(Bloomberg) – Australia has spent heavily attracting throngs of Indian tourists to its shores, signed a post-Brexit free trade deal with Britain and discovered new markets in the Middle East during its 30-month trade dispute with China.
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However, aside from iron ore and other key commodities, exporters face significant problems. For a small and open economy like Australia, turning away from the rising global superpower is easier to imagine than feasible.
China’s inability to meet its massive iron ore needs outside of Western Australia’s Pilbara region means it’s still by far Australia’s largest trading partner, despite the diplomatic freeze.
But for other key industries, there was no easy substitute for Chinese consumers of quality lobster and wine, or their spend-savvy tourists and students, who have also been kept out by Covid-19 restrictions. While there are some signs that tensions are easing — new Prime Minister Anthony Albanese met with President Xi Jinping last week, the first tete-a-tete between country leaders since 2019 — Australian companies are not building an early easing of restrictions. Here’s how six key sectors — tourism, seafood, wine, education, barley and coal — have thrived at the heart of China’s trade reprisals.
Two years after China imposed tariffs of more than 200% on Australian wine, winemakers are still reeling from the messy split from its most lucrative export market, previously worth about A$1.2 billion ($802 million) a year.
Mitchell Taylor, who runs Taylors Wines in South Australia, said the size of the adjustment required should not be underestimated.
“While we found new small opportunities, there has never been anything that could replace a market of this size and scale, especially in the luxury space,” he said. Taylors Wine used to get about a fifth of its annual export earnings from China alone.
“With some of the kibble we get, we’ve probably recovered about half of it.”
Taylor considers destinations such as Singapore, South Korea and North America. While India may one day become a big market, that is likely at least a decade away due to access issues and tariffs, he said. Meanwhile, the UK – often seen as the main market for cheaper produce – has now overtaken China to become the top destination for upscale Australian wine.
“We’re getting our feet back on the ground now,” he said. “It’s not all doom and gloom, there are certainly those opportunities to build.”
Other luxury wine producers have taken a different approach to being frozen out of China. Treasury Wine Estates Ltd., best known for its Penfolds brand, began production in China in September – a move that allowed it to bypass restrictions on Australian-made tips.
While Taylor hopes ties will improve, betting solely on China is too risky a strategy in the long run, he said.
“I think we have to be very realistic and careful about China,” he said. “We need a lot of validation and we’d want to hear a lot of positives.”
The lack of well-funded Chinese visitors is still being felt acutely by the tourism industry, with the number down 92% in September compared to the same month in 2019 before the pandemic. Operators cannot afford to simply wait and see when China’s Covid-Zero guidelines are relaxed. To fill the gap, Tourism Australia is anticipating a revival from other countries, including India.
As part of its recent ‘Come and Say G’Day’ campaign, it hosted Indian cricketers ahead of the 20:20 World Cup in Australia.
The sports stars took a yacht to Rottnest Island, just off the coast of Perth, and posted their action-packed day on social media, from celebrating a birthday and a game of lawn ball to dealing with quokkas, a native marsupial the size of a human domestic cat. According to Tourism Australia, the posts delivered one billion impressions.
While India has great potential as a market – Australia’s Indian diaspora has grown by 40% in the last five years, opening up huge opportunities for visits from friends or relatives – it’s nowhere near as lucrative.
Before the pandemic, visitors from China spent an average of A$215 per night. According to figures from Australia & New Zealand Banking Group Ltd. only 84 AUD per night for Indians.
“In terms of spending or export earnings, the tourism sector needs almost twice as many visitors from India as from China to generate the same revenue,” said ANZ economist Madeline Dunk.
Australia’s international education system is also still struggling with the twin blows of tension and the consequences of border closures.
Enrollments from China, Australia’s largest source of international students, are still at less than 70% of their pre-pandemic levels, according to government data.
Some relief is offered by a more robust return of Indian and Nepali students, the next two leading countries. At the end of August, 110,000 Indian students were enrolled in Australia, down only about 15,000 from 2019.
However, a lasting change in student composition would be important for the overall economy, as Chinese students in Australia tend to spend more money on consumer goods than other nationalities.
The timing of China’s anti-dumping tariffs of over 80% on Australian barley in 2020 could not have been worse. The move came just weeks after many growers planted seeds in the ground, leaving farmers unable to optimize planting programs.
Australia found a new home for the grain by diverting much of its bumper crop to Saudi Arabia, which is vying with China for position as the world’s largest barley importer.
But the pivot hurt. Saudi Arabia typically uses most of the grain for animal feed, which means high-quality Australian malting barley, which previously fetched an attractive premium in China, was sold at a hefty discount.
Luckily there was a solution: plant something else. “Growers are already working on a rotation,” said Zach Whale, policy and advocacy general manager at GrainGrowers. “If it weren’t for these farm-level malt premiums, you would just be growing feed barley.”
Farmers are also now planting things like canola and wheat, both of which are in high demand after the Russian invasion of Ukraine.
The Australian fish industry, which exports almost half of its production, is also looking for new markets worldwide.
While China remains the largest single destination, Hong Kong has gained significant market share, according to Seafood Industry of Australia, while demand from the US, Vietnam and Taiwan has risen sharply.
“China is still our most important trading market. It’s a relationship where we know each other well,” said Veronica Papacosta, Managing Director of SIA. “We find really good buys in other markets, but it takes time.”
The trade association will bring about 20 suppliers to Boston for a major trade show for the first time, said Papacosta, who is also managing director of Sydney Fresh Seafood. Earlier this month it also partnered with the wine and dairy industry to showcase a range of premium products in Thailand, she added. Further events are planned from South Korea to Indonesia.
Unlike other industries, fossil fuel revenues are now booming.
Coal exports to China plummeted to about 20 million tons from nearly 100 million tons in fiscal 2019-20, a major blow to the sector in its second-biggest market. But as of July 2020, coal purchases by Japan, South Korea and India increased as exports destined for China were diverted to other markets. By the end of 2021, the economic boost sparked by the end of Covid-19 restrictions had boosted coal exports to new highs despite the ongoing embargo by China, according to government data.
The boom didn’t pick up until 2022, when fossil fuel demand fueled by the invasion of Ukraine put Australia’s coal industry on track for one of its most lucrative years on record. At the same time, China has reportedly considered lifting its restrictions on Australian coal to ensure it has enough supplies amid growing global demand for fossil fuels.
Experts now believe the biggest threat to Australia’s coal exports is not China’s ongoing ban, but the steady march towards renewable energy in some of the country’s biggest commodity markets.
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