Commentary | 25 November 2017

'Australia needs to engage China and hedge the risks of this relationship'

Originally published in The Australian (Photo: Max Braun/Flickr)

Originally published in The Australian (Photo: Max Braun/Flickr)

Independence is a powerful, unifying idea that has coursed through Western history from Thermopylae to Catalonia, inspiring nations to greatness and sometimes war. But Australia’s march to independence was relatively uneventful and prosaic. Statues of iconic liberators are notably absent in our cities and towns because there was no war of independence or bloody struggle to throw off the colonial yoke.

Whether through the absence of heroic sacrifice or our sometimes obsessive need for great and powerful friends, it is remarkable how perceptions that Australia lacks foreign policy independence persist more than a century after our formal separation from England.

Russian Foreign Minister Sergei Lavrov is reported to have dismissed Australia “as not a real country”. Many of our Asian neighbours still regard Australian foreign policy as subservient to Washington’s, a position echoed by domestic critics such as Paul Keating, who castigates the government for ceding foreign policy to the US.

However, the looming challenge to Australia’s independence is not the US but China. This reality seems to have escaped critics of our relationship with the US and advocates of ever-closer ties with China. The China challenge is not about having to choose between China and the US. It is about how much independence Australia will be permitted in a Chinese-dominated regional order led by the formidable Xi Jinping, who after the recent Communist Party congress commands more power and influence than any of his Leninist or ­imperial predecessors.

The problem for Australia is that China’s willingness to use ­coercion to achieve its dream of ­renewed greatness is becoming a defining feature of its foreign policy. With the US in self-declared retreat from its global leadership role and lacking a coherent Asia policy under Donald Trump, there are diminishing external constraints on Chinese behaviour and ambitions. These are growing in consonance with its rising power.

Xi’s confident demeanour and revealing speech to the recent party congress suggest he may no longer be satisfied with the restor­ation of China’s natural leadership position in Asia. The “Chair­man of Everything” envisions his country supplanting the declining US as the indispensable world power by 2050.

Xi’s willingness to export a Chinese model of development touting the virtues of authoritarianism is a direct challenge to Australia and the dwindling band of democracies that cling to the notion of a rules-based international order based on respect for human rights, the primacy of free speech, liberty under the law, the separation of executive, judicial and legislative powers, and the notion of a social compact between citizens and their (genuinely) elected governments. As a supremely self-­interested power, Xi’s China privileges social order over individual rights, subordinates the rule of law to the dictates of the party and derives its authority from an asserted doctrinal infallibility that allows little scope for self-criticism or the tolerance of diverse views.

These are weaknesses that ­dilute the appeal of China’s soft power and rob it of the moral authority and commitment to universal values that are the core prerequisites of global leadership.

If China were an insignificant or inward-looking country, this values difference might not matter. But as a proselytising, revis­ionist great power intent on ­reshaping the region to reflect its interests and ideology, it will be difficult to retain the same level of autonomy and freedom of action to which we have become accustomed. The fundamental reason is that as China moves from soft ­authoritarianism to uncompromising totalitarianism at home, its domestic preferences will shape the character and prosecution of its foreign and strategic policies. Just as he closes down political space for domestic critics, Xi wants to reduce other countries’ strategic space and limit their capacity to contest China’s dominion.

This approach is evident in a string of recent confrontations with neigh­bouring states over territorial disputes that include Japan (Senkaku/Diaoyu Islands), India (Doklam plateau), Indonesia (North Natuna Sea), Vietnam (Paracel and Spratly islands) and The Philippines (Scarborough Reef). Each is complex and China is entitled to press its sovereignty claims. What is worrying is its ­unwillingness to recognise that the other parties to these disputes have legitimate claims, too; its curt dismissal of the explicit ruling by the International Court of Arbitration that its South China Sea claims have no validity in international law; the often threatening tone of its rhetoric; its propensity to use force to change facts on the ground by militarising disputed ­islands; and diplomatic ­delaying tactics that prevent a peaceful settlement of the eminently resolvable South China Sea dispute.

Aside from these attitudinal and strategic challenges to our autonomy, Australia’s economic and trade dependence on China is beginning to reach unhealthy proportions, making it increasingly difficult to push back against policies with which we disagree and heightening our vulnerability to a sudden or prolonged downturn in the Chinese economy.

