Bad trade: The rising cost of accessing China’s large market

We’ve heard a lot about “unfair” trade over the last decade, but there might be something worse on the horizon: bad trade. Recent events in Australia suggest a scenario where trade with China might mean giving up some sovereignty and free speech. Preserving the best economic policy – openness – is as important as ever, so we’ll need to be vigilant.

Governments often have geopolitical or diplomatic spats without sacrificing unrelated commercial trade flows. But it appears China is breaking such diplomatic norms. In May, Australia called on the World Health Organization to conduct an independent and comprehensive investigation into the origins of the deadly coronavirus. Soon after, China targeted Australia’s top 20 exports with otherwise-unexplained sanctions.

A full-blown trade war with China would be grueling for Australia, costing it 6 percent of GDP, according to one study. But Canberra is undeterred. With nearly 2 million people dead worldwide, understanding how the virus made the leap into human populations could help stave off the next pandemic.

Some of the trade sanctions are in black and white, like duties on Australian barley published in a government report. But there have been murkier actions like unexplained delays at ports. Jeffrey Wilson of Perth USAsia Centre, an Australian think tank, attributes these to quiet instructions from a Chinese Communist Party official to a Chinese importing agency.

It was no surprise when China took affront at the call for a pandemic inquiry, with one senior diplomat saying Australia’s move “hurt the feelings of the Chinese people.” But there is no “hurt feelings” clause in World Trade Organization (WTO) rules, and Australia is turning to international law to fight back.

It recently launched a WTO challenge to China’s 80 percent tariff on its barley exports, and it reportedly has a strong case. Many will watch to see if the United States, Europe or others join Australia as third parties.

Tensions between China and Australia are not new, and matters relating to an encroaching China will not surprise a U.S. audience. For instance, in 2013 Chinese hackers reportedly stole the blueprints of Australia’s new spy headquarters. Australia had to gut the building and restart the half-billion-dollar project. 

In 2017, an Australian senator was heard defending China’s South China Sea policy in ways that directly contradicted his party’s stance. That senator turned out to have received hefty campaign donations from a wealthy Chinese businessman and a subsidiary of a Chinese state-linked company.

Meanwhile, there are ongoing concerns of China silencing free speech on university campuses. With China representing one-third of all foreign enrollments at Australian universities and a major source of research funding, the stakes are high. 

Australia has responded by tightening up domestic laws and removing security vulnerabilities to foreign influence, including passing laws to prohibit foreign interference in elections, a ban on Chinese telecoms from Australia’s 5G network, and an investigation into the links between China and the country’s higher education sector. 

These moves mirror similar actions by the U.S. government: restrictions on the use of Chinese-connected software applications, restricting U.S. investment to finance Chinese Communist Party military companies and legislation to de-list companies from U.S. exchanges if they cannot establish independence from a foreign government.

But the China-Australia trade clash reveals a worrying trend: Beijing wielding its huge market as a truncheon against something as straightforward as foreign criticism. And if there was any confusion over China’s sensitivities, its embassy in Canberra released a list of 14 grievances, which extend beyond Australia’s call for an independent inquiry into the origins of the pandemic. Beijing’s resentments include government funding for any research or report that is unfriendly or antagonistic towards China, accusing China of cyberattacks, involvement in South China Sea issues, restrictions on foreign interference in elections and restricting China’s investment.

“I’ve never seen anything like it before,” said former Australian Prime Minister Malcolm Turnbull. Australia has no incentive to stoke further tensions, but Prime Minister Scott Morrison’s Liberal–National Coalition is unlikely to back down. 

The United States is facing similar threats. In July, FBI Director Christopher Wray spelled out the threats posed by the Chinese government and Chinese Communist Party: “Our data isn’t the only thing at stake here—so are our health, our livelihoods, and our security.”

The economic effects of trade are one thing we know a lot about. We become far more prosperous in the aggregate, albeit with adjustment costs – sometimes severe for specific local communities – along the way. Opening up trade with China has brought huge consumer benefits and gains for many American firms. The question moving forward is whether the political and social ramifications of China’s new belligerence could someday overwhelm the undeniable economic benefits of integration.

In situations where accessing China’s huge market means giving up tangible national sovereignty and free speech, that’s a bad trade.

Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.