While China was imposing punitive barriers against Australian exports, its own sales to Australia were rising rapidly, with growth led by motor vehicles, electric machinery and wind towers. 

China’s annual sales of manufactured goods (excluding refined petroleum) to Australia rose 39% to $106 billion in the three years from 2019-20 to 2022-23, according to trade tables compiled by the Department of Foreign Affairs. 

Australia’s annual imports of Chinese motor vehicles have soared from $415 million to $6.2 billion since 2019-20, while purchases of electric machinery are up 88% to $3.1 billion and steel structures, which include wind-towers, are up 71% to $2.3 billion. 

There has also been massive growth in imports of Chinese trucks and semi-trailers, forklifts, civil engineering equipment and electricity transformers.  Australia’s imports of Chinese whitegoods, clothing and sporting goods have all been rising at a rate of 10% or more a year. 

A surge of China’s exports of manufactured goods, as Chinese companies seek to compensate for the softness in their domestic economy, is raising hackles in the United States, Europe and in many emerging nations. 

The European Union is preparing to impose tariffs on Chinese electric vehicles, saying their manufacture is being subsidised, and it is also under pressure to launch a similar anti-subsidy investigation on behalf of wind turbine and solar power manufacturers. 

China has retaliated by launching an anti-subsidy investigation into its French brandy imports, while German car makers Mercedes-Benz and Volkswagen are trying to halt the European tariffs on electric vehicles, fearful of curbs on their sales in China. 

The Biden administration has retained tariffs on Chinese goods imposed under the former Trump administration and has flagged that a forthcoming review of its trade agreement with Mexico and Canada will seek to stop Chinese car manufacturers gaining entry to the US market through setting up factories based in Mexico.  

Brazil’s steelmakers are seeking tariffs on Chinese steel of between 9.6% and 25% after imports soared from US$700 million in 2020 to $2.7 billion last year. The Financial Times reports that Brazilian tariff investigations are also under way in chemicals and tyres. The Thai government has accused Chinese companies of avoiding anti-dumping duties, while Vietnam has launched investigations into the dumping of wind towers and steel products. A New York Times report noted that pushback against Chinese manufactured goods was also evident in India and Turkey.  

Analysis of newly released OECD data by IMD Business School’s Richard Baldwin shows China is now the unrivalled global manufacturing superpower.  While China accounts for 15% of global GDP, it provides an astonishing 35% of world manufacturing output.  That exceeds the combined output of the next nine largest manufacturers: the United States, Japan, Germany, India, South Korea, Italy, France, Taiwan and Mexico. 

China’s share of global manufactured exports is lower, reflecting its outsized share in its domestic market, but is likely higher than the 20% share shown in the latest OECD data, which runs only to 2020.  A paper by the US Council of Foreign Relations shows China’s trade surplus in manufactured goods is now equivalent to 1.7% of global GDP and has largely been won at the expense of the United States, whose global manufacturing deficit is now equivalent to 1.3% of the world economy. 

Excluding refined petroleum, China’s share of Australia’s manufactured imports is 33%, which is significantly greater than China’s global market share. 

Australia has low tariffs, but it is one of the most energetic users of anti-dumping measures, particularly against China, a matter that China has raised during negotiations to remove its anti-dumping duties from Australian wine and barley.  The Australian Anti-Dumping Commission lists seven Chinese products subject to anti-dumping action and a further nine that are under review. 

The commission late last year suspended anti-dumping duties from Chinese wind-towers not because of pressure to offer a quid-pro-quo to China but because there had been no Australian-made wind-towers since 2020, when the Victorian government stopped offering subsidies for local content. 

Manufacturing has a smaller presence in the Australian economy than in almost any other nation. The World Bank’s measure of manufacturing as a share of the economy ranks Australia 150th, behind Botswana, Cyprus and Azerbaijan, with output equivalent to 5.6% of the economy.  

