China shooting itself in the foot even as it attacks Australia

China Australia coal iron ore 2020 trade

There is a perception that in the trade wars, China is doing very well by attacking Australia industry by industry.

And there is certainly a lot of truth to that, given that by picking off export industries one after the other, China has been able to send some real shivers through many exporters that rely on the Chinese market.

However, it is not entirely true to say that China is getting away scot free from its trade aggression, with the country paying a fairly heavy direct economic cost for its actions, quite apart from the image it is propagating of itself as an unreliable, bullying and capricious trade partner.

After all, if China can do this to Australia – a country with which it has signed a free-trade agreement in 2015 – then what can it do to other countries?

Cost of coal going up for China

A good example of these costs is with the “unofficial’ ban on Australian coking and energy coal, which has seen more than 60 ships full of Australian coal swinging at anchor outside Chinese ports since October.

The ban has certainly had a swift effect, slashing the price of Australian coal to below the price of Chinese coal, which is much poorer quality.

China has been seeking alternative coal supplies, with Canada the main beneficiary but the disturbance in the market has had the effect of pushing Canadian coal prices up and increasing the cost of producing Chinese steel.

In the longer term, other coal customers will step up to take more Australian coal and you would expect the price to equalise more as traders try to grab Australian coal while it is cheap.

Coal changes send ripples through iron ore

Ripples from the coal trade changes are also felt in the iron ore market, with any move to lower quality coking coal resulting in a greater use of iron ore.

Certainly, the iron ore price has been going through the roof – so much so that the China Iron & Steel Association (CISA) has complained bitterly to BHP.

The rising iron ore price has been threatening the profitability of the Chinese steel plants which are on track to set a record for crude steel production this year.

Chinese angry about expensive iron ore

While the Chinese steel plants might be angry about iron ore prices, there is little doubt that their own country’s actions in causing uncertainty in world markets for bulk commodities has played a part in boosting prices.

In the longer term, the coal industry will have even bigger issues to cope with as more countries such as Japan, Korea and China commit to firm climate targets which will put real pressure on coal volumes.

While China might be feeling the pinch a little in its steel industry, the Chinese economy is still performing well and in November its trade surplus with the US hit an amazing US$75.4 billion (A$100 billion).

This is a salutary lesson for Australia not to follow the US example of outgoing President Trump who has now categorically lost the “short and easy to win” trade war he called on China.

The Trump strategy, which saw at least $US360 billion or so of tariffs slapped on China’s exports to the US, plus sanctions and bans on companies and individuals over national security or human rights issues, has been ineffective.

Despite China being dragged to reluctantly sign a trade deal with the US in January, there is little sign that it will meet its commitment to buy an extra US$200 billion of US agricultural commodities, energy and manufactured goods compared to 2017.

Consumers pay the price for tariffs

US consumers and businesses have paid a heavy price of around US$360 billion for the tariff barriers and apparently China is only meeting around a half of its commitments for purchases while still recording massive trade surpluses.

We now know that tariffs don’t work against China and that running an aggressive trade war against them is fraught with difficulties.

It would be ironic if when the boot is on the other foot and China is the trade aggressor against tiny Australia that its actions rebound on it in Trumpian proportions.

We haven’t seen that happen yet but perhaps the distortions in the coal and iron ore markets are the start of some unpredictable trade changes that could just rebound on China, even as they also cause Australia plenty of pain.

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