Market Adjustments To Import Sanctions: Lessons From Chinese Restrictions on Australian Trade, 2020–21

Abstract

Under what conditions do high levels of export concentration in a single market generate vulnerability to coercive economic power? This paper investigates that question by examining the experiences of Australian export industries that lost access to the Chinese market during a sanctions episode beginning in May 2020. Despite China being a dominant and highly valuable export market for many affected industries, the economic – and accordingly political – impacts of sanctions were more modest than anticipated. We argue the reason for this lies in autonomous market adjustments. Theoretically, we extend insights from research on how market dynamics condition the impact of sanctions that generate ‘supply shocks’ (such as oil embargoes) to the new domain of ‘demand shocks’, and present a model of the process of responding to unilateral import sanctions from the perspective of target exporters. We argue impacts can be diminished by three mechanisms: reallocation (selling sanctioned products to alternative markets); deflection (circumventing sanctions via intermediaries); and transformation (adjusting production processes to produce and sell different products). Empirically, we document variation in adjustment processes undertaken in nine Australian industries, and explore the conditions under which adjustments are viable depending upon differences in market dynamics across products.

Keywords: economic coercion, economic sanctions, market adjustment, China, Australia

JEL Classification: F14; F51; F52