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Our China Ties are Firmly Bound

John Lee

Prime Minister Julia Gillard’s review of Australia’s engagement with Asia is promising to deliver a blueprint that will guide Australia’s strategic, economic and trade direction over the course of the next generation.

Although driven by the transformative shifts in economic power from West to East, and led by former Treasury Secretary Ken Henry, the white paper is designed to address questions about Australia’s future strategic orientation in addition to its economic one. Since the announcement, some experts—such as Professor Hugh White—have suggested the recent reinforcing of our strategic alliance with the United States will likely harm our future economic relationship with China.

Many businesspeople eager to continue to benefit from Chinese growth will consider such a white paper overdue, and would agree with White that deepening ties with America will harm our trade relationship with China. For the first time in our history, our largest trading partner (formerly the United Kingdom, Japan, and then the United States) is no longer a member of the western alliance.

Australia’s external environment has become much more complicated. But the evidence and logic that China will—or even is able to—economically punish Australia if we do not move closer to its strategic orbit is weak.

The first point to note is that Australia is facing the same kind of dilemmas confronting many other Asian countries.

Based on volume alone, China has become the most important trading partner for Japan, South Korea and India, in addition to Australia. With the China-ASEAN Free Trade Agreement coming into force in January 2010, Chinese trade with all southeast Asian countries is also rapidly growing.

Yet, like us, Japan and South Korea have recently reinforced and deepened their long-standing security alliance with America and dramatically improved ties with each other. India, along with Vietnam, Indonesia, Singapore, Malaysia, Thailand and the Philippines, have all resisted jumping to the Chinese side and have all instead renewed, reinforced, or developed closer security ties with America. Indeed, China’s only allies remain North Korea, Burma and possibly Cambodia and Pakistan. This is hardly a grouping that Australia ought to join.

Significantly, despite Beijing’s frustration at all major capitals in the region hedging against China’s rise by moving closer to America and each other, trade with all of these countries is blossoming and has not suffered.

This suggests two realities.

First, China needs to trade with these nations as much as these nations need to trade with China.

Indeed, many commentators underestimate the importance of the export manufacturing sector to Beijing. Despite the majority of economic growth in China being driven by domestically-funded fixed investment, the export sector provides 150-200 million of the best jobs in the country to China’s 700 million-plus workforce. There is no way that other sectors of the Chinese economy can possibly make up the slack should the export manufacturing sector take a significant hit, which would occur if Beijing tried to use trade restrictions as a strategic weapon to put pressure on foreign governments to change their strategic orientation.

Remember that in an authoritarian system where the Chinese Communist Party relies on economic performance to guarantee legitimacy, unemployment is a political danger to the regime and the entire political system.

Second, we need to remember that, in spite of its size, China is still a developing country. Trade remains the primary way Chinese firms acquire foreign technology and know-how. Genuine instances of indigenous innovation are still fairly rare despite such a large economy.

This means that China is not able to use trade as a point of strategic leverage, and is unlikely to be in a position to do so in the foreseeable future.

Currently, the Chinese consumer market is about the same size as France’s—large but not dominant. If China became the dominant centre of global consumption in the world, rather than just the primary hub for processing and assembling products to be shipped out to Western markets, then Beijing’s leverage might improve. But this would mean changing its whole growth model from a state-led fixed investment one towards a private sector-driven consumption economy, and allowing foreign firms to actually compete on a level playing field against domestic SOEs in the Chinese domestic consumer market.
Of course, such a move would also imply opening its capital markets and an eventual end to China’s much criticised currency policies.

Doing so would make good economic sense but would also severely dilute the economic power of the hitherto protected state-owned sector, and therefore the political power of the CCP. Like in other places, bad politics will almost always get in the way of good economics.

Manufacturing and services trade is one thing, but what about commodities? Likewise, China has much less leverage than many Australians fear.

Remember that Beijing remains obsessed by energy and resource security or, more precisely, insecurity. If we learnt anything from the Stern Hu arrest saga, it should be that having reliable access to good quality and cheap resources is viewed as being intrinsic to Chinese national interests (read regime security) since these commodities are needed to keep the wheels of development turning in the country.

True, China is sourcing alternative supplies in Africa and Central Asia. But if you do the numbers on projections, their reliance on Australian resources will remain steady if not increase. This means that Beijing is not in any position now, or in the future, to punish Canberra for our strategic orientation.

For evidence, look no further than 2010. The political relationship between Beijing and Canberra reached a generational nadir over issues such as the failed Chinalco bid for a larger stake in Rio Tinto, the arrest of Rio Tinto’s Shanghai executive Stern Hu, an Australian Defence white paper which named China as a potentially disruptive rising power, and the arrival of Uyghur activist Rebiya Kadeer on Australian soil. Despite all this, Chinese demand for Australian resources continued unabated.

Insightful and forward-focused leadership is one thing. Making false choices is another. Let’s hope the impending white paper resists the incorrect analysis that pursuing Australia’s strategic interests and values will somehow harm our economic and trade relationship with China.

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