22 Jun

Seeking New Economic Ties: Australia, China and the UK in a post-COVID World

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Written by Karen Brittain and Sabrina Berardinelli

As Australia looks to begin negotiations for a Free Trade Agreement with the UK this month, many are wondering how COVID-19 has impacted our global trade relations.

Earlier this year, the Australian British Chamber of Commerce had planned to host an event in Perth, around the trade agreements of Australia, UK and China in a post–Brexit world. Just a few days before the event, COVID-19 hit our shores and everything changed.

This week, we spoke to some of our expert panellists from the postponed event to provide an update on their views on Australia’s recovery and of our tri-lateral relationship with China and the UK in this ever changing global environment.

Australia’s recovery

With Australia now officially entering its first recession in 29 years, the most pressing issue around our future trade relationships is how Australia and our trade partners will recover from the catastrophic impacts of COVID-19. Paul Bloxham, HSBC’s Chief Economist of Australia, New Zealand and Global Commodities, provided his thoughts on Australia’s biggest economic challenges ahead.

“In the short run, a key challenge will be encouraging a pick-up in consumer spending and broader economic activity, while still maintaining public safety and preventing a second wave of COVID-19” he said.

“Not long after this, another key challenge will be withdrawing the massive amount of fiscal stimulus that has been delivered, including the government’s wage subsidy programme, while still seeing economic growth continue”.

With the post-COVID-19 economy likely to look different to the pre-COVID-19 economy in a number of fundamental ways, some businesses will not survive and some households will struggle as public support is withdrawn. This will present economic and political challenges.

“With this in mind, we see the current crisis as a significant opportunity to deliver a comprehensive economic reform agenda to support the recovery as well as improve the competitiveness of the economy for the 2020s” he explained.

Bloxham believes that there are three key risks to Australia’s economic recovery. Firstly, there is the risk of a second wave of the COVID-19 virus, which could drive a re-instatement of containment measures or a slower paced removal of ‘social distancing measures’.

Secondly, COVID-19 containment policies could have a more lasting damaging effect on economic activity than expected.

“In particular, it could be that the closing of the borders, and its negative impact on international tourism, education exports and migration has a more persistent negative effect on the economy than expected. One channel through which this would happen is if weakening housing demand, due to stalled migration, sees a sharp fall in housing prices” Bloxham explained.

Thirdly, the disruption to activity from the containment measures could have a more lasting effect on other areas of the economy – such as retail and office property prices – as fewer people choose to shop in bricks-and-mortar establishments and more employees work from home.

“In Australia’s history property market corrections have tended to exacerbate economic downturns, which is a key risk this time too”.

So how does all this play out when it comes to our relationships with China and the UK?

Australia and China

China and Australia have held a strong economic relationship that has developed over time. The two-way trade between both states was worth less than $100 million in 1972, and is now worth more than $155 billion. The booming trade relationship and strategic economic partnership was consolidated in 2014 when the Liberal government secured the China-Australia Free Trade Agreement (ChAFTA).

Today, Australia’s largest trade partner in terms of both imports and exports is China, with China heavily reliant on exports of raw materials and energy supplies from Australia.

However it’s not all pretty. The rise of COVID-19 has caused education, Australia’s fourth-largest export to China, to drop in student numbers and bare a vulnerability like never before. In addition, current trade tensions between the states, due to Australia’s push for a global inquiry into COVID-19, has perceivably inflicted damage to Australian exports including beef and barley. These tensions over recent weeks have seen growing calls for Australia to diversify exports.

So to what extent is Australia’s recovery dependent upon the economic performance of our trading partners?

“It is a great advantage that Australia’s major trading partners are in Asia and that Asia’s economies are recovering from the COVID-19 crisis more quickly than the Western economies” Bloxham said.

“In particular, China’s economy is picking up pace, led by a recovery in manufacturing production, which is now rising year-on-year.As China now faces weaker demand for its exports, we also expect more policy support for domestic demand, including tax reform and a focus on infrastructure investment”.

Again, for Australia this is a positive story, as Australia’s exports to China are largely used to meet China’s domestic demand rather than being used as inputs in the manufactured exports supply chain.

“Australia’s export basket is highly driven by China’s construction activity, which we expect to pick-up through 2020” Bloxham said.

Tony Chong, Managing Partner of Squire Patton Boggs Perth office and the Senior Vice President of the WA Chinese Chamber of Commerce gave some perspective on China’s play.

Although it appears news on China’s current economic activity are subdued, we expect China to continue to improve trade and bounce back from COVID-19.  It is interesting that Beijing has dropped its growth target (which has been a feature of its economic planning since 1990).  This is consistent with its shift to a more sustainable economic model” he said.

