I have spent the past few days in Australia and New Zealand for a run of conferences and meetings. One of the more memorable stops was arranged by a former student of mine, now a member of the New Zealand Parliament, who invited me to sit in on Question Time — the session in which the prime minister and his cabinet take questions from the floor. What I found interesting is that during the entire session, there was not a single question about foreign policy or foreign trade. For a small, open economy so heavily dependent on trade, and that trades heavily with China, it is telling me something.
My meetings in the region with academics and some government officials left me with a consistent impression: Australia and New Zealand are not unduly worried about the China Shock, which has preoccupied policy makers in many countries. They have good reason not to be. China Shock means the surge of Chinese manufactured exports that, over the past two decades, hollowed out factory employment across much of the developed world and probably has had a dampening effect on industrialization in the developing world. China Shock is a huge boon to the consumers but a bane to the producers worldwide.
This is the double-edged sword of trade and there is nothing unusual or special about trade with China—except, and this is a big except, for the fact that the scale of Chinese export is so huge and the scale of its import is so small. (I discussed this issue in a previous Substack post.) This is why trade with China has been such an animating issue in much of the developed world and in some developing countries. In some ways, the China Shock is a bit like AI—we know it is good on the expenditure side—cheap prices and high quality—but we worry about its impact on income.
Australia and New Zealand seem to be blessed with three conditions that are insulating them from the downside of the China Shock. The first is that Australia and New Zealand have what China needs. Their main exports to China are commodities that feed Chinese manufacturing rather than compete with it. In 2024, Australia exported to China US$105 billion of iron ore along with large volumes of liquefied natural gas and coal. China is Australia’s largest trading partner by a wide margin, and Australia runs a trade surplus on the order of US$80 billion. New Zealand exports a lot of dairy to China. Milk powder is the country’s single largest export, worth close to US$10 billion, and China is its biggest market, taking around a fifth of all New Zealand exports. These are inputs and staples and to China, Australia and New Zealand are suppliers, rather than economic rivals.
The second reason is the most important. This region makes very little that competes with China. Neither Australia nor New Zealand is a manufacturing economy, which turned out be the best insulation there is from the flood of Chinese goods coming your way. Inexpensive, well-made Chinese products benefit people as consumers but hurt them as producers and workers. A country without much manufacturing gets the upside on the consumption side— cheap and well-made Chinese products for its consumers, but it does not incur the downside of having to worry about what will happen to its employment. For a democratic society, whose government answers to voters who are also workers, that is close to a heavenly combination. The China Shock is a shock mainly to places that make the same things China makes—and China makes everything. These two countries do not.
The third reason is that both countries are already high-income and they got to be that way not through manufacturing. Their economies rely on commodities, agriculture, services, tourism, and education, sectors that are all complementary with China. Contrast this situation with developing countries that try to grow their economies through manufacturing, a path that will put them in direct competition with China. Also contrast their situation with a high-income country like Germany. Germany is wealthy but it got there through manufacturing, which is now under real strain from Chinese competition. China Shock is difficult for two types of countries—countries that are rich and highly industrialized and countries that are poor but aspire for industrialization. Australia and New Zealand are not in either of these two positions.
Which may explain what I did not hear in the New Zealand Parliament. On trade with China, both Australia and New Zealand are, in the grand scheme of things, doing okay, a respite from the China Shock that is now sweeping much of the world.
And yet the overwhelming media narrative in Australia is that China is an existential threat to our nation and we must disengage from China. Only this week, the Foreign Minister has terminated a science undergrad exchange program between Australia and China on security grounds. Our media reporting is driven by US-based and US-funded think tanks and does not serve the national interest.
While these advantages is indeed very true but in the sense of broader economic. It’s not an advantage. The ability to export raw materials is great, it means you have the abundance of resources but that also comes with the lack of choice for manufacturing.
Australia simply doesn’t have any manufacturing capacity, in fact Australia imports steel back. It’s really a shame a country that has so much potential are dependent on other countries otherwise, these are just rocks sitting in the ground. The fact that Australia can’t compete with a China in these spaces is a problem, there isn’t even a choice to compete. At least Germany can think about, and have private companies to preserve some capacity in case of worse times comes
Relaying on the commodity reminds me a famous quote from Lee Kuan Yew:” Australia will become the white trash of Asia.” Holding on to Australia dollars while China still needs your iron ore…. What if one day China no long needs Australian iron ore? This shock might sink half of the economy. The underlaying risk here should not be underestimated.