It is well known that China buys one-third of our merchandise exports. Less known is our growing reliance on income derived from Chinese students and tourists. Chinese students contribute $23.6 billion of export income. They make up 38 per cent of the average Australian university’s international enrolments and more than 6 per cent of all students, the highest ratio in the ­developed world. According to the Australia-Chinese Business Coun­cil, Chinese tourist numbers are on a similar trajectory, growing from a modest 4.9 per cent of all tourists in 2005 to 13 per cent last year, with a projected increase to 24 per cent, or 3.3 million, by 2026, which would make China our largest source of foreign tourists.

But is more China an unmitigated blessing? Do we risk putting too many eggs in the China basket in our quest to lock Australia into an imagined Sino-centric world? What would be the consequences for the financial viability of our universities, tourist sector and ­national budget should trade and Chinese student and tourist numbers fall precipitately for political or economic reasons?

China’s use of economic power for strategic purposes ­ampli­fies our vulnerability because of the sheer weight, lure and momentum of an economy that is already the world’s largest by some measures and continues to register stellar nominal growth of 6.8 per cent. How Beijing uses its burgeoning economic strength for geopolitical advantage is still poorly understood because of the separation of business from government in a free market system. In China, the powerful state-owned sector is ­entirely beholden to the government while private companies are “state overseen” and subject to far more stringent control and direction than would be possible here.

It is difficult for Australians to grasp the extent to which Beijing integrates business, economic ­development and national security policy to advance its wider interests. The pre-eminent example is Xi’s Belt and Road Initiative, which is inexorably drawing Asian countries into Beijing’s strategic orbit. Participating countries may derive tangible economic and ­development benefits from the ­initiative. But it is heavily weighted to China’s advantage and structured so that ­smaller countries risk becoming ever more dependent on China’s financial largesse, making them reluctant to take political and strategic decisions that are contrary to Beijing wishes.

Australia’s high economic ­exposure to China poses three risks to our independence and prosperity. First, many of the policies designed to place China at the leading edge of the world economy are thinly disguised protectionism. They are primarily designed to move China up the hi-tech ladder while protecting domestic industries until they are ready to compete internationally.

The trouble is that some of the methods and practices employed, such as cyber theft of other countries’ intellectual property, are clearly illegal. Others are simply unfair. An example is China’s ­attempt to corner the market on battery packs to power electric ­vehicles, identified as one of 10 strategic industries Beijing hopes to dominate.

Carmakers must choose from a prescribed list of 57 manufacturers of EVs to qualify for government subsidies. All the listed companies are Chinese, which precludes foreign battery makers from competing on a level playing field and creates a large, captive market for local producers.

Second, the dark side of China’s rise has been a well-documented propensity to use economic ­coercion to threaten or punish countries for resisting China’s geopolitical demands. Japan, The Philippines, Mongolia and Norway have all been on the receiving end of orchestrated Chinese ­embargoes and deliberately disruptive trade practices in retaliation for taking policy positions that Beijing opposed.

For Australia, the most salient example of China’s preparedness to weaponise trade for political gain was the decision to play geo-economic hardball with South Korea earlier this year because Seoul had the temerity to allow the deployment of the US anti-ballistic missile Terminal High Altitude Area Defense system in response to North Korea’s repeated nuclear missile provocations. Beijing’s ire was raised by the ability of the ­associated X-Band radar to peer several hundred kilometres into China and potentially spy on military installations and capabilities. After Seoul ignored repeated warnings not to go ahead with the deployment, Beijing applied a full-court, economic press on its ­beleaguered neighbour, encouraging boycotts of South Korean products, cancelling concerts featuring South Korean performers and causing huge losses to businesses heavily invested in China.

The most prominent of these was the Lotte Group, singled out by China for special treatment ­because it owned the golf course where the first THAAD missiles were installed. Lotte is expected to lose more than $US1bn ($1.3bn) this year as a consequence. The dramatic fall in Chinese tourism has cost South Korea more than $US6.5bn and the spat is expected to knock 0.4 per cent off South Korea’s economic growth.

