You are on page 1of 5

Oxford Analytica Daily Brief

China is a mixed blessing for big commodity exporters


Thursday, October 25 2012
An Oxford Analytica In-depth Analysis
Chinese demand was key to the 'supercycle' that has swollen government coffers and
boosted growth in commodity exporters -- even those with big and diversified economies,
such as Australia, Brazil and Canada. The former two countries in particular have benefited
directly from trade with China. More recently, Chinese foreign direct investment (FDI) has
also started to increase. Yet relations with the world's second largest economy are often
seen as a mixed blessing, with concerns ranging from the threat of Dutch disease to
suspicion of FDI from Chinese companies.

What next
A slower-growing China that seeks to rebalance towards domestic consumption will exert
less pressure on commodity prices in the coming years. Australia and Brazil will receive a
more timid boost from China trade as a consequence. Canada may enjoy a lift in the future
if it manages to overcome political and environmental opposition to oil exports to Asia,
although it will remain largely dependent on the United States. Anti-China rhetoric --- with
or without good reason -- will continue to be heard. However, by and large, all three
countries will welcome Chinese FDI in non-'strategic' sectors.
Analysis
China's share of global GDP (in current market prices) jumped from 3.7% in 2000 to 10.5%
last year. During this period, an extremely competitive manufacturing sector, supported by
WTO accession in 2001, boosted exports, which represented 3.9% of global shipments in
2000 and 10.4% in 2011. Imports rose from 3.4% to 9.5% of the global total due, among
other things, to the fact that the Chinese industrial powerhouse has shown enormous
appetite for commodities.

In this context, managing economic and political relations with China has become a key
concern for commodity exporters such as Australia, Brazil and Canada.

Oxford Analytica 2016. All rights reserved


No duplication or transmission is permitted without the written consent of Oxford Analytica
Contact us: T +44 1865 261600 (North America 1 800 965 7666) or oxan.to/contact

An iron ore mine in Western Australia


(REUTERS/Reuters Staff)

Impact
Australia, Brazil and Canada
will manage weaker
commodity prices well.
Disputes over national
security will intensify between
China and Australia but not
deter business exchanges.
Brazil needs productivity
improvements to sustain high
growth in the middle term.
Headwinds facing the US
economy will also affect
Canada in 2013, but US
dynamism will benefit it in the
middle term.

Oxford Analytica Daily Brief


China is a mixed blessing for big commodity exporters

Australia
This year marks the 40th anniversary of Australia's diplomatic recognition of China.
However, cultural and economic linkages were slow to develop until the beginning of the
last decade's resources boom. China currently is Australia's largest trading partner (as well
as its largest source of migrants). Chinese FDI is also increasing rapidly from a low base.
In some quarters, this gives rise to Australian reservations about the role of state-owned
enterprises in areas of strategic significance. Balancing Australia's strategic alliance with
the United States and its economic dependence on China will pose political challenges in
the future.
Trade
Australia will have to balance
its strategic alliance with the
In 2001, exchanges with China comprised 6% of total Australian trade in goods and
services. In 2011, China had become Australia's most important trading partner. Exports of United States with its economic
dependence on China
77 billion Australian dollars (80 billion US dollars) and imports of 44 billion Australian
dollars accounted for 23% of total Australian overseas trade.
Iron ore is responsible for most of the increase -- in 2011, this single commodity was
responsible for 61% of all Australian exports to China. A pipeline of investment in new
mines is based on the expectation that growth in export volumes will continue, albeit at
prices lower than recent peaks. A number of large liquefied natural gas (LNG) initiatives -offshore projects in Western Australia, and coal seam gas in Queensland -- have been
underwritten by long-term supply contracts to China. This trade will grow in importance as
production comes on-stream.
Negotiations on an Australia-China free trade agreement started in April 2005. There have
been 18 rounds of negotiations since, most recently in March. Major sticking points appear
to be access for Australian agricultural exports and security of intellectual property rights.
In the meantime, Australian trade ministers have focused on reaching business
cooperation agreements with provincial governments in China.

