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Hidden Lessons from China’s Coercion Campaign against Australia

28 Feb 2024
By Dr Naoise McDonagh
PM Albanese at the China International Import Expo, Shanghai, 5 November 2023. Source: DFAT. /

Common consensus holds that China’s recent trade coercion campaign against Australia failed. Yet the consensus view misses important political effects and economic costs of coercion.  

In late 2023, Canberra and Beijing stabilised bilateral relations after an approximate three-year period during which China applied a campaign of wide-ranging economic coercion against Australia. This involved China weaponising economic relations to punish Australia over bilateral political disputes. Two noteworthy outcomes of this episode are apparent. First, a consensus has emerged (here, here and here) that the real costs of coercion to Australia’s overall economy were marginal. 

Second, the consensus holds that China’s economic coercion failed politically given Australia did not change its position on any of the issues that triggered the dispute, such as its ban on Huawei’s 5G technology, or calling for an inquiry into the origins of Covid-19. While this consensus holds some truth, it is not the entire picture. Yet, if taken to be the full story, it will result in misleading conclusions. Consideration of economic costs at a sub-national level, and of political concessions separate to the issues that triggered coercion, paint a fuller picture of this episode. 

Beginning with economic costs, it is claimed that Australia “shrugged off” China’s coercion because businesses were able to find new international markets for their goods, and the impact to Australia’s GDP was minimal. From the national perspective, the real cost of coercion between 2020-2023 was less than 1 percent of GDP, as an Australian Productivity Commission report confirmed, underscoring the consensus that coercion failed to produce meaningful economic effects. This perspective on economic coercion might be informative, but can downplay significant sub-national effects. 

To illustrate this, a recent study estimated that losses to the nominal value of trade amounted to AUD$59 billion dollars between 2020-2022, and real losses, after businesses engaged in trade re-direction, reached AUD$20 billion. For the Australian economy as a whole, AUD$20 billion is a small figure, but the real losses are not averaged across the Australian economy. Instead, they are heavily concentrated on a small subsection of the economy comprising individual businesses, such as lobster fisheries, wineries, and coal exporters who were targeted by China, and ultimately absorbed the AUD$20 billion in real losses, while also incurring significant additional costs in finding alternative markets. Only later will costs flow onto the wider economy through lost consumption and taxation. 

Concentrated sector-specific losses ensured that targeted business interests pushed for a diplomatic reset and praised it when it arrived. That is understandable given their commercial interests. Business leaders did not view China’s trade measures as marginal, nor as a bark lacking bite, but rather as a core commercial issue on which they lobbied the Australian government accordingly. 

Beijing’s coercion campaign also created uncertainty for other Australian exporters to China, who could be targeted so long as bilateral relations were strained. Businesses dislike uncertainly, therefore China’s coercion created ongoing political pressure in Canberra through an influential business lobby group pushing the government to repair relations. Given that commercial and national interests are not always aligned, economic coercion creates a fundamental tension in domestic politics, offering Beijing leverage in negotiations when repairing bilateral relations. This effect of coercion on domestic politics has been underappreciated in the consensus view. 

Furthermore, there is a case to be made that China effectively used its carrot of restoring market access to Australia when one assesses the Labor government’s approach to Australia’s World Trade Organization (WTO) cases against China. The WTO governs world trade and is therefore a key institution of the international rules-based order. Reinforcing the norms and rules of the WTO is a stated Australian national interest, as acknowledged in the 2016 Defence White Paper. 

Given Canberra’s view that the WTO is central to Australia’s long-term trade interests, and given the current government’s stated view that economic coercion undermines those interests, it is reasonable to ask why the government chose to suspend its barley and wine cases against China, despite indications Australia was set to get a favourable ruling in its complaints. This appears to have been a concession required to re-establish diplomatic ties. Some supported this concession on the grounds that the WTO would not mention coercion in its report, and continuation of the case would needlessly prevent the removal of China’s coercive measures. These reasons represent flawed, short-term thinking that misses the bigger issue of the systemic importance of WTO cases against economic coercion. 

First, it is true that the WTO would have made no judgement on whether China was engaging in trade coercion, nor was it tasked to do so. Its sole function in the barley and wine cases was to judge whether China’s formal sanctions had any merit. Why would this be a useful finding? Had the WTO declared that there was no legitimacy in China’s actions, such a finding would have served as indirect, but influential, support to the claim that China’s actions were coercive. 

Such findings would have had international repercussions. If China ignored such a hypothetical WTO ruling, this would have undermined its ability to claim leadership of the Global South and Asian countries. That is because these countries remain interested in maintaining established trade rules, precisely because they offer small countries protection against bigger countries. Nations care about their international image for such strategic reasons. 

Second, claiming that pursuing the WTO cases would be antagonistic to China signals to Beijing that its bullying tactics work, and afford it special privileges to weaponise trade without facing formal consequences for its actions. WTO cases are not “megaphone” diplomacy, as some claim, but rather a necessary part of the system’s proper functioning, designed to ensure members meet their legal commitments. Australia has taken and finalised cases against even its closest ally, the United States, without producing bilateral tensions. If we are now in a world where China’s perceived antagonism makes countries afraid to finalise WTO cases, then the question arises what the point is of having rules in the first place. 

In offering to withdraw its WTO cases to create a fragile reset, the current government decided to forego a stated long-term core interest – upholding the international norms and rules of the WTO – almost certainly as a concession to restore commercial and diplomatic relations with China. Thereby it failed to legally address the issue of coercion, which erodes the WTO’s legitimacy by making it’s rules de facto ineffectual. 

Ultimately, China’s coercion campaign imposed significant concentrated costs on Australian domestic businesses. This created domestic political pressure, and business uncertainty, providing leverage for Beijing over Canberra. Real costs turned out to be less than initially feared, but were not negligible at a sub-national level. This campaign signalled to Australia and others that they must constantly consider the risk of economic coercion when doing anything that might offend China. Since rational actors avoid costs whenever possible, economic coercion changes states’ behaviour towards China, leading them to avoid actions they would otherwise take, and where they calculate that the benefits are less than the costs of potential coercion. In this way economic coercion campaigns have wider, more subtle systemic effects on how countries relate to China than is generally appreciated. For that reason, WTO rulings on coercion help build the basis for an international response, a key lesson for international leaders to take from this episode. 

Dr Naoise McDonagh is a Senior Lecturer at the School of Business and Law, Edith Cowan University, and former President of the Australian Institute of International Affairs South Australia. 

This article is published under a Creative Commons Licence and may be republished with attribution.