Opportunities for Australian Businesses in China in 2022

While the bilateral relationship is decidedly icy and many Australian exports to China declined in 2021, there are still opportunities for Australian businesses in China. China’s continued demand for iron ore drove Australian total exports to China to increase by 21 percent in 2021. Australian businesses have restructured their productions to reach the Chinese market through Hong Kong and to pivot to other Asia markets. Meanwhile, opportunities exist in other natural resources and tech and service sectors. 

China-Australia relations have been tumultuous in recent years, putting what was once a mutually beneficial economic relationship into question.

Amid diplomatic disputes, China has hit a range of Australian products, from wine to beef to coal, with a variety of official and unofficial trade barriers over the last two years.

Yet, while the bilateral relationship is decidedly icy, Australian exports to China are once again on the upswing. Despite political relations dropping to a low, Australian exports to China increased by 21 percent in 2021.

Within the context of ongoing political tensions but growing trade, where are the opportunities for Australian businesses in China in 2022?

What happened to China-Australia relations?

China-Australia relations entered a crisis when Australian Prime Minister Scott Morrison called for an international inquiry into the origins of COVID-19 in April 2020. The Chinese government responded by introducing an 80 percent tariff on Australian barley, before applying additional tariffs and restrictions to other products, including iron ore, coal, lobster, wine, and timber.

This dispute caused former Australian ambassador Geoff Raby to state that bilateral relations in 2020 had reached their lowest point since the two formed diplomatic ties in 1972. Relations continued to be tense in 2021, which saw Australia request the World Trade Organization investigate Chinese tariffs, among other incidents.

While China-Australia relations took a turn for the worse in 2020, the relationship had already begun to sour in the preceding years. In 2017, Australia passed foreign interference laws after a number of scandals involving alleged Chinese interference in Australian politics. In 2018, Australia banned the Chinese telecommunications companies Huawei and ZTE from participating in its 5G mobile infrastructure network.

What have been the impacts?

The effects of tariffs and other restrictions emanating from declining bilateral relations have been felt by some sectors more than others. At the macro level, impacts to Australia’s economy have been relatively small, as trade to China has continued to increase.

In 2021, Australia’s exports to China increased by 21 percent year-on-year to reach US$133 billion. This growth is partly attributable to China’s continued demand for iron ore, which reached record high prices.

Outside of growth in iron ore, however, many Australian exports to China declined in 2021. According to Oxford Economics, the worst-hit goods include timber, seafood, beverages, edible oils, coal, textiles, footwear, cereals, and sugar, which has led to significant challenges for many small and medium-sized enterprises.

Australian winemakers have been especially impacted, seeing their exports to China fall in value by 97 percent – or close to AUS $1 billion (US$719 million) – in 2021. The number of exporters shipping wine to China fell from 1,988 in 2020 to 208 in 2021. In October 2021, the World Trade Organization agreed to set up a panel to examine China’s duties on Australian wine, the results of which will likely be announced in the coming months.

Where are the opportunities for Australian businesses?

Natural resources

As the above trade data suggests, some of Australia’s largest exports to China have grown more lucrative despite trade tensions. This is because China is dependent on Australia to provide key products like iron ore, gas, and agricultural products, of which the latter two are essential to fuel the country’s industry and construction needs. Iron ore alone is worth about half of all Australian exports to China.

While businesses in these sectors may seek to expand in alternative markets to mitigate risk, their risk exposure is comparatively lower as long as China does not have adequate alternatives. However, once prices of iron ore and other commodities lower from historic highs, they will do less to mask the declines in exports of other Australian products hit by China’s trade actions.

Tech and services

While the Chinese government has put tariffs and trade restrictions on many Australian products, there is more latitude for Australian service exports and foreign direct investment. Accordingly, Australian businesses can continue to invest in many of China’s most dynamic sectors, such as healthcare, medical devices, green technology, biotech, agritech, and services.

For example, the conglomerate Ping An Insurance projects China’s healthcare market to grow from RMB 6 trillion in 2019 to RMB 16 trillion by 2030, due to an aging and increasingly affluent population. Meanwhile, agrifood funding in China increased by 66 percent to US$6 billion in 2020, showing the rapidly growing demand for food and agriculture technology innovation in the country.

While these industries have their own unique challenges and regulations, they represent future-oriented opportunities for foreign investors from Australia and other advanced economies.

Restructuring production

Depending on the nature and structure of their operations, some Australian businesses may be able to bypass trade actions by restructuring their production or export practices. For example, some Australian winemakers have begun bottling their wine abroad, such as in New Zealand or China itself, so that their wines are not deemed to be of Australian origin. Australian businesses that produce goods within China for the Chinese market will not be exposed to China’s trade actions.

Alternatively, some Australian exporters have managed to reach the Chinese market through Hong Kong, even though trade actions should still apply to any Australian-origin products entering mainland China. Some Australian winemakers, for example, exported their products to Hong Kong to sell to specialist sellers and wholesalers who in turn sell to China, explaining the 45 percent increase in Australian wine exports to Hong Kong in 2021. Similarly, exports of Australian rock lobsters to Hong Kong increased by over 2,000 percent after being banned in China, as Hong Kong acted as a go-between.

For the rest: pivot to emerging Asia

For sectors where doing business with China is not possible in the current political climate, some businesses have found success in pivoting to alternative markets. China’s trade actions have led many Australian businesses to explore other markets in Asia, including fast-growing markets in South and Southeast Asia that offer long-term potential.

According to Australian Treasurer Josh Frydenberg, Australia’s exports of targeted goods fell by AUS $5.4 billion (US$3.88 billion) during the first 12 months of trade actions, but exports of those same goods to the rest of the world increased by AUS $4.4 billion (US$3.16 billion). This data suggests that, while China’s trade actions have negatively impacted Australian exporters in a material way, many businesses have withstood these challenges by increasing their presence in other Asian markets.

For example, Australia’s coal exports to countries such as India, Japan, and South Korea have rapidly increased since China placed trade restrictions on the product. Ironically, China turned to Russia and Indonesia to source coal in place of Australia, creating opportunities for Australian coal in India, Japan, and South Korea, which lost some of their Russian and Indonesian suppliers to China. Similarly, Australian Barley increasingly went to Southeast Asia and Saudi Arabia, copper to Japan and Europe, and cotton to Bangladesh and Vietnam, according to Jeffrey Wilson, research director of the Perth USAsia Centre.

Some Australian companies hit by trade actions may find that there is no sufficient strategy to maintain their presence in China until the government lifts tariffs and other restrictions. Establishing a presence in emerging markets like India and Indonesia, though unlikely to immediately make up for lost opportunities in China, is a means to create long-term sustainability in Asia.

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