Decoupling from China ‘impossible’, classified Australian studies find

Australian authorities conducted three internal studies in the past eight years to determine whether the commodity-exporting nation could completely diversify supply chains from China – but all said the task was impossible, according to two sources with knowledge of the matter.

The unanimous and non-partisan judgment helped to justify Canberra’s renewed trade engagement with Beijing late last year despite obstacles such as Aukus, a security pact between Australia, the United Kingdom and the United States.

Canberra’s Department of Foreign Affairs and Trade (DFAT) and its treasury department jointly administered two studies, one in 2015 and another in 2020, both of which concluded “no other markets could replace China as a market for Australian commodity exports”, one source said. Both spoke on the condition of anonymity due to the sensitive nature of the topic.

“DFAT and treasury studies have made it clear that Australia cannot successfully diversify trade away from China,” the person said. “Diversification to Southeast Asia is really China plus.”

The first study was ordered by prime minister Tony Abbott, as his cabinet decided to act on a US warning in 2012 that growing economic and trade dependence would make Australia vulnerable to Chinese pressure.

“Abbott was always suspicious of the motives of Communist China,” the source said.

“He is famous for describing the Australian relationship with China as based on ‘fear and greed’.”

China is a major buyer of Australian iron ore, liquefied natural gas and agricultural products. Bilateral trade totalled US$152.9 billion last year and is widely seen as a bedrock in relations.

A breakdown appeared imminent in 2020, when the Scott Morrison administration called for an international investigation into the origins of Covid-19. After China responded with official and unofficial trade sanctions, the concept of diversification started to gain more attention.

Former treasurer Josh Frydenberg “vetoed” the release of a public version of either report because “it did not fit in with the China narrative of the Morrison government”, the source said.

“However, the reports are well known in official circles in Australia.”

The Anthony Albanese administration, which took office last year and has made a conscious effort to improve relations with China, has filed a report that comes to the same conclusions as the studies completed under Abbott and Morrison.

Another source added that at high levels of the government in Canberra, there was an understanding that it was not feasible to move away from China entirely.

It was common for the government to run internal studies “for practical and less practical [political] reasons”, the source added.

All three studies are classified, and the Post was not able to obtain copies. Neither DFAT nor the Australian Treasury replied to requests for comment.

“Telling these Australian exporters to ‘diversify’ is both silly and insulting,” said James Laurenceson, director of the University of Technology Sydney’s Australia-China Relations Institute.

Institute data showed that among the three major Australian export goods – lithium, iron ore and lobster – China’s imports accounted for a respective 84, 69 and 80 per cent of the world total.

Laurenceson said that in areas where exporters were selling into competitive global markets, like for coal or barley, diversification was “borderline irrelevant.”

“This is because if China closes its market [as it did in 2020], Australian exporters can very easily and very quickly find alternatives,” he added.

“They don’t need to ‘diversify’ because global markets will simply redirect their output.”

David Olsson, national president of the Australia China Business Council, said the recently released Southeast Asia Economic Strategy 2040 highlighted the massive potential of markets in the region, but would take time to fully be realised.

“Accessing the China market has taken decades for many exporters, building relationships, networks and understanding the laws and culture,” he said.

“Australian business is a long way from that level of engagement in Asia.”