Australia's exports to China are jumping despite their trade fight

  • The value of Australia's exports to China has jumped 24% from a year ago, to reach over $180 billion Australian dollars ($135 billion) as of the latest August data, according to research firm Oxford Economics.
  • Tensions between the two countries deteriorated sharply early last year after Australia supported a call for a global inquiry into China's handling of its initial Covid-19 outbreak.
  • Meat and live animal products are still holding "steady" and going to China despite restrictions, said Oxford Economics.

China has been buying more goods from Australia this year even as their trade spat shows no signs of abating.

The value of Australia's exports to China has jumped 24% from a year ago, to reach over $180 billion Australian dollars ($135 billion) as of the latest August data, according to research firm Oxford Economics.

Monthly data shows goods to China hit a record monthly high of 19.4 billion Australian dollars in July – a surge of 72% as compared with a year ago, according to Reuters.

Relations between the two countries deteriorated sharply last year after Australia supported a call for a global inquiry into China's handling of its initial Covid-19 outbreak.

Since then, those tensions have filtered into Chinese sanctions on Australian goods. That has ranged from levying tariffs to imposing other bans and restrictions — affecting Australian goods including barley, wine, beef, cotton and coal. 

"Australia's increasingly fractious trading relationship with China has been a key downside risk to the outlook over the past year," said Sean Langcake, principal economist at Oxford Economics. "Trade barriers on certain products from Australia have been imposed and have steadily escalated as diplomatic tensions rise."

However, through it all, Australia's exports to China "have held up remarkably well," the firm said in an Oct. 22 note.

Australia is one of the few developed countries that enjoys a trade surplus with China, its largest trading partner.

Iron ore driving export growth

While the headline numbers show a jump in exports, the rise is attributed mostly to iron ore — a commodity for which China is heavily dependent on Australia.

"Record-high iron ore prices and strong demand for steel-making inputs in China accounts for much of this strength," Langcake said.

Without iron ore, exports to China across most categories outside of mining actually dipped this year, according to Oxford Economics. Unsurprisingly, the worst-hit goods include those that China targeted.

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Within food exports, however, some products bucked the trend. Meat and live animal products are still holding "steady" and going to China despite restrictions, said Langcake.

The goods among the worst hit include timber, seafood, beverages, edible oils, coal, textiles, footwear, cereals and sugar, according to Oxford Economics.

Australian officials have slammed China for the trade sanctions. In a statement to the World Trade Organization last week, Australia said: "China says that these actions reflect legitimate trade concerns; but there is a growing body of information that demonstrates China's actions are motivated by political considerations."

On Tuesday, the WTO said it has agreed to set up a panel to examine China's duties on imported Australian wine, according to Reuters.

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Despite the sanctions, Australia has managed to divert its banned exports to other countries, according to Oxford Economics.

"The key question throughout this episode for exporters has been their ability to pivot to alternate export destinations if confronted with barriers when exporting to China," said Langcake. "Encouragingly, we find evidence that trade dispersion has occurred, rather than a collapse in export performance."

One example is coal, which has been under the spotlight as China's restrictions on Australian coal remain in place, despite the country's worst power crisis in years due to a shortage of the commodity.

Coal exports from Australia to India – which is facing its own coal shortage — Japan and South Korea have soared, said Oxford Economics.

— CNBC's Saheli Roy Choudhury contributed to this report.

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