Not since the global financial crisis has Australia faced so much uncertainty.
The country’s two largest states have now lost control of the Covid-19 Delta variant. They are both vaccinating furiously as they abandon ‘zero-Covid’ and embrace a future of ‘living with Covid’. As lockdowns and restrictions fall away, the great unknown is the level of hospitalisations and deaths over the coming months.
The other problem is the conflict between the various states and territories as they pursue different Covid-19 strategies. Try telling Western Australia that it’s time to ‘live with Covid’. Internal border closures, and all the economic and social difficulties they create, look set to remain well into 2022.
But the pandemic is only one of many challenges currently facing Australia.
Those challenges include AUKUS-related diplomatic crises, an escalating trade war with China, a collapse in the price of iron ore, the fallout from the Evergrande crisis, ballooning state and federal debt, problems for Australia’s coal industry, skyrocketing house prices, and a looming federal election.
Whatever one thinks of the new AUKUS alliance, its arrival has been messy. The first casualty was Australia’s relationship with France. The agreement to buy nuclear-powered submarines from the Americans brought a very sudden end to the previous $90 billion contract to buy subs from France.
The French foreign minister, Jean-Yves Le Drian described Australia’s move as a “stab in the back” and accused Australia of betraying “a relationship of trust”. The French ambassador to Australia has been recalled.
This appears to be the end of the closer economic ties that had been developing on the back of the French subs contract. It could also have wider consequences. Australia wants to finalise a free trade agreement with the European Union but there are reports France is now seeking to delay the deal.
The AUKUS alliance has also caused disquiet much closer to home. Indonesia, Australia’s nearest neighbour, issued a ‘Statement on Australia's Nuclear-powered Submarines Program’ in which it said that it is “deeply concerned over the continuing arms race and power projection in the region”. Scott Morrison’s planned visit to Jakarta next week has been cancelled because the Indonesian President Joko Widodo is no longer available.
Malaysia has expressed similar concerns that AUKUS will trigger a nuclear arm’s race in the region.
And then there’s China’s reaction. It is best summed up in an article in the Chinese Communist Party’s newspaper Global Times which says that the new alliance makes Australia “a potential target for a nuclear strike”.
Since the AUKUS announcement, China has applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Australian trade minister, Dan Tehan, has threatened to veto that application unless China calls off its trade war and resumes minister-to-minister contact with Australia.
At the same time, Scott Morrison is in Washington for a ‘QUAD’ meeting. QUAD is the ‘Quadrilateral Security Dialogue’, a strategic arrangement between Australia, Japan, India, and the US. This is widely recognised as part of the four nations’ strategy of ‘balancing’ against the rise of China in the Indo-Pacific region.
Even before these latest developments, Australia’s relationship with China, its largest trading partner, was difficult. Now it is dire and that will increase the economic costs for Australia. For example, former Australian Prime Minister Kevin Rudd predicts that the decline in Chinese students attending Australia’s universities, a significant source of export earnings, will accelerate rapidly.
Australia’s largest export earner is iron ore. The commodity’s price has been sliding for months. It is currently around half its record earlier this year. That represents a big hit to Australia’s iron ore producers and, through lower taxes, to the Australian government.
To date, the price of one of Australia’s other key export commodities, coal, has held up. However, Australian coal is subject to a Chinese ban and there are several other threats to the country’s coal industry on the horizon, including increasing domestic opposition from environmental advocates, the finance sector’s growing reluctance to fund investment in the industry, and yesterday’s announcement by Chinese President Xi Jinping that China will no longer fund coal-fired power stations overseas.
In the medium term, coal will suffer from the increasing focus on climate change and the move away from fossil fuels. One example is the European Union’s ‘carbon tariffs’ on the importation of carbon-intensive products.
Scott Morrison, if he goes, is expecting a chilly reception at the COP 26 UN Climate Change Conference in Glasgow in November.
