By NEIL THOMAS
Scott Morrison faces the unenviable task of steering Australia through an intensifying economic conflict between the US and China.
There is rising concern that Australia’s even-deeper business ties with China present an unacceptable security risk as Beijing becomes increasingly authoritarian at home and more activist overseas.
So how should the emerging debate about the so-called “bounded engagement” with China apply to economic relations? China is clearly important to Australia’s economy. Trade increased from $13.8 billion in 1999-00 to $194.6bn in 2017-18, when China accounted for 24.4 per cent of Australia’s total trade.
Exports to China were equivalent to 6.8 per cent of Australian GDP that year, led by iron ore, other minerals, agricultural products, education, and tourism. China is also the fifth-largest source of foreign direct investment in Australia, with 4.8 per cent of the total.
Clive Hamilton, the most prominent Australian critic of economic engagement with China, thinks Canberra is “mesmerised by the belief that only China can guarantee our economic prosperity” and is thus “afraid to stand up to Beijing’s bullying”. Australia could “become a tribute state of the resurgent Middle Kingdom”.
Other voices call for Canberra to “diversify economic ties” to “reduce our economic dependence” on China.
Australia certainly does not want its decision-making bound by external pressure, particularly at a time when China is becoming increasingly active in global security.
Over the past decade, Beijing has deployed temporary trade sanctions to exert diplomatic pressure on multiple countries, including Canada, Norway, Japan and South Korea. Since early this year, some Australian coal exports have been delayed at Chinese ports, possibly to benefit local miners or for environmental reasons, but possibly as retaliation for hardening China policy.
But Beijing is unlikely to switch suppliers of iron ore, Australia’s major export, because it would suffer significant transaction costs, damaging supply interruptions, and a further erosion of global trust. More vulnerable, though, are substitutable exports, including tourism and education.
Still, economic engagement does not give Beijing anything like veto power over Australian strategic decision- making.
It may be true that China is more willing to absorb economic pain in pursuit of strategic goals than Australia, but trade is a two-way exchange and China is hardly immune from the consequences of market interference. Restrictions on trade and investment raise costs in the Chinese economy and invite domestic pushback from businesses, investors and consumers, making it harder for Beijing to sustain the healthy growth it needs to maintain popular legitimacy.
Internationally, geoeconomic coercion elicits defensive pushback from target countries and prompts these victims to take stands against Chinese pressure and draw closer to the US. Australia must not, of course, be naive about China. Sensitive sectors should be off-limits to trade, investment and collaboration. These limits ought to be strictly enforced but should focus narrowly on critical infrastructure and advanced military technologies. Otherwise Canberra risks shutting Australian firms out of the global ecosystem of investors, manufacturers and customers that drives innovation.
Analysts call this a “small-yard, high-fence” strategy and the government should form an interdepartmental taskforce to apply it in Australia.
But Morrison should also seek to minimise downside risk by establishing a fund dedicated to providing temporary financial relief to sectors affected by any coercive economic diplomacy. He should also direct the recently launched National Foundation for Australia-China Relations to fund China due-diligence capacities for Australian organisations, independent Chinese-language media and community organisations, and academic research on bilateral relations.
However, Australia’s economy is overly dependent on China — not for national security reasons but because of overexposure to China’s slowing growth and financial risks.
The US-China trade war and a slowing Chinese economy are already hurting Australian growth. So, the government should harness the benefits of trade with China to provide incentives for regional diversification. Increased funding for export financing through EFIC could encourage Australian firms to trade and invest in new markets. Economic diplomacy could increase Australia’s competitiveness by raising standards in trade pacts such as the Regional Comprehensive Economic Partnership and the surviving Trans-Pacific Partnership.
A hard-nosed foreign policy must recognise the enormous breadth of benefits that come from trade and investment with China, including co-operation on global threats such as climate change and stronger employment, lower prices, productivity growth and higher incomes in Australia.
Yet, given that China’s ability to convert trade into leverage is quite limited, and China’s influence is not nearly as overwhelming as some suggest, Australia requires only modest controls to continue bilateral economic relations while still upholding its sovereignty and a rules-based global order.
Neil Thomas is a research associate at Macro Polo, the in-house think tank of the Paulson Institute in Chicago. His views do not necessarily reflect the views of the institute.
This is adapted from a paper on Australia-China economic engagement published as part of Asia Society Australia’s Disruptive Asia series.
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