China cannot have it both ways on trade
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China cannot have it both ways on trade

Beijing's tactic of using trade as a political stick against Australia will not impress the rest of the world. Originally published in the Australian Financial Review.

It is getting hard to believe China’s leaders when they say the country "will hold high the banner of free trade and multilateralism". China has paraded the ASEAN-led Regional Comprehensive Economic Partnership, and this week Xi Jinping floated the idea of joining the resurrected Trans-Pacific Partnership.

In the same breath, China is targeting exports from 13 Australian industries worth $54 billion, almost entirely outside of established mechanisms for trade disputes. This contradiction is indicative of many others that are exposing weaknesses in China’s strategy.

As much as China’s officials claim that the delays on Australian exports are in line with quality procedures, anti-dumping regulations and quotas, the now-famed list of "14 grievances" tell another story. The Chinese embassy’s list of irritations was lengthy, spanning concerns from foreign investment decisions to unfriendly media reporting.

None of this is surprising to Australians; Chinese government officials and state-owned media alike have complained about all of these issues in real time, very loudly.

But the list is notable because Beijing appears to have said the quiet part out loud. Wielding economic coercion is not new to statecraft, nor unique to China. But in previous cases, China has been careful to preserve some element of plausible deniability.

But now it seems that Beijing is openly demanding political compliance, from not just the Australian government, but the free press and academia too. All of this comes from a country that claims to be a defender of the international order, on the basis of "mutual respect".

Beijing’s efforts to quieten Australia have been counterproductive. Australia is too accustomed to the familiar litany of claims that Canberra is out of line in the South China Sea or on Huawei’s exclusion from Australia’s 5G network. This list was notable for going beyond the usual complaints, criticising funding for media organisations and outspoken backbenchers.

DFAT Secretary Frances Adamson said earlier this week that “China may have reached a point where it believes that it can largely set the terms of its future engagement with the world. If it has, it is mistaken.” This is hardly the sound of a government that has been cowed into compliance.

The opposite is true. Australian attitudes have been hardened by Beijing’s heavy-handed approach. Almost all Australians want to diversify away from the Chinese market, and trust in China has plummeted, according to the latest Lowy Institute Poll.

Some may take small comfort from Beijing’s flat reaction to the more conciliatory tones from Prime Minister Morrison’s speech this week. But the flow-on effects of this saga are already palpable, as businesses in both countries look for alternatives and prepare for what now seems inevitable: politically motivated trade disruption.

These consequences may partially align with China’s goals, as it prioritises domestic production and aims to reduce its reliance on other countries. This is yet another contradiction on display, from a country that will soon be the world’s largest economy but still claims developing nation status.

Still, its unclear why Beijing has doubled down on this strategy. It could represent a misplaced confidence that China’s approach is working to shift Canberra’s behaviour. This would be yet another worrying sign that, in the paranoia of Xi Jinping’s regime, internal reporting tells what the leadership wants to hear rather than the reality on the ground.

Alternatively, the same logic of Xi’s China has led to public demonstrations of loyalty from lower-ranking officials. The "14 grievances" could be a signal back to Beijing of commitment to China’s cause, though this may not be plausible given the stakes at this point. But it is this same phenomenon that has given rise to "wolf warrior" diplomacy.

It is more likely that Beijing’s list of demands are not for Canberra, but aimed at other capitals. China needs to signal that Australia's perceived recalcitrance will be punished. It doesn’t want to risk others getting any ideas about not deferring to Beijing’s interests. The plight of Australia’s export industries may serve as a potent warning.

Australia may seem like an outlier as a recipient of the Party’s ire, as Beijing exacts retribution for perceived slights. But the number of clashes between China and other countries also grows by the day.

A scan of Chinese state-owned media finds the airing of grievances with India, Canada, the United Kingdom, New Zealand and Brazil just in the last two days. A number of these countries, including Australia, would have to agree for China to join the TPP trade agreement.

For these countries and others, the lessons are obvious. Unless they can control their media and political debates, and look the other way on Chinese interference or potential risks to critical infrastructure, they may be next in line.

But there is another lesson here, and yet more evidence of the contradictions in China’s policy. No number of trade agreements and deals with China will insulate a country from the wrath of the Party. With every additional threat, China itself is making the argument for many countries, not just Australia, to hedge or even diversify away from China. Business confidence and trade relationships are both undermined.

In the face of overwhelming pressure from China, Australia has not blinked. But Beijing can’t have it both ways. Punishing Australia could help to stifle criticism in the future, but not without China being seen as a bully and a threat.

Natasha Kassam is a research fellow in the diplomacy and public opinion program at the Lowy Institute.

Areas of expertise: China’s domestic politics; public opinion polling; human rights; Australian foreign policy; Taiwan; Indo-Pacific strategy