While Australia has some individual highly competitive manufacturers, the sector overall has suffered over the past two decades as both capital and skilled labour have favoured the resources and services sectors. 

Total Australian manufacturing production has dropped 3.6% over the last 10 years and 5.3% over 20 years. The total value of the capital stock of Australia’s manufacturing industry has fallen by $20 billion over the past 10 years, with new investment failing to keep up with the depreciation and shutdown of existing plant. 

Australia’s appetite for manufactured goods has kept growing but has been satisfied by imports. The 39% growth in manufactured imports from China since 2019-20 is only slightly ahead of the growth in manufactured imports from other sources, which have risen 34%. 

There are few signs of Australian importers seeking to diversify their suppliers away from China during the years that China was flouting the WTO’s global trade rules with its discriminatory barriers against Australian goods. 

Mobile phones and telecommunication equipment, which are Australia’s biggest import category from China, are a possible exception. China’s sales in Australia have risen by only 4.7% to $9.9 billion since 2019-20, while imports from other suppliers have risen by 33.7% to $7.8 billion. The ban on Huawei’s participation in Australia’s 5G network and the difficulty Huawei and other Chinese mobile phone makers have had competing in the face of US technology-export controls may have had an impact. 

Refined petroleum, which has been excluded from the above analysis because of the volatility of imports, is another possible exception. Australia’s total purchases of refined petroleum have soared almost three-fold from $18.7 billion in 2019-20 to $49.0 billion in 2022-23, following the closure of domestic refineries and possibly also reflecting increased domestic storage requirements. 

Australia spent $3.1 billion on Chinese refined petroleum in 2019-20 but by 2021-22 imports had dropped to $850 million.  That may have been because of concern about the breakdown in Australia’s relations with China or simply reflected purchasing decisions.  Refined petroleum imports from China were back to $3 billion in 2022-23. 

The only other import sectors where China has lost market share over the last three years are textiles, where there is competition from such countries as Bangladesh. 

Across a wide variety of sectors, China still accounts for more than half Australia’s imports. It provides almost 80% of Australia’s light fittings and more than 70% of its electronic circuits, semi-trailers, shipping containers, steel and aluminium structures, furniture, mattresses, sporting goods and toys. 

China’s sales of semi-trailers and containers have more than doubled since 2019-20 to $1.8 billion. Imports of Chinese trucks are rising rapidly from a low base, increasing from $140 million to $930 million in the past three years.  

Australia’s imports of Chinese civil engineering equipment are also growing rapidly, rising from $600 million to $1.5 billion over the period that China was imposing bans on Australian exports. 

As well as wind-towers and solar panels, Chinese firms are gaining business across the electricity grid, with a 60% rise in electric power machinery and a 50% rise in cable and insulating materials.  Imports of mechanical handling equipment, which includes forklifts and conveyor belts, have increased 96% over three years to $1.6 billion in 2022-23. 

China’s export machine has shifted up a gear, with global sales close to a record levels in July and August as its manufacturers respond to the demand generated by Covid-19 stimulus programs in Europe and the United States.

With global trade volumes facing a steep fall and prices also depressed, China’s share of world exports, which reached 13.5% last year, is likely closer to a record 16% now, which would be almost double the share of the US.

China’s imports are down because its own economy is still feeling the effects of the pandemic, so its surpluses are rising. China’s efforts to stimulate its economy have focused on supplying business credit, rather than supporting the incomes of displaced workers, which has been the primary response among most rich countries.

Leading trade economist Brad Setser, with the US Council on Foreign Relations, says that with rising exports and falling imports, China appears headed for a current account surplus of US$400 billion by the first quarter of next year, which he predicts will become a source of global friction.

‘Of every dollar China received on its goods exports, it now is only spending around 75 cents on imported goods. And if you just look at manufactures, for every dollar China receives it spends only about 50 cents on imports. If you export over US$2 trillion of manufactures, that starts to matter.’