A more immediate threat to the coal price, and to the price of other commodities exported by Australia, are concerns about the property sector in China, and in particular the emerging problems with Evergrande, known as China’s ‘Lehman Brothers’ moment.
Evergrande is one of China’s largest property companies. The Chinese construction industry is an enormous consumer of steel (which requires iron ore and coking coal) and of copper and nickel. If, as has been predicted for some time, the Chinese property sector is overdue for a major downturn, the impact on the price of Australia’s exports could be significant.
That is the last thing Australian state and federal governments can afford. They have taken on vast amounts of debt during the Covid-19 pandemic to support the economy. According to the OECD’s recent Economic Survey, Australia’s initial fiscal response to the pandemic was the largest in the OECD. As a result, net federal government debt is projected to hit a trillion dollars and 40% of GDP in the next few years. The debts of state governments may approach another trillion dollars.
The implications of Evergrande for Australia are not limited to commodity prices. While the company has survived the immediate crisis this week, it has debts of more than US$300 billion and operates in a troubled sector. Some still fear trouble ahead. If Evergrande defaulted on its obligations, there could be a financial contagion with consequences for international financial markets. Australia would not be alone under that scenario.
China’s is not the only property market that worries Australian politicians and regulators. The domestic housing market is running red hot. Is it an unsustainable bubble, a natural response to record low interest rates, or both? According to data from CoreLogic, Australian house prices jumped 18.4% in the year to 31 August. That includes 5.2% in the latest quarter when much of the country was in lockdown.
To top off all the other uncertainties facing Australia, a federal election is due before next May. The Coalition government has the benefits of incumbency, but it has been in power since 2013. At the moment, it’s hard to pick a winner.
Of course, when you consider the ongoing Covid-19 pandemic, the fallout from AUKUS, the growing discord with China, the emerging Evergrande crisis, volatile commodity markets, record government debt levels, and an overheated housing market, winning the next election might be a poisoned chalice.
And the way things are going, there may be new challenges just around the corner.
Ross Stitt is a freelance writer and tax lawyer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of a new 'Understanding Australia' series.
57 Comments
There's a very dark undertone to those comments - like a proper hatred of another nation state.
Scary times.
Just imagine if there are a billion or more people in China have the same line of thinking.
Would this be true - do the majority of people from China hate Australia, or are you a minority in those views?
This why China invaded Tibet - they threw to much rubbish?
I actual agree with the CCP on more things than you perhaps realise and can see how powerful China is becoming and how relatively weak the west is in comparison.
My question was more trying to understand how real the hatred was and to what extent that rhetoric was shared within mainland China. Is that just your view or do quite a lot of people in China truly hate the west/Australia?
Some irony there in the history. Only real interest the French had in the Pacific region was a place safely distant from them to detonate their nuclear bombs. Now Australia is to be a nuclear presence, strategically in the very same region. Can’t imagine France would think to send any of its nuclear subs to the Pacific for combat. No guard the motherland. Very arrogant, very selfish and ever since the glory days of Napoleon, militarily inconsequential.
People seem to make the same mistake; conflating nuclear submarines with nuclear weapons. Let's be very clear here; these subs will NOT be armed with nuclear weapons, the Aussies have already made that very clear, but they will have a nuclear power plant. And most likely sourced from the US, but i would remind readers that neither the US nor the UK have suffered a significant accident with the powerplants in any of their naval vessels. That's a pretty impressive safety record!
Nikolay Patrushev, the secretary of Russia's Security Council, told the Argumenty i Fakty newspaper on Tuesday that the pact between the three nations, known as AUKUS, will inevitably be yet another military bloc aimed at containing and confronting the two strongest non-Western powers. Link
Russia will have a peacemaker targeting Australia.
There is nothing smart about picking a fight with your largest trading partner at the behest of the US.
