Why Australian iron ore could save Taiwan as China ponders economic ramifications of invasion

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As the dark clouds of war gathered over North East Asia in 1938, a curious battle took place at home which forever tainted the memory of the founder of the Liberal Party, Sir Robert Menzies , and which could be a harbinger of what lies ahead.

Then Attorney General for the Lyon government, Menzies became embroiled in a fight with Port Kembla waterfront unions over the loading of a British steamer, the SS Dalfram, with pig iron produced by BHP bound for the Japan.

The Lyon government had banned iron ore exports to Japan after its brutal invasion of China and the Nanjing Massacre in 1937, but, inexplicably, it had allowed the shipment of pig iron – a raw form of processed iron.

Menzies decreed that only the government had the right to decide relations with foreign powers and goods to be exchanged. After a 10-week stalemate, she forces the unions to load the ship.

It was an event that led to the future Prime Minister being nicknamed ‘Pig Iron Bob’ and – after the attack on Pearl Harbor in 1941 which saw Australia go to war with Japan – he was mocked by mockery that he had shipped iron ore to Japan before. the war for the imperial army to send back in the form of bombs and bullets.

The incident helped dismantle the White Australia policy – as well as the prejudice and racism of the time – after Chinese Australians showed their gratitude by providing striking workers with fresh food. And, given the course of history, it is a stark demonstration of the futility and wastefulness of war.

The recent visit to Taiwan by US House of Representatives Speaker Nancy Pelosi (left) has infuriated Beijing, including its Australian ambassador.(AP: Taiwan Presidential Office via AP)

Once again we face a similar threat, but the tables have turned.

Japan is now a staunch ally and, instead, China is waving the saber. After US House of Representatives Speaker Nancy Pelosi’s visit to Taipei last week, the charming Australian Ambassador to China, Xiao Qian, rocked the sheepskin clothes with a blunt and aggressive warning about our stance. as Beijing steps up military exercises around the island.

But, for all its rhetoric and threats, Beijing’s decision-making power may be limited. And the key weapon may well be that same red earth from Western Australia.

Difficult choices loom

For decades, we have straddled an inherently unstable ideological and diplomatic chasm. While our defense and diplomacy have been firmly aligned with the democratic West, our trade and commerce has increasingly been dominated by our relationship with a state-controlled one-party China.

However, the time is fast approaching when we may be forced to choose as China fights for strategic dominance in the Pacific.

Xi Jinping salutes from a black vehicle as he drives through a parade of some 15,000 soldiers.
China has become increasingly aggressive in its foreign policy under President Xi Jinping.(Reuters: Thomas Pierre)

It’s a possibility that has barely entered the public debate and that few seem willing to confront, at least in public. Even financial markets do not price in the prospect of a violent upheaval in our national income or in the incomes of the corporations that dominate our trading relationships.

Because if Beijing decides to take Taiwan by force, Canberra will have no choice but to impose trade restrictions.

Washington, Tokyo, London and Brussels would demand it. The idea that we could continue to supply vital military ingredients to a global superpower threatening to upset international stability by force would be inconceivable.

Nasty as it sounds, over the past five years it has been Beijing that has used trade as a blunt weapon to bludgeon Australia.

It has systematically shut us out of its markets for almost everything from coal to lobsters, using increasingly flimsy excuses about tainted grain, pest-infected wood, protected wine and anything else that punishes our perceived indiscretions.

There’s only one product because it held off well and that’s iron ore. There’s a good reason for that. Beijing cannot afford it.

Australia supplies around 60% of the world’s iron ore, bringing in around $150 billion in 2020/21. The vast majority of these shipments, almost 80%, go to China.

It is difficult to underestimate the importance of iron ore to the Chinese economy. For decades, massive state-led investment in infrastructure and private investment in building construction have helped spur growth, spur employment, and stave off recessions.

A man and woman bump elbows in front of the camera with the Australian and Chinese flags behind them.
Foreign Minister Penny Wong (left) attempted to improve Australia’s frosty relations with Beijing during a July meeting with her Chinese counterpart Wang Yi in Jakarta.(Provided: Australian Embassy Jakarta)

It also allowed the regime to build a vast military complex.