The growth target announcement, made by Premier Li Keqiang in a speech to the annual National People’s Congress in late May, came as the world's second largest economy shrank by 6.8% in the first quarter from a year ago, as lockdowns took effect.

 “China is not immune to a global recession.  We are seeing a trend towards closer trading relationships between China and Europe and the UK”. 

Mr Chong alluded to the Australian businesses that are looking at supply chains and opportunities outside China and more into ASEAN as a challenge.  “There are currently head winds in our relationship. We hope that over the course of the medium to longer term, the trading relationship between China and Australia will return to more favourable settings”.

Mr Chong’s optimism also expanded to new sectors. “We are also seeing strong interest from Chinese companies for technology transfers and in the health and food sectors, sectors which both the UK and Australia have strengths in and should be able to seize the advantage”.

Australia and the UK

Australia’s first engagement with the global trading system was a simple bilateral exchange of primary commodities in return for British manufactured imported goods. In the nineteenth century, three-quarters of Australian trade was with the UK, and by the 20th century, the UK continued to account for half of all Australian trade. Currently, Australia’s seventh-largest trading partner is the UK, with service trades and two-way goods valued at over $30 billion in 2018-19. Australia’s current main exports to the UK are gold, alcohol, lead, pearls and gems; whereas, the main imports are passenger motor vehicles and medicaments.

Australia is currently committed to pursuing an ambitious and comprehensive Free Trade Agreement with the UK. Post-Brexit, Australia is seen as an important key trading partner by the UK particularly in the agricultural sector.

The ability of Australian and UK organisations to reciprocally invest and operate with one another, will also enable the development of the key industries of the future – such as advanced manufacturing and AI or 3D technology. The removal of tariffs between the two countries will also be a key aspect of the trade discussions going forward.

One of the biggest cultural and economic factors of the UK-Australia relationship however, is the free flow of people.  Given the monumental impacts of COVID-19 on migration, Professor Shamit Saggar, Director of the Public Policy Institute at the University of Western Australia had his own views on how Australia will look.

“Let’s remember that Australia is a very significant player in the skilled international migration game. In excess of 200,000 such migrants have come to the country each year in recent times but the COVID-19 crisis will pare that back to barely 40,000 in 2020. Migration numbers are also closely connected to the university and property sectors: work-related opportunities attract lucrative overseas students and expanded housing demand is driven by population growth.” he explained.

Now more than ever, Australia is realising the benefits of a strong migration policy. Professor Saggar believes that the idea of a ‘Big Australia’ - first coined by Kevin Rudd who wanted population growth to reach 36 million in 2050 - will become contentious as unemployment is expected to rise steeply. But we should not over-react for three reasons.

“First, both of these sectors will rely on migration to come back strong. Second, migrants the world over end up having a complementary impact on employment: they help create new jobs in areas that were under-developed” he said.

Finally, innovation in technology, human services and lifestyle fields are heavily dependent on new Aussies who are different and not ‘just like us’ – their outlook, background and drive can sustain the next chapter of economic development in Australia. But the price of this will be to reduce unskilled migration pathways and to update priority areas to ensure that highly trained migrants continue to contribute to sunrise sectors”.

Once people do migrate here, many businesses and individuals such as The Australian British Chamber of Commerce CEO, David McCredie, are advocating that one of the greatest benefits could be also be achieved through mutual recognition in standards and professional qualifications between the UK and Australia. In some instances, these are government mandated issues, in others they are set by industry bodies.

So how is Australia going to showcase its appeal to the UK?

Western Australia has the strongest cultural ties back to the UK out of any other State in Australia (214,000 UK born residents in 2016 Census). With this unique position in mind, Professor Saggar described how Western Australia will play a part in facilitating and nurturing the bi-lateral trade relationship between Australia and the UK.

“WA is of course the natural gateway for the UK into Australia. Besides its British disaspora population, the trading relationship can go further than primary industries and agriculture. Tourism is a top contender, especially as WA can promote itself with relative ease as a COVID-19 bright spot. The bigger challenge will be for British firms to use WA’s existing familiarity with east and south-east Asian markets to ramp up its own trading relationships. We should expect to see both countries pool resources and know-how to penetrate those markets”.

The Australian British Chamber plan to resume this Perth based event with our panel once restrictions are lifted. Thanks to HSBC Bank Australia and Squire Patton Boggs for sponsoring the event.

The Australian British Chamber of Commerce welcomes submissions from Members on their priorities in the Australia-UK Free Trade Agreement. Please forward your ideas and submission to policy@britishchamber.com

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