By Wayne Cole

SYDNEY (Reuters) – Australia’s new security pact with the United States and the UK, seen as a move to contain China, may worsen strained ties with its biggest export customer, but China’s insatiable appetite for resources may limit its punitive responses, say analysts.

Beijing will view the security pact, including U.S. submarine technology access, with Western powers as a threat. This is according to Michael Sullivan of Flinders University’s International Relations Lecturer.

“China will view the decision to expand defence cooperation with the US and UK and, in the future, base US strategic strike capabilities in Australia as confirmation that we are a growing military threat to its interests, such as the Belt and Road Initiative,” said Sullivan.

China has placed hefty restrictions and tariffs on Australian exports, such as wine, beef, and barley. They also outlawed coal imports, to protest Canberra’s foreign policies. This was despite only limited success.

These are huge amounts at stake as Australia sent a record A$173billion ($127 billion), mostly of resources, to China during the twelve months ending in July. This represents more than 35% Australia’s total exported. In that same time period, Australia only purchased A$87 million of mostly-manufactured goods from China.

The torrent of cash has allowed Australia to enjoy a string of current account surpluses while also increasing the profits of miners and their dividends. The government has received a significant amount of tax revenue, which is a great benefit at a moment when the budget deficits are huge to pay for emergency aid to citizens locked up by coronavirus.

Iron ore is the largest exporter. This was because of China’s increased demand for steel, which drove the price for this mineral to record highs in May. Australia’s exports of metal ore in July reached A$19 Billion, more than 40% from total earnings.

China partly changed the course of events in recent months, stepping up steel production cuts and warning that it will impose stricter control on carbon-emitting countries. This has led to iron ore price drops of 45% from its peak.

China still has no choice but to buy iron ore imported from Australia. China also cut down on steel output and warned of tighter carbon emission controls. Brazil, the world’s largest importer, is experiencing capacity limitations.

“If China just stopped importing iron ore, that would be a disaster for Australia,” said Shane Oliver, chief economist at AMP (OTC:) Capital. “But it would essentially mean China would have to shut much of its own economy as well.”

He added that Australia has been able find new markets to export its products. So while China tensions are still a concern, they have not had a significant impact on Australia’s exports.

Beijing’s control of Chinese tourists to Australia and their students who have spent time and money there has also been a factor in putting pressure on Australia.

The pandemic, however, has effectively shut down Australia’s international borders. But the education and tourism sectors in Australia are pushing for their reopening before the year ends.

($1 = 1.3624 Australian dollars)