Gloves have come off in the ongoing diplomatic rift between China and Australia. While China wants to hurt Australia by diversifying its iron ore imports and suppressing steel production in order to control the growing demand for Australian iron ore, Australia might be looking to devastate the Chinese economy by stopping the export of iron ore to the Communist nation.
Government-funded think tank warns Australia over iron ore trade with China
The Australian Strategic Policy Institute (ASPI), a defence and strategy think-tank founded by the Australian government and partially funded by the Australian Department of Defence and the State Department, has urged Canberra to take action before Beijing starts attacking iron ore imports from down under.
The ASPI report stated, “In the event that an iron ore glut emerges over coming years, Australian miners could be susceptible to the same kind of discriminatory action that China has taken against Australian coal.” It added, “Australia could make it more difficult for China to take such a step by taking action now against China over its ban on Australian coal.”
Beijing suppressing its steel industry
China imports $136 billion worth of iron ore from Australia every year. In fact, last year, 81 per cent of the Australian iron ore exports ended up in China. The Communist nation has a colossal steel industry that produces 51 per cent of the world’s total steel. In the first five months of this year, the Chinese steel industry has already consumed 444.9 million tonnes of iron ore.
However, Chinese President Xi Jinping is a mad dictator. In order to punish Australia, he can damage China’s own economy also. This is why Beijing had also imposed an unofficial ban on coal coming from Australia, even though it has created a severe power crisis in the Communist nation.
There are indications that Xi wants to cut down imports of Australian iron ore, even if comes at the cost of losing an effective monopoly in the steel industry. In fact, iron ore prices have suddenly collapsed and gone below $US100/ tonne because Xi is suppressing China’s steel industry. For Australia, it, therefore, makes sense to diversify its iron ore exports and exclude China from the iron ore supply chain.
Growing demands for iron ore action in Australia
Last year, Senator Matthew Canavan had suggested that Australia should “take tougher action immediately like a levy on iron ore exports to make China pay for their illegal trade sanctions.”
Good on the government for taking China to the WTO but this will take years to resolve. That is why we should take tougher action immediately like a levy on iron ore exports to make China pay for their illegal trade sanctions. Justice delayed is justice denied. pic.twitter.com/IRwNiO8fSs
— Matthew Canavan (@mattjcan) December 16, 2020
Economic commentator David Llewellyn-Smith too advocated a boycott of China in the iron ore sector. Smith likened Australian iron ore exports to China with similar exports to Japan in the 1930s. About his proposal to stop exports of iron ore to China, Smith said, “The results would be instant.”
The economic commentator added, “The Chinese economy would be structurally shocked to its knees … An instant debt crisis would sweep the Chinese financial system as its bizarre daisy chain of corruption froze … It’s possible that it would trigger a political revolution in China.”
Smith did admit that Australia too would suffer some damage. But he added, “The very large initial hit to national income would quickly be offset by the halving currency. We’d quickly source new supply chains or rebuild our own production.”
Also, many in Australia are thinking of empowering the country’s metal-making industries instead of exporting all the ore that it produces. Such value addition would only help Australia create more jobs and earn more foreign exchange, thereby setting off the losses due to any future lack of iron ore exports to China.
Why Australia should act quickly
Canberra must act quickly if it wants to hurt China in the iron ore sector. Presently, China is looking for alternatives. However, Brazil, one of the biggest sources of iron ore, doesn’t offer much promise due to concerns surrounding safety disasters. Similarly, China cannot tap into iron ore reserves in Guinea, an impoverished West African nation, due to a complete lack of infrastructure and a regime change that has thrown a pro-China President out of power.
For China, diversifying iron ore import options would still take several years. And before, China starts diversifying itself, Australia must create new supply chains with like-minded countries like India, Japan, South Korea and the United States of America. This is how Canberra can inflict maximum damage on the Chinese economy.
Make no mistake, any significant shortfall in steel production in China isn’t only going to ruin the Chinese economy, but it will also disintegrate the Chinese society and body politic. Chinese people have somehow tolerated the CCP’s dictatorial policies because of the vast amount of wealth generated by the construction and infrastructure sectors. Now, if China loses its single biggest source of iron ore, the CCP could end up facing an uncontrollable rebellion.