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Canberra vs Beijing: Getting serious about costs

It is impossible to have a useful public debate about the value of sovereignty if we refuse to put a price on it.

An iron ore mine in Western Australia (John W Banagan/Getty Images)
An iron ore mine in Western Australia (John W Banagan/Getty Images)
Published 16 Jul 2020   Follow @SamRoggeveen

The word “diversification” trips far too easily off the tongues of Australian strategic commentators.

Australia is rightly concerned about China's growing international assertiveness, so the instinct to diversify away from China as a trading partner is understandable, because excessive dependency would make Australia easier to manipulate and coerce. But the whole idea of Australian dependency on China is highly questionable, and calls to diversify tend to come without price-tags attached. We need a clear idea of what economic diversification might cost before we decide whether it is a reasonable response to our economic relationship with China.

Last month I debated this issue with my Lowy Institute colleague Alan Dupont (here's Dupont's opinion piece, followed by my response, and finally Dupont's counter), who said in his last contribution:

Most Australians would regard our independence and sovereignty as critically important non-negotiables. Their loss would be palpable although difficult to quantify. But so too is the dollar cost of diversifying away from China. This cannot be accurately gauged or even meaningfully estimated by economists because there are so many variables and competing assumptions. Economic and financial forecasting will not provide an actionable, calculable balance sheet for comparing the respective costs of diversification versus non-diversification.

I agree that independence and sovereignty are important (though not “non-negotiable” – more on that later), but that only makes it more urgent to calculate the costs of protecting it. That’s a difficult task and the results will be imperfect, but it is not beyond us to come up with estimates that provide a meaningful guide to policy. In fact, it will be impossible to have a really useful public debate about the value of sovereignty if we refuse to put a price on it.

We can draw an analogy with health policy. Most of us have asserted, at one time or another, that “you cannot put a price on human life”, and in moral and legal terms, that’s true. But without measuring the cost of keeping human beings alive, it is impossible to fairly distribute finite resources across the health budget. In fact, although the Australian Government doesn’t advertise it much, it actually does put a price on human life – it’s about $4.9 million at the moment

The trick is to find a solid basis for the difficult judgments that lie ahead regarding the costs of asserting our rights and interests against a rising China.

Governments make similar calculations with the defence budget. Every year, they judge what it will cost to defend Australia – too much and we waste resources, too little and we weaken our deterrent power and leave ourselves open to intimidation by adversaries. It’s hard to ever know if the government is getting this judgment right, but we do know that it is impossible to build a defence force without making them. 

So it is not at all unrealistic to ask those who want to diversify Australia’s economy away from China to estimate what it will cost, and whether we should be prepared to pay that price. Or, to offer some specific examples: how big a subsidy are we willing to pay companies like BHP Billiton to stop selling iron ore to China? How much extra are we willing to pay for a 5G service if we exclude the cheapest vendor? Recently, regular Interpreter contributor Greg Earl highlighted some new studies which estimate the costs of diversification. Not surprisingly, it depends on what we are buying or selling. In some cases, the costs of diversifying away from China would be minimal, but not in others. 

Moreover, dependence a single market is not always risky. Dupont thinks universities now regret their “China-centric, bottom-line driven business models”, but as Richard McGregor has argued, China’s education and tourism markets have been liberalised, making it difficult for the central government to suddenly turn off the tap in order to coerce the universities or our government. Moreover, the market is the best judge of whether reliance on Chinese students or tourists is too commercially risky – if universities, hotels, airlines or tour operators want to spread that risk, they can do so. No government intervention is required.

Of course, the market is a poor judge of national security risk, which is where government must occasionally intervene, as it did on 5G. But even in those cases, governments cannot avoid the need to balance risks against costs. It sounds good to assert that sovereignty is non-negotiable but in actual fact it is negotiable. Indeed we surrender pieces of it all the time in exchange for other benefits (take free trade agreements, for example).

The trick is to find a solid basis for the difficult judgments that lie ahead regarding the costs of asserting our rights, interests and, yes, our sovereignty against a rising China. Economic estimates alone won’t suffice to reach those judgments, but they are necessary.

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