Australia's Iron (C)ore: Examining Economic Interdependence with China Through Structural Vector Autoregression Analysis

This paper explores the dynamics of Australia's economic interdependence with China, with a particular focus on the mining industry and iron ore exports. Specifically, a Structural Vector Autoregression (SVAR) model, variance decomposition, and Granger causality testing are used to examine the impact of fluctuations in Chinese industrial production of steel on nine selected economic variables (four international and five domestic). In response to a positive demand shock, all variables tested display an immediate positive result, suggesting interconnectedness and a quick adjustment to the shock. Additionally, in line with the results of existing studies, the cash rate and exchange rate appear to act as shock absorbers. Further, a persistent effect on the Index of Global Real Economic Activity and Australian GDP growth highlights the long-term influences of Chinese demand (a result further validated by the strong Granger-causal relationship between iron ore exports and Australian GDP growth (p-value: 4.2e- 06)). These findings have substantial implications for both the mining industry and overall Australian economy. Given existing trade tensions and the importance of China as a trade partner, it is thus essential for Australian business and policy leaders to plan for similar real-life scenarios appropriately.