Maybe the last place on earth insulated from the China Shock?

I have spent the past few days in Australia and New Zealand for a run of conferences and meetings. One of the more memorable stops was arranged by a former student of mine, now a member of the New Zealand Parliament, who invited me to sit in on Question Time — the session in which the prime minister and his cabinet take questions from the floor. What I found interesting is that during the entire session, there was not a single question about foreign policy or foreign trade. For a small, open economy so heavily dependent on trade, and that trades heavily with China, it is telling me something.

My meetings in the region with academics and some government officials left me with a consistent impression: Australia and New Zealand are not unduly worried about the China Shock, which has preoccupied policy makers in many countries. They have good reason not to be. China Shock means the surge of Chinese manufactured exports that, over the past two decades, hollowed out factory employment across much of the developed world and probably has had a dampening effect on industrialisation in the developing world. China Shock is a huge boon to consumers but a bane to producers worldwide.

This is the double-edged sword of trade, and there is nothing unusual or special about trade with China —except, and this is a big except, for the fact that the scale of Chinese exports is so huge and the scale of its imports is so small. This is why trade with China has been such an animating issue in much of the developed world and in some developing countries. In some ways, the China Shock is a bit like AI. We know it is good on the expenditure side — cheap prices and high quality — but we worry about its impact on income.

What works for Australia and New Zealand

Australia and New Zealand seem to be blessed with three conditions that are insulating them from the downside of the China Shock. The first is that Australia and New Zealand have what China needs. Their main exports to China are commodities that feed Chinese manufacturing rather than compete with it. In 2024, Australia exported to China US$105 billion of iron ore along with large volumes of liquefied natural gas and coal. China is Australia’s largest trading partner by a wide margin, and Australia runs a trade surplus on the order of US$80 billion. New Zealand exports a lot of dairy to China. Milk powder is the country’s single largest export, worth close to US$10 billion, and China is its biggest market, taking around a fifth of all New Zealand exports. These are inputs and staples, and to China, Australia and New Zealand are suppliers, rather than economic rivals.

For a democratic society, whose government answers to voters who are also workers, that is close to a heavenly combination. The China Shock is a shock mainly to places that make the same things China makes — and China makes everything. These two countries do not.

The third reason is that both countries are already high-income, and they got to be that way not through manufacturing. Their economies rely on commodities, agriculture, services, tourism, and education, sectors that are all complementary with China. Contrast this situation with developing countries that try to grow their economies through manufacturing, a path that will put them in direct competition with China. Also contrast their situation with a high-income country like Germany. Germany is wealthy, but it got there through manufacturing, which is now under real strain from Chinese competition.

China Shock is difficult for two types of countries — countries that are rich and highly industrialised and countries that are poor but aspire to industrialisation. Australia and New Zealand are not in either of these two positions.

Which may explain what I did not hear in the New Zealand Parliament. On trade with China, both Australia and New Zealand are, in the grand scheme of things, doing okay, a respite from the China Shock that is now sweeping much of the world.

This article was first published in Substack by Yasheng Huang, as “Maybe the last place on earth insulated from the China Shock?”.

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