Will Australia use iron ore as a lever to fix trade with China?

So far, Australia has responded like a deer in the headlights to the growing spate of trade attacks from China.

While our biggest trading partner freezes us out of discussions and encourages official and unofficial sledging of our country while imposing heavy tariffs or slowdowns on a range of products from barley and wine to coal and crayfish, our reaction has been one of stunned surprise.

As the attacks have grown in volume and ferocity, Prime Minister Scott Morrison has even made the mistake of publicly expressing outrage and calling for an apology for attacks on our troops through a mocked-up photograph.

That went absolutely nowhere good – just like his earlier call for an investigation into the origins of the COVID-19 pandemic which drew a savage and enduring Chinese response.

Instead of the post coming down and an apology arriving, the attacks from China only grew more savage and the post received much more airplay than if it had been ignored.

That is not to say the Prime Minister is wrong to respond to Chinese actions – just that he might like to try using lower ministers to launch the attacks and save the Prime Ministerial rhetoric for when it is really needed.

Can Australia strike back – and should it?

The really big question is whether and how Australia should strike back at China and, if so, exactly how.

While most of the power seems to lie in China’s hands, which is why its trade bullying so far has been stunningly successful, the other area in which Australia really holds the upper hand is with iron ore.

China relies heavily on supplies of high-quality iron ore from Australia to feed its steel mills and build the infrastructure that is integral to its economic growth.

Australia’s Pilbara efficient and low-cost mines are the logical supplier of that iron ore, with the development of new mines and transport in countries such as Guinea in Africa realistically around five to ten years away.

Alternative suppliers such as Brazil are unlikely to be able to ramp up mining too much, due to supply restrictions from the pandemic and dam collapses.

During that window of about a decade, Australia could arguably enjoy much higher iron ore prices and put some pressure on China by restricting iron ore supplies and tightening the seaborne market.

Many ways to restrict iron ore output and raise prices

There are many mechanisms for achieving such a result, not all of them subtle, but the best would probably be changes that did not focus specifically on China.

An export tariff or hefty COVID-19 caused port charge on ore would be one way of achieving higher prices but it would not help to boost Australia’s consistent and laudable calls for free and unprotected global trade.

Another option would be to have a ceiling on iron ore exports, set at a previous annual level, with miners able to bid for export permits.

That would have the desirable effect of ramping up iron ore prices and would force China to pay dearly to get the supplies it needed, although it runs the risk of alienating not just China but other buyers of iron ore such as Japan and South Korea who would be faced with tighter supplies and higher prices.

Protection always causes unforeseen problems and trade distortions

That is always the problem with trade protection – it is a blunderbuss and can have a lot of unintended consequences, including blowing up in the faces of those doing the protection.

It is not that long ago that some of outgoing US President Donald Trump’s measures to impose tariffs on aluminium and steel inadvertently hit Australian exports, before a deal was done to exempt us.

Likewise, imposing tariffs on Chinese imports into Australia is most likely to harm Australian consumers rather than Chinese exporters – particularly given our small size.

However, restricting exports would undoubtedly raise the iron ore price and reduce the ability of China to ramp up steel production with a wave of the hand, which would damage its ability to stimulate the economy by building infrastructure.

It would also raise the level of urgency within China to look for alternative iron ore supplies, just as China’s export restrictions on rare earth minerals caused a supply response with mines developed in Australia and other countries.

Using iron ore as a weapon is hugely risky

Whether Australia should pull the iron ore lever is another question.

There are massive risks with playing the only ace in your hand against your biggest trading partner, the most obvious being what remains of Australia’s exports to China.

Retaliation could be multi-faceted and savage, something that would need to be considered the next time Australian Navy ships steam through the South China Sea or an Australian academic or business figure arrives in China.

By every relevant measure, Australia is an absolute minnow compared with China and despite the current troubled relationship between the countries, there remains considerable links between them which are intact and still functioning normally.

China is not monolithic

It is also worth remembering that what the Chinese leadership or their slightly distanced spokespeople say and what the Chinese people think are not necessarily the same thing, with every chance that Australian baby food and wine will remain in demand in China even if supplying that demand becomes less economic from this end.

All of this needs to be carefully considered by the Federal Government well before it “goes nuclear’’ and uses iron ore as a bargaining chip.

As frustrating and opaque as the Chinese actions must seem from the Canberra perspective, there is at least some justification for them from the Chinese point of view following restrictions on Huawei, action on foreign influence in the Australian political process and a slew of dumping complaints that Australia has raised against China over the years.

There is also the perception that Australia acts as a deputy sheriff for the US – which is why China can afford to take actions against Australia that it would be much less likely to take against the US.

Being diplomatic is unsatisfying but may be successful

Trade diplomacy is slow and difficult – particularly when Chinese officials won’t pick up the phone from Australia – but perhaps it is the only other choice given the strategic importance of China in the world and our extensive trading links.

The hope would be that eventually, China’s attention will focus elsewhere and the more vitriolic attacks and significant trade reversals will gradually settle down and moderate.

Reducing the temperature of the trade war seems a much more preferable option than forming global groups to lobby against China or even from grabbing the iron ore lever and pulling back on it hard.

Trade is always unfair at some level and relies on a bit of give and take in both directions to succeed.

As a small exporting nation, Australia is best suited by an open global trading situation with a minimum of protection measures so we are more likely to be harmed rather than helped by resorting to the same protectionist measures that we have long complained about other countries using.