On the surface, Joe Hockey’s analysis of the imposition by Chinese authorities of tariffs on coal imported from Australia as good old-fashioned protectionism seems straightforward.
That at least is what the Australian treasurer was emboldened to say at a closed door meeting of the International Monetary Fund in the US. His boss, Mr Abbott was even more vocal with his “coal is good for humanity” plea. He called the surprise measure a setback to the bilateral relationship, painting it as an unfortunate event to happen just as the two countries are looking to sign a much heralded Free Trade Agreement (FTA). The agreement is expected to be signed by the end of the year, when President Xi Jinping is due to visit Australia.
It does seem a strangely aggressive thing for China to do at a moment when it should be gearing up for diplomatic friendliness. Is this a sign of China finally turning nasty on an Australian government that has gone out of its way to speak up its preference for Japan over China, and whose prime minister has often seemed clumsy when dealing with his Chinese interlocutors?
Punishing the displeasers
This might be true. China has shown in the past it is not averse to punishing the unfavoured by turning off access pipes to its domestic economy. It seemed to cut rare metal exports when arguing with Japan a few years back, at a time when Japan was very dependent on these for many of its high-tech exports. With North Korea, it has sporadically stopped energy exports to whip the regime into line. But usually with its developed market partners it uses more sophisticated methods.
China is the first to call on protectionism when it sees it. Over the solar panels with the European Union last year, things escalated to the point where both threatened high tariffs before a compromise was reached, with Chinese negotiators angrily denouncing what they called aggressive unreasonable European behaviour in cutting off access to their market. With the US, it has tended to rely on the World Trade Organisation to make claims of protectionist behaviour.
China seems to regard market access as a sphere of diplomatic activity by which it can promote its national interests. But it is hardly alone in this. In an age where economic success is the global benchmark for sustainable political stability, governments will do anything to promote their trade advantages. And China’s greatest asset is its huge domestic market demand and the potential for growth there. It grants access to this at increasingly steep costs for outsiders. The choice for them is simple. Either engage or walk away. Most decide to engage – they have little choice.
But the coal issue also has a big domestic element. China’s growth is slowing. From double digits only two years ago, it is now down to 7.5%, with Chinese leaders making no secret of the fact they expect it to fall further. The rates posted before were unsustainable. With falling demand, China’s domestic mines and the many millions reliant on them are hurting, and the government has to do something to prop them up. The government enforcing price increases on one of their local industry’s largest foreign competitors assists in this.
On top of this, with cities clogged with filthy air and a pushy middle class starting to get fed up with being poisoned by their own environment, greening policies and pollution management compliance for enterprises in China is being more strictly enforced than ever before. The costs of production for them are rising, fast.
Part of the Chinese government’s aim therefore might also be to stop people using the biggest producer of emission and air borne pollution – fossil fuels, and in particular coal. Of China’s energy needs each year, 70% comes from coal. This addiction has to end one day.
Is this tariff imposition part of the move to induce this, raising prices and forcing enterprises to look at other sources of energy? In 2012 to 2013, of the new energy put onto China’s grid, 60% was from renewables. Things are moving in the right direction. Market interventions like rising costs for coal usage might push this to 70 or 80% in the next two years. And in this battle, every little helps.
The way out
It is likely the reason for the tariff impositions is all of the above. Chinese investors in the coal sector in Australia are being hit just the same as local ones, so it can’t be categorised as a purely protectionist measure. It might be a tactical move to soften Australia up before the final round of talks on the FTA. For Australia, though, they might take heed of the famous saying of Mao Zedong and use this seeming defeat as the basis for future victory.
Australia is complacently reliant on resource exports for its relationship with China. The tariff move makes it all the more important to do everything to shift to a more diverse, more service orientated relationship. That should be the vision encoded in the FTA if and when it is announced later this year.