Oxford Analytica 2016. All rights reserved


No duplication or transmission is permitted without the written consent of Oxford Analytica
Contact us: T +44 1865 261600 (North America 1 800 965 7666) or oxan.to/contact

Oxford Analytica Daily Brief


China is a mixed blessing for big commodity exporters

Investment
In 2010, the Chinese share of FDI flows into Australia was 2%, but this has been growing
in recent years:
A high proportion of investment has been in the iron ore, gas, and coal industries.
Australians are more comfortable about Chinese investment in mining projects than in
agricultural land or residential housing.
Overall, there is some unease about the participation of state-owned enterprises in
Chinese FDI. Yet private capital may be seen as undesirable, too. Earlier this year,
Canberra intervened to prevent private Chinese telecommunications company Huawei from
tendering for contracts in the government-owned National Broadband Network on national
security grounds.
Geopolitics
In November 2011, Australia and the United States announced closer military ties,
including (see PROSPECTS 2012: US Asia policy - November 21, 2011):
greater US use of Australian air bases;
an increased rotation of up to 2,500 US Marines through the Northern Territory;
increased access by US ships and submarines to a Western Australia naval base; and
the use of Cocos Island as a base for US surveillance aircraft after the closure of
facilities in Diego Garcia.
These developments have attracted some criticism in China, where they have been
interpreted as Australian participation in the US repositioning of forces in response to
strategic shifts in the western Pacific. Such views are unlikely to have a material impact on
trade and investment relations in the short term (see CHINA/AUSTRALIA: Business
trumps security divide - June 26, 2012), but they signal sensitivities which will have to be
carefully managed.
Brazil
China is also Brazil's most important trade partner, with bilateral exchanges rising from
just over 3 billion dollars in 2001 to slightly over 77 billion in 2011:
China is the largest national export market for Brazil, which shipped to it 44.3 billion
dollars-worth of exports last year (17.3% of its total foreign sales, against 10.1% for the
United States, the second largest market).
It is also the second largest supplier of imports for Brazil, which bought 32.8 billion
dollars-worth of Chinese imports in 2011 (14.5% of the total), marginally less than the
United States (34.0 billion).

Oxford Analytica 2016. All rights reserved


No duplication or transmission is permitted without the written consent of Oxford Analytica
Contact us: T +44 1865 261600 (North America 1 800 965 7666) or oxan.to/contact

Oxford Analytica Daily Brief


China is a mixed blessing for big commodity exporters

While Brazil runs a regular trade surplus with China -- which in 2011 accounted for about a
third of its global surplus -- policymakers and manufacturing companies point out that
Brazil is only China's ninth most important trade partner and, especially, that bilateral
exchanges resemble 'colonial' trade relations. This is because Brazil exports mainly
primary goods (80% are iron ore, soya and petroleum) and imports mostly manufactured
and semi-manufactured goods.
This has fuelled a dominant perception that trade with China leads to 'primarisation' and de
-industrialisation. Such fears are justified to a significant extent:
The share of Brazilian output represented by the manufacturing industry fell from 18.1%
in 2005 to 14.6% last year -- that represents the continuation of a wider trend seen
since the mid-1980s but which had reversed moderately in the late 1990s and early
2000s
Shipments of primary-sector products corresponded to only 29.3% of Brazilian goods
exports, but that figure had risen to 47.8% last year. Meanwhile, the share of
manufactured products plummeted from 57.2% to 38.1%.
Yet while Brazilian manufacturers are losing prominence, they are not producing less in
absolute numbers. Indeed, manufacturing industry output last year was 10.5% higher than
in 2005 and 27.5% higher than in 2000. Success stories include the machinery sector -typically pictured among the most threatened by China -- whose exports grew by 30% last
year. Some sectors at the low end of the value chain, such as shoemakers and textiles,
have been able to move onto higher value-added goods, although not without a painful
adjustment including a series of company failures (see BRAZIL/CHINA: Competition may
boost efficiency - April 14, 2011).
Reaction
Despite some successes, the image of China as a trade rival prevails in Brazil, and Beijing
has become the target of a negative policy agenda. Brazil is a proficient user of trade
defence measures. It does not recognise China as a market economy, which gives it great
flexibility in applying anti-dumping charges against Chinese goods. Other measures that
target China indirectly have also been adopted in the past years, including tariff hikes,
discriminatory procurement policies, local content rules and technical barriers.
FDI
As with other countries, significant Chinese FDI into Brazil is a very recent development.
Most of it has focused on natural resources, such as oil, iron ore, and soya. Reactions
were overwhelmingly negative, with industry lobbyists, politicians and commentators
decrying Chinese efforts to 'lock up' Brazilian natural resources. Yet there have also been a
series of projects in manufacturing, including automobiles, machinery and electronics. The
need for more seems to have been reinforced by President Dilma Rousseff during her visit
to Beijing in April 2011.
Canada
Prime Minister Stephen Harper has made expanding trade and diversifying the country's
export markets a national priority. He wants Canada to be less dependent on the United
States, in part due to the obstacles preventing the Keystone XL pipeline project from going
forward. Currently, 99% of Canadian oil exports are sent to the United States, yet US
energy import needs are projected to decrease. With the energy and extractive sectors
driving growth in the Canadian economy, Ottawa has sought to increase trade and
investment with Asia, focusing on China in particular. China has grown to become
Canada's second most important trading partner in recent years.