Skilled diplomacy is required, not cutting off you nose to spite your face because you think it plays well with domestic voters. We have to hold our noses at times when trading with other nations - Australia has a woeful environmental and human rights record and the UK and US sell arms to Saudi. Do we really want to send our youth to defend Taiwan? At the end of the day we side with AUKUS, we always will. But I see little benefit in sticking our neck out while Australia is still shipping millions of tonnes of iron ore to China.
I've always wondered at what point countries stop trading with a rising power before a war. But I guess you don't know war is going to occur until after it actually happens.
Do you then just pretend you're mates right up until you realise you aren't actually mates?
(I don't know the answer as I don't know if there is one to be had)
I agree, who know. NZ and Australia have become relatively wealthy from trading with China, we will not replace that if and when it stops. The CCP are a deeply unpleasant regime, but let's be honest, the UK/US are no angels and will always act in their own interests. They just did what China are doing now a few hundred years earlier.
Our politicians will need to be on top of their game to steer NZ through this.
Yeah its surprising me how aggressive China have become in a short space of time. I've always wondered, well at least the last 15 years or so was how would countries like NZ deal with being a member of 5 eyes, while seemingly willing to do anything to foster trade relations with China who were likely the biggest military and economic threat to the 5 eyes regime. Its like a person who wants to be two things at once - eventually it always tears them apart.
TK - there, for once, we are in complete agreement.
Except that you probably think there's a 'back to normal' after the 'through'.
But their ain't. Past the bottleneck, there is a world of much-reduced energy and thus much-reduced through-put. Local will be the new format; not enough surplus energy to make it bigger than that. Infrastructure triage will be big for a while, but a temporary thing. We are entering an interesting phase, which has never been enacted, and will never be again; the global collapse of industrial civilisation. It may manifest in war(s) over what's left, it may be a prolonged bump down the stairs, or a total cliff. But manifest it will. Buckle in
Switzerland certainly made hay while the sun shone, throughout. Trade arranged strange bedfellows. Although part of the Axis Japan continued trade to Russia and carried on even after Pearl Harbour and Hitler had declared war on the USA. Russia traded lucratively, and was a conduit for similar raw material from the east, supplying the Nazi war machine up until Barbarossa whereupon Germany quite gratefully fired it all back at them.
Take a look at the US trading legacy. They traded with Germany and the Allies in the First World War up until at least 1915. Their policy was to not favour either side. The U boats sank a few US ships and only then they started to favour the allies.
And they were actively trading Oil with Japan whilst Japan was ravaging China in the 30s. US stopping Oil flows to the Japanese war machine was a trigger for Japan to bomb Pearl Harbour.
US has no issues making money out of conflicts. Go on Aussies, we’re behind you.
There is great support for Taiwan & their excellent PM.
This will be the test case for the free world - do they have the courage to defend another free country? Now that HK has fallen.
https://www.theguardian.com/politics/2021/sep/16/theresa-may-aukus-pact…
The military defence of Taiwan would be for the defence of that country and the reasons to protect freedom and democracy from an invader. Not primarily to serve other partner countries or leaders.
If World War III breaks out between China and the U.S., it is likely to be over islands of Asia claimed by China, with the U.S. fighting not for its own territory but for the island territory of allies, probably islands in no way vital to the security of the United States.
Which is how world powers often end their days as world powers, fighting unnecessary wars on behalf of other nations. Link
So Te Kooti, how might you feel if the Chinese (or anyone else ..take your pick) invaded little ol NZ at sunrise and the world stood by?
We have massive fishing resources and are a desirable stepping stone to the resources of Antartica.
Make NO mistake, NZ needs alliances more than anyone. Sons have gone to war in the past..that's what they do when the SHTF.
I for one wouldn't count on the rest of the world rushing to save us if China wanted to take over here. The one thing that is saving us is a great big land mass called Australia and our pure distance from China. Taiwan on the other hand couldn't be closer to China if they tried. Its like the Stewart Island suddenly trying to break away from New Zealand.
