As Sydney heads back into another budget-busting lockdown, and the global economy grows on the reemergence of travel and the commodities trade, we are again poised to look at some of the unprecedented changes in the economy, especially our relationship with China. Furthermore, in the wake of the G7 summit and the growth of environmental concerns globally we need to review new ideas and policies to diversify our trade, industry and especially reliance on commodities.
1. Chinese protection backfires
Chinese protectionist policies and goals to halve their reliance on Australian iron ore have by and in large backfired in the short term.
Firstly, let’s quickly review the current protectionist system and the nature of protections overall. We tend to think that protections enable economies to secure their industries against external shocks, dumping and the removal of employment. However, in many circumstances, geo political and global barriers to trade prove more prescient.
Most recently, in response to Australia’s desire for an inquiry into Covid and our closeness with the US, China has debuted a plan to halve the price of our iron ore, decreasing their supply costs and weakening our economy. This was framed by Chinese state media as a desire to send Australia into a “wintry period” by wiping more than $81 billion from our economy.
If successful, this would have improved the Chinese Bogs by decreasing the cost of one of their largest imports, lowering the price of their steel exports and thereby driving an increase in their export dominance and Current account Surplus. However, despite the power of the Chinese economy, this particular policy has undergone the effects of a truly globalised economy, despite the Chinese hope that such a policy would create enough fear to reduce prices, the regrowth of the global economy as well as the reduction in supply of iron ore from Brazil has led to a skyrocketing of iron ore prices above $207 USD, a 7% annual rise. Such a high price is likely to drive an ongoing increase in our BOGS, helping to secure our CAS and economy into the medium term.
HSC application:
- Iron ore prices have risen above 200USD again, driving an increase in AD and an improvement in the CAS
- Chinese iron ore exports currently act as $166 billion worth of our imports
2. Diversification and ESD
This week, Bloomberg News released an article that spelled out what many of us know: a reallocation of resources towards renewable areas of the economy will help to improve our aggregate supply and economic growth into the long term.
Essentially, Australia currently provides a large amount of the raw materials that go into the production of batteries, while China continues to be the largest producer of said batteries and thus purchaser of our materials. This means that the value added in Australia is minimal, reducing total output.
As Bloomberg reports, a shift to production of lithium batteries domestically would “enable the battery industry to contribute about A$7.4 billion ($5.6 billion) to the nation’s economy by 2030 and create 16,000 extra jobs.”. This particular example shows us that specialisation and efficiency, even if that means the reduction of international supply chains, might help to improve our economy and increase the value of Australian exports the global economy relies on.
HSC application:
- contribute about A$7.4 billion ($5.6 billion) to the nation’s economy by 2030 and create 16,000 extra jobs
- Improving our specialisation and access to the global supply chain will help increase our Current Account Surplus
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This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
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