Could the same thing happen here? Perhaps the more pertinent question is, why not? Like Australia, South Korea is heavily dependent on trade with China and bilateral relations were excellent before the two countries fell out. Despite Beijing’s recent attempts to patch up the relationship, it is unlikely to be as intimate as before because trust has been broken. South Korean business chiefs make no secret of the fact they intend to reduce ­exposure to China.

A third risk is that our deepening economic ties with China make us increasingly vulnerable to a downturn in the Chinese economy, which would hit Australia hard should the correction be sharp or extended.

This is no longer a distant or unlikely prospect. The World Bank, the International Monetary Fund and the Reserve Bank have all warned about the conse­quences of China’s ballooning debt, which has reached unprecedented proportions at more than three times China’s gross domestic product. In a sobering study of 43 previous credit booms internationally, the IMF found that all ended in recession or ­financial crisis. China is unlikely to be the exception.

The core political challenge for Australia is how to engage totalitarian China without sacrificing our democratic freedoms in the face of a concerted attempt by Xi’s party-state to change our norms, institutions and people to make them more responsive to China’s preferences and interests. Beijing’s use of soft power to achieve these ends is subtle, extensive, well-­co-ordinated and becoming more sophisticated with each passing year. Of course all states try to ­influence the behaviour and policies of others so at one level China’s approach is unexceptional. It is merely the great game of nations writ large. But there is an important difference.

As a populous, emerging great power with global ambitions, China brings formidable resources to the task and is clearly embarked on a mission to make Australia a more compliant state. It would be an exaggeration to cast this as an attempt to impose on this ­country a contemporary version of the ­imperial Chinese tributary state system. But there are echoes of its central purpose in Xi’s apparent determination to establish a Pax Sinica that could one day ­replace the fragmenting Western international order.

What would this mean in practice? One only has to recall recent Chinese attempts to interfere in Australian domestic politics to understand the implications. Our politicians are being seduced and shaped by Chinese money, favours and patronage channelled via ­ostensibly independent organisations that on close inspection are controlled by the United Front Work Department, a propaganda arm of the Chinese government.

Chinese diplomats have placed their students under surveillance and cajoled, persuaded and organised them to support pro-Beijing policies. Australian citizens of Chinese descent also have come under pressure to toe the party line, ­reflecting Beijing’s ­apparent view that all ethnic Chinese are its subjects regardless of their citizenship. All this goes well beyond the bounds of democratic accept­ability since the net effect is to ­reduce the freedoms that ­define us. There is no doubt a subtle process of conditioning is taking place in which Australian elites are more receptive and sensitive to Beijing’s concerns, sometimes to the point of self-censorship. A recent example is Allen & Unwin’s decision not to publish Clive Hamilton’s book on Chinese influence in Australia for fear of Beijing’s retribution.

Donald Trump would attract an avalanche of criticism were he to implement some of his Chinese counterpart’s more egregious policies, yet Xi is rarely taken to task for his ­excesses. Maybe such contradictions are inevitable in the contest to shape the values and principles of the emerging world order. Perhaps we should learn to accommodate China and accept a loss, or qualification, of the freedom we have come to expect in exchange for ­unequivocally locking Australia into what Keating lauds “as the fastest and biggest economy in the world”.

Or should we actively work to contain China and burnish our deputy sheriff credentials, as some China hawks argue?

Well, actually, there is a better third way — “to engage and hedge”, the sage advice of ­another Australian prime minister but one with unparalleled experience in dealing with China. Kevin Rudd was not in the Lodge long enough to fully implement his own advice. But judging by the just ­released foreign affairs white paper, and earlier comments by senior officials, the Turnbull government seems fully committed to a policy of engage and hedge.

The engagement part is obvious. All Australian governments have been doing exactly this for several decades. But the hedging part needs refinement. It requires us to manage China risk better by strengthening our ties with other regional democracies, especially Japan, India and Indonesia. It means retaining our alliance with the US, which is not going away and remains the only country capable of balancing China.

It also means protecting our core economic interests from Chinese-induced shocks and predatory behaviour by not giving away our intellectual property and by reducing our exposure to merchandise trade and services with China through diversification. It means telling Beijing that we have core interests and values, too, and not being afraid to articulate and defend them. And it means establishing reciprocity as the key principle governing the ­relationship.

All this will be necessary to preserve our independence in a more China-centric world.