relations.

The nature of the changes in Australia-China relations is actually not complicated. At the beginning of the conflict, China's logic was, "if Australia wants to earn our money, it should follow what we want”. Behind this logic lies Australia's close economic and trade relationship with China. Some policy analysts in China are blind believers in the Australian economy's dependence on Chinese imports. Since 2010, China has remained Australia's largest trading partner, export destination, and source of imports. According to statistics, Australia's exports to China accounted for 33.1%, 34.1%, 38.2%, and 39% of its total exports from 2017 to 2020. In recent years, Australia's export dependence has been as high as 40%, leading some people in China to believe that Australia's export dependence on the Chinese market is the bargaining chip of China.

However, this view is obviously too optimistic and ignores the high dependence of China's economic structure and industrial structure on Australian resources. In the case of Australian iron ore, which accounts for 60% of China's domestic supply, China still buys more than 80% of Australia's iron ore as it struggles to find a supply chain to replace its imports, even as bilateral relations hit rock bottom. In 2020, the bilateral iron ore trade between China and Australia is estimated to be as high as AUD 80 billion, or about USD 58 billion. Can China wean itself off iron ore imports from Australia? The truth is, this will be a highly unlikely outcome. China imports a lot of iron ore from Australia, which is due to the quality and cost of iron ore. It can be assumed that, at least in the short term, Australian iron ore is irreplaceable for China. In 2020, the total global crude steel production was 1.878 billion tons, China's crude steel production was 1.065 billion tons, accounting for 56.8%. To some extent, China's steel industry, as well as the production of rail tracks, cars, aircraft carriers, tanks, and so on, could be seriously affected if iron ore imports from Australia are restricted.

Since the deterioration of Australia-China relations, China has repeatedly countered Australia's geopolitical provocations against it with trade sanctions. Unfortunately for China, the sanctions have had limited effect. The Australian goods on which China has imposed bans and restrictions include barley, wine, beef, cotton, and coal, according to tracking by ANBOUND's researchers. In 2019, these targeted exports were collectively worth about USD 25 billion, or 1.3% of Australia's GDP, according to the Australia-based Lowy Institute. The Chinese restrictions were not as damaging as feared because Australia limited the damage by diverting many of its exports to other countries. Roland Rajah, lead economist at the Lowy Institute, estimated that affected Australian exports to China, excluding coal, will remain steady for most of 2020, with trade amounting to just over USD 9 billion. As restrictions escalated at the end of 2020, exports eventually fell to about half that amount. After the restrictions were imposed, these goods found alternative export markets and their trade increased by about USD 4.2 billion on an annualized basis, offsetting most of the losses due to China’s restrictions. By January 2021, Australia's coal exports to the rest of the world were USD 9.5 billion higher on an annualized basis than they were before the ban. In addition, Australian coal has been gaining market share in India.

It can be seen that in the "trade war" triggered by geopolitical friction between Australia and China, the iron ore export, which has the greatest impact on both sides, is basically unaffected; China has imposed trade restrictions on a number of Australian goods, and Australia has found alternative export markets. In this trade war of sanctions and counter-sanctions, the Australian economy has not suffered any real damage and Australia has basically won the game.

Objectively, this situation should have something to do with China being unfamiliar with geopolitical theory. Not knowing the social classification model and the different social and economic nature determines the different results caused by "money". In addition, China’s domestic policy departments seem to be unaware that ANBOUND's argument that excess capital will lead to "upstream industry having a bigger say". All these theories can be used to predict the outcome of the trade war.

The outcome of the geopolitical game between Australia and China, trade sanctions and counter-sanctions, may not be expected by many people, and probably not by Australia. Because of this, the unexpected outcome has led to a complete shift in Australia's attitude from negotiating to standing up and confronting the rise of China. This is followed by Australia actively engaging in confronting China on a series of issues surrounding Indo-Pacific, Western Pacific, and the South China Sea.

From the deterioration of Australia-China relations, we can observe a key to the formation of the "Cold War Order". The "Cold War Order" was formed by continuous and series of conflicts and competitions, rather than through negotiations. Therefore, China will definitely face such a series of competitions and confrontations in the future, and the geopolitical game between Australia and China is just the beginning.

Final analysis conclusion:

Australia-China relationship has deteriorated to its lowest point in history. The geopolitical and geo-economic games between the two countries have formed a series of conflicts and competitions, and also promoted the formation of the "Cold War Order". In the future, China will face many kinds of competition, and the geopolitical game between China and Australia is just the beginning.