Australia’s growth may ‘never return’ to its pre-virus path after trade trouble with China, says economist

Australia’s economy has been badly hit by escalating trade tensions with China — and it’s possible growth might “never return” to its pre-virus levels even when the pandemic is over, 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, the firm said.

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

Gross domestic product (GDP) in Australia could contract even more if Beijing continues to pile tariffs on more Australian imports, said its senior economist Marcel Thieliant in a note last week.

Goods and services that are already “in the firing line” are worth almost a quarter of Australia’s exports to China — forming 1.8% of its economic output, the research firm said.

But it may not end there.

“That figure could rise to around 2.8% of GDP if China targeted other products for which it isn’t hugely dependent on Australian imports,” Thieliant said.

Bilateral relations between Canberra and Beijing soured earlier this year after Australia supported a growing call for an international inquiry into China’s handling of the coronavirus pandemic.

More restrictions by Beijing could come, including exports of gold, alumina – a type of material for industrial usage – and a “vast range of smaller items,” the report said.

“While Australia should be able to divert some shipments to other countries, the escalating trade war is another reason why Australia’s economy will never return to its pre-virus path even once the pandemic has been brought under control,” Thieliant said.

Overall, the country’s gross domestic product could fall short of its pre-virus trajectory by about 1.5 percentage points at the end of 2022 – and additional trade restrictions by China could widen that shortfall further, said Capital Economics.

The pain could be lessened, however, as “it’s possible that Australia will find other destinations for its exports,” said the economist.

Australia is the world’s largest producer of iron ore, another commodity that has been under the spotlight as Australia-China tensions rose.

But there’s one bright spot for Australia: Iron ore exports would likely continue to be spared, given that half of China’s needs are being met by Australia.

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

Analysts say the lack of alternatives available could be why iron ore has been spared from the tariff fight so far.

Iron ore prices recently spiked as demand from China rose, and have been further stoked by dwindling supply and disruptions caused by storms hitting Australia.

“We still think that iron ore exports will remain spared … It would not be possible for China to source all of its current needs without Australia,” Thieliant wrote.