China accounts formore than a thirdof export dollars earned by Australia.

The figures, for the 12 months to October, cover the period of coronavirus disruptions and disputes over trade.

They apply to physical exports rather than harder to measure services, and are dominated by record-high Chinese takings of Australian iron ore.

But they mightnt last.

China is changing, transitioning from growth driven by the iron-ore hungry expansion of cities and manufacturing to growth driven more by the supply of services.

Externally, its belt and road infrastructure investments facilitate the supply of resources from locations other than Australia, among them theSimandouiron ore and bauxite deposits in Guinea, West Africa that will eventually offer higher quality ore than Australia from a region China may regard as more friendly.

Even if this source is slow to emerge, China will seek to diversify its supplies of iron ore by other means, as suggested by Australias former ambassador Geoff Raby in his recent bookChinas Grand Strategy and Australias Future in the New Global Order.

One will be to ensure a steady supply from Brazil which, with China, is a member of theBRICSgroup of major emerging national economies.

Australia produces few manufactured goods and pays for the considerable quantity it imports by exporting commodities, mostly to China.

The loss of this export channel would be serious, but how serious?

Iron ore matters more than we think

Conversation authorsJohn QuigginandJames Laurencesonargue the effects would be small. They point out that mineral exports account for only 1% of Australias national income and that China would hurt itself if it cut off the flow.

But Chinas size means the damage to China would be proportionately smaller than the damage to Australia.

And while the mining sector is not the largest in Australias economy, its growth since 2002 has brought with it a secondary boom in Australian service industries. Australias East Coast cities have prospered even while most of the mining has been in the Pilbara.

The mining boom brought a substantial boost to our terms of trade (the earning power of our exports relative to the cost of our imports), pushing up the Australian dollar and making imported goods much cheaper.

A reversal would see our terms of trade fall and our cost of living rise.

Some commentators place store in our ability to redirect exports of wine and barley, and whatever else is affected by trade disputes, to other customers.

At least for iron ore, however, there are few other customers at current volumes. This suggests a decline in export prices and in Australias terms of trade.

Damage to us, a mozzie bite for China

So it’s worthwhile attempting to quantify the damage from a winding back by China of its imports from Australia.

We have conducted simulations of the effect of shutting down Australia-China trade by 95% in which we allow time for capital flows and production and employment to readjust and assume that monetary policy and fiscal balances remain unaltered throughout the world.

We find the shock to the demand for Australian products is large and it is only partially offset by the redirection of our exports, even with a large depreciation of the Australian dollar.

The reason for this is that the loss of Chinese exports reduces the rate of return on investment in Australia, forcing financial markets to reallocate finance to other parts of the world.

The effects on Australian gross domestic product and real disposable income per capita are big (6% and 14 %), while those on China are mosquito bites by comparison (0.5% and 2.4%).

Its wise to be prepared

Important things we can do to hedge against such an occurrence include maintaining strong relations with current and potential export destinations and fostering innovations that will allow our export product mix to adjust so as to better service the markets that remain open.

Examples include the proposal byRoss Garnautto turn Australia into an exporter of green energy and associated plans byFortescueandothersto raise exports of energy by more than the east coast of Australia currently consumes.

Without such innovations, a substantial decline in trade with China would cut investment in Australia and cut living standards.

It is, of course, entirely possible that the worst wont happen, but we dont think thats something Australians can bank on.

If our ship does begin to sink, capital and skills will jump off and what we are left with wont be enough to support us in the manner we have come to expect.

This article was republished from_The Conversation_30 November 2020