The severance of relations with Australia poses an acute threat to the Middle Kingdom at a time when it faces enormous economic challenges on multiple fronts.

A rapidly aging and shrinking population, rising and massive debt levels, slowing growth, a housing bust and a crackdown on high-tech companies have left the economy hurt and deeply scarred. Then there are the ongoing COVID-19 lockdowns that are taking their toll.

While China produces huge amounts of iron ore itself, it is mostly low quality, dirty and expensive. Brazil has been unable to fill the breach and Beijing’s ambitions to increase production in Guinea, West Africa, will take years, if not a decade, to materialize.

This makes it vulnerable and exposed to any immediate disruption in trade.

What are Beijing’s options?

For years, Beijing has desperately searched for alternatives. He acknowledged that Australia’s iron ore, and its reliance on trade, is its Achilles’ heel both economically and strategically.

The most promising alternative source is the west coast of Africa in Guinea, where the giant Simandou project promises to fill the gap with around 2.5 billion tonnes of high-grade ore.

The exterior of the Rio Tinto building is framed by another building and a tree.
Perth-based Rio Tinto received some good news about its lucrative Simandou project last week.(ABC News: Rebecca Trigger)

But for decades the project was mired in corruption and controversy, made all the more difficult by an unstable government and difficult terrain.

Rio Tinto – which has a majority stake in the operation – first became involved in the project in the late 1990s and, along with everyone else involved, has been the subject of international investigations into allegations of corruption in connection with the project over the past five years.

Last week, however, the project seemed to be back on track. Rio, its Chinese government-owned partner, the Guinean government and a rival consortium have agreed to complete the project, with the first shipments scheduled for 2025.

Given that it was supposed to be fully operational by 2015 and that vital infrastructure – including port facilities and a 600 kilometer rail link – has yet to be built, there are legitimate doubts as to the feasibility of this schedule. And, in the event that trade sanctions are imposed on Beijing, the involvement of Rio Tinto could well be called into question.

Another possible source of high-grade iron ore for China is the Donbass region of Ukraine. But again, with the ongoing war likely to continue for some time, developing this region could take much longer than China can afford.

What does this mean for us?

A mining truck drives over red dirt at BHP's Jimblebar mine on a bright sunny day.
Australian iron ore remains critical to the Chinese economy due to the lack of equivalent alternatives.(ABC News: Rachel Pupazzoni)

Beijing’s reliance on Australian iron ore potentially puts us in a very powerful but extraordinarily difficult diplomatic situation.

Shutting down Australian iron ore would be a hammer blow to China’s national economy for at least the next few years.

It would hurt here too. Our national income would take a big hit, especially in terms of federal tax revenue. Some of our largest and most powerful societies – many of which have benefited enormously from China’s economic transformation over the past three decades – would suffer the most.

Having profited from Vladimir Putin’s invasion of Ukraine, which sent resource prices skyrocketing, they would be forced to bear the brunt of any Chinese aggression against Taiwan.

In relative terms, however, the blow to Australia’s economy would most likely pale in comparison to the damage inflicted on China.

Australian mining is overwhelmingly foreign-owned, meaning most profits go offshore. Take Rio Tinto, the largest operator in Australia. Its main shareholder is Chinalco, a Chinese state-owned company, with 15%.

Foreign investment houses, sovereign wealth funds and wealthy international investors all gravitate to Australian miners, as they are among the biggest in the world. Thus, the income received would be distributed well beyond our borders.

Even on the jobs front, the effects – while devastating for industry players – would be manageable. Mining is a highly mechanized, capital intensive and extremely efficient operation.

The main difference between the two countries is that iron ore is an external source of revenue for Australia and a lucrative source. But for China, it is a vital ingredient that fuels its internal growth.

If the Western alliance were to impose trade restrictions or bans on Beijing that included iron ore, Prime Minister Xi Jinping’s One China ambitions could crumble as the economy collapses.

Despite all the military exercises and show of force on Taiwan over the past fortnight, the prospect of an economic collapse resulting from trade bans on key commodities would make Beijing think twice about invading Taiwan.

At least for the next few years.

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