China’s exports to the US in August were 20% higher than a year earlier, while its imports were only 1.8% higher, despite US President Donald Trump’s vaunted trade deal. China’s imports from Australia in August were down by a massive 26%, partly because of lower iron ore volumes, but likely also reflecting the political tension.

It is precisely because of the friction that China’s export dependence was generating, particularly with the US, that the politburo earlier this year embraced a new economic strategy, with the cumbersome title of ‘dual circulation’, intended to increase the importance of the domestic market.

The new imperative, as spelled out by the politburo’s May meeting, is to ‘fully bring out the advantage of China’s super-large market scale and the potential of domestic demand to establish a new development pattern featuring domestic and international dual circulations that complement each other.’

Translated from its jargon, the idea is that the focus of China’s growth should shift from international integration (the first circulation) to domestic self-reliance (second circulation).

Details of the strategy will not be unveiled until the release of the 14th five-year plan in 2021, but a report by Center for Strategic and International Studies analysts Jude Blanchette and Justin Polk describes it as ‘the latest, and perhaps most consequential, development in the Xi administration’s ongoing efforts to position China to withstand volatile geopolitical exigencies’.

They say it is calculated ‘to fortify China’s economic resilience in the face of global economic undulations and a general retreat from globalization among Western democracies’, adding that the impact on the world economy could be momentous. ‘Even a marginal shift by China away from its focus on mercantilist export practices could fundamentally reshape global trade and investment flows.’

While the Chinese authorities will make a concerted and potentially successful effort to strengthen domestic capabilities in high-technology sectors such as microchip manufacturing, where US sanctions leave them vulnerable, it is doubtful that the proposed broad economic realignment will be achieved.

As finance professor at Peking University Michael Pettis explains, China has been pursuing a strategy of boosting domestic consumption for years without success. A 2007 speech by the then premier Wen Jiabao, which drew on International Monetary Fund research, promised that the government would make it a priority to rebalance domestic demand towards a greater focus on consumption.

Household spending accounts for just 38% of the Chinese economy, which is one of the lowest shares in the world. Other countries with similarly low shares are Singapore, Saudi Arabia, Ireland and Luxembourg, but they each have tiny populations relative to their business sectors. In other large emerging countries like India, Brazil and South Africa, the consumer share is 55% to 60%, as is also the case in most advanced nations.

Since Wen’s speech, the consumer share of GDP has risen by only 2 percentage points, and that gain will be lost entirely this year, because households have responded to the surge of unemployment following the coronavirus outbreak by slashing consumption and redoubling their savings.

Pettis says that to rebalance the economy to give consumers anything approaching a normal share of the benefits of the economy would require shifting 10% to 15% of GDP away from businesses, the wealthy and government to households. ‘Rebalancing involves a massive shift of wealth—and with it political power—to ordinary people. This will not be easy.’

He notes that China’s export strength, on display in the latest trade figures, depends on the workforce receiving a very small share of what they produce, either directly through wages or through the social safety net.

‘China can only rely on domestic consumption to drive a much greater share of growth if workers begin to receive a much higher share of what they produce, so the very process of rebalancing must undermine China’s export competitiveness.’

As has been evident this year, the first instinct of the Chinese authorities when faced with economic adversity is to redouble lending to businesses. Total debt (public and private sectors) has doubled to 320% of GDP since Wen’s 2007 speech, a level that is without precedent in the emerging world. Pettis says it will rise a further 20 percentage points this year.

China’s economic model has been accompanied by social stability partly because there has been employment growth as the economy expands, even if income levels remained low.

However, in the wake of coronavirus, many employees lost their jobs or had wages cut. While the wealthy have been little affected by the downturn, the 290 million migrant workers in the cities have been hit hard.

China’s social fabric may be more fragile than its monolithic party and all-conquering exporters make it appear. It will be hard to communicate the benefits of a ‘dual circulation’ economic strategy to the masses.