Australia-China economic relations: a lesson for the U.S., not a threat

China is rising in importance for Australia economically. What does this mean for security relations? Not what some people-including very influential, serious Australians-seem to think. There is nothing about China's economic rise that gives it effective leverage over Australian foreign and defense policy or that necessarily supplants American leadership in the Asia–Pacific over the long term.

Economic Benefits

The growth and extent of Sino–Australian economic ties is impressive. From 2001 to 2010, according to Chinese data, the PRC's overall trade volume increased a dramatic 5.8 times. Sino–Australian trade volume surged 9.8 times. The bulk of the gain came from Australian exports to China, which skyrocketed from $5.4 billion in 2001 to $60.9 billion in 2010. According to Australian data, the PRC is now Australia's largest trade partner by far, accounting for nearly one-fifth of goods trade. Australia runs a sizable trade surplus with China.

Iron ore is the core. China spent almost $80 billion on ore in 2010, and almost 40 percent of that came from Australia. Iron ore comprised about half of Australia's total exports to China.

Investment numbers are less well known but also impressive. China's cumulative foreign direct investment in Australia is unremarkable. However, when equity investment is included, recent years have seen heavy Chinese concentration on Australia. The Heritage Foundation's China Global Investment Tracker puts Australia as the top Chinese non-bond investment destination at $34 billion from 2005 to 2010. This is comparable to the total for Europe and considerably more than the U.S. received, despite Australia's far smaller population and comparatively small gross domestic product.

The most famous transaction is Chinalco's two-stage $14.3 billion investment in Rio Tinto, which involved but was not limited to iron ore. Chinese acquisitions of stakes in Australian coal have exceeded $5.5 billion since 2005. Other sectors have included natural gas and shipping.

Trade and investment enable Australia to share the wealth created by the PRC's rapid growth. Partly buoyed by Chinese demand-but also partly attributable to 25 years of Australian economic reform-Australia saw only one quarter of economic contraction during the financial crisis. It had no trough from which to recover. Growth in 2010 was a reasonable 2.7 percent, and unemployment was an enviable 5.1 percent. Using nominal exchange rates, Australia ranks as the world's sixth richest country. Correcting for purchasing power and excluding micro states, it ranks near the top 10 in average income.

Economic Risks

It is underappreciated that economic ties with China bring risks. The obvious one for Australia is commodity dependence. Iron and coal are by far the country's biggest exports, the top 10 goods exports are commodities, and only education and tourism crack the top 10 when services are included. Iron dominates trade with China, and coal is about equal in value to all services exports to the PRC.

Chinese demand for fossil fuels will continue to rise, and demand for metals is hardly going to collapse. Rapid export gains for Australia, though, cannot last and may fade relatively soon. The PRC's steel sector suffers from gross overcapacity and must contract, hitting iron and coal.Australia can supply China with a great deal of natural gas, but it faces considerable competition and has already lost a large gas deal with China.

It is possible that Chinese demand for consumer goods will soar over the next decade. However, Australia is in a poor position to take advantage of this. The economy is now heavily skewed toward resources, and even if capital and labor could shift to finished goods, transport costs give China's market edge to Japan and Korea.

Another possibility seems to get little attention in Australia: The PRC's seemingly unstoppable climb may end in a protracted stall. This is, of course, what happened to Australia's second largest trade partner, Japan.