Australia walks a tight rope on trade with China as security concerns mount

Australia's relationship with China remains fractious even as the country seeks to mend ties with its largest trading partner.

The previous Australian government's support for an international inquiry into China's handling of the coronavirus had invited crippling export curbs from Beijing — something from which Australia is yet to recover from.

While trade compulsions have forced the Asia-Pacific nation to reach out to China, security concerns over Beijing's South China Sea claims have prevented a reset in ties.

"Canberra would not use the word 'reset,'" said Darren Lim, a senior lecturer in international relations at the Australian National University in Canberra, referring to relations with China.

"Since upon taking office in May 2022, the Labor government stressed that Australia's interests were unchanged, which means there are still deep conflicts of interest between the two countries."

China, however, realizes the need to bring Australia into its fold.

"China views Australia as the touchstone American ally of the Indo-Pacific. Whichever direction Australia turns in the U.S.-China competition, other less ironclad U.S. partners and friends often follow," said Wen-Ti Sung, a non-resident fellow at American think tank Atlantic Council's Global China Hub.

Part of Beijing's calculus is rooted in Australia economic dependence on China.

"We were exporting upwards of $1.2 billion worth of wine each year to China at its peak," Lee McLean, chief executive of trade organization Australian Grape & Wine, told CNBC late last month.

"Today's we're exporting just over $8 million worth of wine, so it's something like a 98% or 99% reduction in that value over a couple of years, which is an enormous shock to our sector and it's been pretty difficult to deal with for grape growers and wine makers in many parts of the country," McLean said.

Wine was among the items sanctioned by China in 2020-21 after the Covid-19 diplomatic standoff. It is among the few commodities still subjected to tariffs — at least for a few more months.

Just before Anthony Albanese visited China earlier this month, marking the first trip by an Australian Prime Minister in seven years, he announced that China had agreed to start an "expedited review" of its duties on Australian wine which is expected to be completed in five months.

"There's no single market or collection of markets that was able to replace what we've lost in China. We have been in some instances able to diversify and find opportunities elsewhere, but in reality, that has been a slow and challenging process for many businesses," McLean said.

According to the Australian government, China is its largest trading partner, accounting for nearly a third of the country's total trade with the world. Two-way trade with China in 2020-21 stood at 267 billion Australian dollars.

Just weeks after Albanese's China visit, new strains are already beginning to emerge between the two countries.

Beijing denied last week Canberra's claims that a Chinese destroyer injured one of Australia's naval divers in an "unprofessional" move in Japan's Exclusive Economic Zone on Nov. 14.

"This was dangerous, it was unsafe ," Albanese told Sky News Australia in an interview on Nov. 20. "We've made it clear that we disagree with what occurred, that we have the strongest possible objection, and that this sort of event should not occur."

The incident is just one of several recent cases where China's navy and air force have been aggressively staking Beijing's claim over large swathes of the South China Sea including engaging in hostile maneuvers in international waters and air space.

"The event may also exacerbate security anxieties amid the backdrop of existing regional tensions. Australia is already closely watching potential flashpoints in the South China Sea, and in regard to Taiwan," Economist Intelligence Unit analysts said in a note.

In fact, China has stepped up its aggression since it rejected a 2016 ruling by the Permanent Court of Arbitration in The Hague that struck down its expansive territorial claims in the South China Sea as lacking legal basis in a case brought by the Philippines.

Shoring up its defense preparedness, Australia just concluded its first joint sea and air patrols with the Philippines in the area the Southeast Asian nation claims as its exclusive economic zone — just days after Philippines conducted a similar exercise with the U.S. which is treaty-bound to defend the Philippines from an attack.

Other than bilateral agreements and military commitments like the one with the Philippines, Australia is also a part of nine strategic alliances, ranging from the Five Eyes to Aukus and the Quad — all of which exclude China.

Under the terms of the Aukus security alliance with the United States and the United Kingdom, Australia will receive conventionally-armed, nuclear-powered submarines that will help its navy counter Chinese nuclear-powered vessels in the region.

With the U.S. striving to limit China's access to critical minerals and strategic technology — injecting another layer of political economic consideration for Canberra — Australia will likely have to negotiate a balance between its economic and security needs when it deals with Beijing.

Late on Thursday, even after all the skirmishes in the South China Sea of the past two weeks, the Chinese Commerce Ministry said it would proceed to review "the necessity" of tariffs on Australian wine.

"If Beijing can persuade Canberra to pivot back into China's embrace or at least to move towards equidistant posture between the US and China, it will set an example for other regional countries," Atlantic Council's Sung said. "For that reason Beijing is willing to go far in attempting to repair ties with Australia."