Do you seriously think the USA in its current state would start world war 3 going to the defense of Taiwan ? The people of Taiwan had better hope that China doesn't call Americas bluff on this one, there is no way the USA will be rushing to save you. Pray for the status quo to hold and China being focused on other issues it has to sort out, its worked out for 70 years so far.
US debt to GDP is worse now than at the end of WW2 - and guess who owns a lot of that debt? The days of getting on boats and fighting wars a world away are long gone.
The real issue is that China's trajectory is going to see them overtake the US economically and militarily in our lifetime.
Dalio has been plotting the paths of world powers using a series of different data points. Based on his analysis, in these years we are going through here and now, China's power is rising above the US. The US is falling away dramatically like all other world powers have done. It would appear they have had their day in the sun. The question may become, will they exit the stage gracefully or will they, like many other failing world powers, go down with one last fight?
TK - "The real issue is that China's trajectory is going to see them overtake the US economically and militarily in our lifetime".
Disagree.
Globally, we've already hit the ceiling. China was too late, India way too late, even though the US is failing. Exponential de-growth is just as powerful as exponential growth. In energy-in terms, China has peaked. The rest is sequentially derived from that.
bit overlooked that Queensland & W Australia have actually managed Delta better than NZ & of course the former shares an actual border with NSW. Maybe NZ’s government is just waiting to see what they do seeing as how it doesn’t seem that they have any plans of their own.
Could the media please just grow a pair and start calling China out, instead of pretending that everyone else needs to tip toe around China for fear of starting a war?
This narrative needs to stop. The writer infers in this article that Australia is responsible for: 1) an escalating trade war with China (despite noting the Chinese ban of Australian coal); 2) the triggering of a nuclear arms race (despite quoting the Chinese as saying Australia is “a potential target for a nuclear strike”).
And prior to that if Japan should intercede in an invasion of Taiwan by China, then Japan could expect a nuclear missile response from China. At that time it was ushered in by the CCP that their nuclear armoury is no longer considered to be for only defence of China, but would now be part of a military strategy offensively. Add Australia to that list now. As far as can recall don’t think since 1945 any nation has overtly, wilfully threatened another nation with a nuclear strike, apart from Nth Korea of course.There it is.
It's all about politics. ScoMo could have gotten the subs in a low key manner without blowing it hard on the TV.
It's simply a diversion from the public anger on his wrong bet on AstraZeneca and vaccine roll-out coupled with appeals to nationalistic popularity.
His tenure brought a decimation of the lobsters industry in Tasmania, tanking in coal and iron ore exports and bankrupting barley farmers and wine producers.
NZ should take heed and learn the consequences of a popularist government blowing hard to stay in power.
Scott Morrison, if he goes, is expecting a chilly reception at the COP 26 UN Climate Change Conference in Glasgow in November.
Yeah, well, by November the UK may well have run out of gas so everywhere will be chilly. Pointing out that they have immense LNG resources should warm the room to him nicely.
And what does Australia stand for exactly? It cannot be human rights or democracy otherwise it would not be allied with the USA. Seems insane to declare war on your biggest trade partner to please a dying empire. NZ’s more neutral stand is proper for a nation that is insignificant on the international stage and economically dependent on a growing hyper power. When there is war, we will not be sucked into it. Australia on the other hand….
Well it hasn't so far. Mexican and Thai factories instead of in NZ. Why? Clothing from Bangladeshi sweatshops. Why? Consumable junk from China. Why? In all cases, 'human rights' are subverted so what we get can be 'cheap'. We choose that, every time we choose that 'cheap'.
But let's virtue-signal; let's champion 'human rights' before we trot down to the shops.......
Humanity is 6-7 billion overshot; a temporary arrangement thanks to the once-off drawdown of resources and fossil energy. Long foretold by the granddaddy of nuclear navies:
https://ourfiniteworld.com/2007/07/02/speech-from-1957-predicting-peak-…
It's a sobering read - worth the time.
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