Australia’s losses from trade tensions with China are being offset by rising iron ore prices, according to new analysis, which also predicts the Morrison government will announce a smaller budget deficit than originally forecast.
Deloitte Access Economics said Chinese government moves against wine, beef, barley, lobsters and thermal coal have cost Australia money “but we’ve more than made that up in overall terms thanks to iron ore – and the taxman will be a considerable beneficiary of that”.
Chris Richardson, a Deloitte partner and leading economist, said spot prices had risen by US$18 a tonne since 30 November amid fears that China may consider taking some action against Australian iron ore, resulting in markets “nervously bidding up prices”.
“This ‘fear tax’ isn’t the only thing driving up prices – markets are also worried that heavy rain may constrict supply out of Brazil, while very low interest rates and a falling US dollar are pumping up pricing too,” Richardson said in a statement.
He said the increased iron ore prices would help drive an improvement in the federal budget bottom line when the government delivers an update this week.
For a range of factors, including the better than assumed performance of the Australian economy and lower spending on jobkeeper wage subsidies, Deloitte is tipping the 2020-21 deficit may be $3bn less than the $213.7bn level that was forecast in the October budget.
The improvement in the bottom line may rise to $15bn by 2023-24, according to the analysis.
Deloitte points out that tariffs and other trade actions can hurt both countries, potentially costing Chinese families at the same time as targeting Australian businesses.
As a result, it says, rising domestic thermal coal prices in China “mean that it may be unlikely to do much more than sabre-rattling on Australian coal”.
“Where China knows it is most at risk is iron ore,” Richardson said.
“China is the world’s key customer, but Australia is the world’s key supplier. That’s why analysts have said China wouldn’t act on Australian iron ore, as it would cost them lots. However, markets are still worried that China may do something.”
The Australian government has raised increasing alarm at the series of actions taken by Chinese authorities and has been urging exporters to diversify to other markets.
A second report released on Monday suggests Vietnam provides significant opportunities for Australian exports, including beef, live cattle, grains like wheat and barley, cotton, horticulture and processed foods.
Two-way trade reached about $15.5bn last year but Australian companies are not yet taking full advantage of existing and emerging market opportunities, according to the report by the Australian APEC Study Centre at RMIT University. The centre is directed by the former Labor trade minister Craig Emerson.
The report says both Australia and Vietnam are seeking to reduce their economic over-reliance on China as a dominant trading partner and are committed to supporting the continuing role of the US in the region as a balancing factor.
While Vietnam welcomes overseas business and its economy is maturing fast, it cannot replicate the sheer scale of the China market, the report concedes.
The report also notes the relocation of factories from China to Vietnam due to China-US tensions “is likely to continue in the wake of Covid-19 with the reorganisation of supply chains”. There are also opportunities for growing exports of services.
The report was commissioned by Asia Society Australia and financially supported by the Victorian government and its findings are likely to find favour in Canberra.
Last week the federal agriculture minister, David Littleproud, told Guardian Australia there was frustration among producers and growers about the China standoff, but he hoped to see enrichment of links with Vietnam next year.
Littleproud said he also hoped next year brought the finalisation of new trade agreements with the EU and the UK, along with pursuit of opportunities with India even if that did not lead to a formal free trade agreement.