Oxford Analytica 2016. All rights reserved


No duplication or transmission is permitted without the written consent of Oxford Analytica
Contact us: T +44 1865 261600 (North America 1 800 965 7666) or oxan.to/contact

De-industrialisation fears
abound in Brazil

Oxford Analytica Daily Brief


China is a mixed blessing for big commodity exporters

FIPA
In February, Canada and China concluded negotiations for a Foreign Investment Protection
and Promotion Agreement (FIPA -- the Canadian equivalent of a Bilateral Investment
Treaty) to increase trade and investment flows between the two countries. Ottawa hopes
that the agreement will open Chinese industries to its investors, while China wants to
increase its access to Canadian natural resources.
The main purpose of the agreement is to provide foreign investors with protection from
discriminatory and arbitrary practices in the host state, to ensure compensation in cases
of expropriation, and to improve the predictability of regulations:
Both countries are currently conducting a legal review of the agreement. Upon
completion they will need to ratify the agreement and, in Canada, it will be tabled in the
House of Commons.
Ottawa and Beijing have embarked on a Joint Economic Complementarities Study to
explore the possibilities of a free trade deal.
Energy and natural resources
Harper's support for the Enbridge Pipeline Project highlights his determination to have
Canadian energy reach Asian markets. Canada has also courted Chinese investment to
develop the oil sands sector. While Canada has the world's third largest oil reserves, it
does not have the capital fully to develop this sector. China has invested significantly in the
sector even if it is not yet importing any Canadian oil (see CANADA: Harper reforms will
boost energy sector growth - May 9, 2012).
Limitations
While trade and investment between China and Canada have increased significantly in
recent years, the two countries remain very minor players in each other's economy:
Canadian investments in China represent less than 1% of Canada's total FDI.
Chinese investments in Canada are about 2.5% of China's total.
Canada's share of China's total trade has also declined to just over 1% recently, even if
bilateral trade has grown in absolute terms.
In seeking new markets, Canada is not relying only on China. It is actively trying to join the
Trans-Pacific Partnership while negotiating major trade deals with the EU, India and Japan
(see CANADA: New 'political geography' drives policy - July 6, 2012).
Though exports to China are expected to grow significantly, the Department of Foreign
Affairs and International Trade still expects the United States to continue to import
approximately 75% of Canadian exports (approximately the current level) for many
decades to come.

Oxford Analytica 2016. All rights reserved


No duplication or transmission is permitted without the written consent of Oxford Analytica
Contact us: T +44 1865 261600 (North America 1 800 965 7666) or oxan.to/contact

Despite growing trade and


investment, China remains a
very minor player in the
Canadian economy