Qld economy in big trouble if China follows through with trade threat

Australian investors appear remarkably optimistic about the prospects for patching up our relationship with China given that, as the Financial Review reported yesterday, ASX up 4.4pc in US election, QE week. I can understand why a new round of Quantitative Easing would be a positive for the market, but I’m surprised there’s not more concern about the huge potential cost of Chinese trade restrictions. Our PM Scott Morrison and Trade Minister Simon Birmingham are correct that the new restrictions being talked about are being denied by the Chinese administration. But they are being reported in one of the major state-aligned news outlets, China Daily, so it’s a legitimate threat. We will learn more over the remainder of 2020 as we find out whether orders for our coal, beef, wine, and other commodities fall further, and whether additional Australian goods are rejected at Chinese ports.

Queensland is obviously heavily exposed to trade restrictions from China (see the chart below and also check out Qld Treasury exports briefing, September 2020). Queensland’s annual goods exports to China of circa $25 billion amount to around 7% of our Gross State Product. Ongoing trade restrictions from China would cause major economic damage, especially in our regional economies such as Central Queensland and Mackay which are highly dependent on resources and agriculture. And, in the lead up to the 2020-21 Queensland Budget which Treasurer Dick will hand down on 1 December, I should note that Chinese trade restrictions would be a big blow to our budget via impacts on royalties and other revenues such as payroll tax and stamp duty which would be lower due to the economic shock. Sure, our exporters may be able to find alternative markets in which to sell, but that will take time, and they may have to heavily discount their products to find non-Chinese buyers.

Source: DFAT compilation of ABS data. Note: Thanks to Adept Economics Research Officer Ben Scott for this chart.  

As if 2020 hasn’t been bad enough with the COVID-shock and recession, trade restrictions from China could make it much worse. Ultimately, this will require a diplomatic solution, one which respects both our economic and broader national interests and values. I’m reasonably confident this can be resolved diplomatically, but there’s enough of a chance it won’t be to cause me and industry players anxiety. I’ll keep a close eye on developments and provide updates as we learn more over the coming weeks.

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