See the latest Australian dollar analysis here:
What is Australia’s secret weapon against China, I ask?
Iron ore! I hear you scream.
Sure, iron ore’s good to have. It makes steel. That’s pretty important if you want to build apartments, bridges…and guns.
But iron ore is not forever. Even if it seems so.
Why, you say? For one thing, those really big guns may be pointed back at you, or at somebody you know, before too long.
Then there’s the natural end to the historical episodes of urbanisation that drive developing economies, even on a colossal scale. For China, this moment approaches. Most developed markets peak at 80% urbanisation rate. China has reached 64% and it moved 14% of the population into concrete jungles in the decade to 2020. If it does the same in the next 10 years then, well, they’re at the end!
And then there is a simple fact that Australia and China are now frenemies. We don’t like each other as nations. For good reason.
China is the evil communist empire reborn.
Australia is the “tip of the spear” in the liberal American empire.
I mean, really, that was always to end in tears. So China can’t rely on Australia to supply iron ore when it needs it. Especially so when it needs it most. Amid conflict.
For these three reasons, China is going to cut off Aussie iron ore over the next decade.
So, if iron ore is not our secret weapon then what is it?
Ludicrously expensive houses? Nope.
ANZUS, surely? Nope
Our secret weapon is hiding in plain sight. It means that no matter how much pressure China applies to our economy via trade boycotts, we can come through it relatively easily and quickly. It enables us to rebalance our trade to other nations. It enables us to devalue externally rather than internally when needed. It keeps us competitive in asset prices, wages and inflation such that capital will always seek us out as a great place to invest and get a return.
It’s the Australian dollar of course.
No matter what China does to Australian exports, it cannot break us while we have a floating Australian dollar. The more harm China’s trade war does to us, the lower the AUD will go, and immediately and surprisingly swiftly repair the damage.
The math is simple. In 2019, Australia exported $373bn in goods and services. $135bn went to China. Most of it is commodities so all but iron ore would simply go elsewhere if cut off. Not so iron ore because there would be too much of it.
Let’s be pessimistic and say that if China cut off the whole lot then Australia would see roughly a $100bn hit to exports.
Now add an Australian dollar plummeting to $0.50 cents. That adds $98bn to the remaining export base. So, in fact, we’d come out even.
And once we did, an uber-competitive Australia would suck in capital from every quarter as our post-carbon advantages, position on ASEAN’s doorstep, prominence and reliability within the US liberal trading bloc, and smart people drew investment.
Sure, there’ll be losers. But even more winners. That’s business.
And Australia itself will still be young, rich, and, most importantly, free.