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China-Australia report: Economic relationship needs work

China-Australia report: Economic relationship needs work
Published 15 Aug 2016 

It’s less than four years since then-Prime Minister Julia Gillard launched ‘Australia in the Asian Century’ at the Lowy Institute. It has sunk, with hardly a trace.

There was much inspirational language about the great opportunity the Asian Century gave Australia to undergo 'a transformation as profound as any that have defined Australia throughout our history'. There was, however, a shortage of specifics on how to achieve this transformation. As I said back then: ‘If anyone didn't already know that we have the good fortune to be next to the most economically vibrant region in the world, this document sets out the full measure of our luck.’ But, beyond some nice-sounding ideas about fostering Asian-language learning, there wasn’t much in the way of an agenda on how to reap the potential, and virtually no funding to help any initiatives get started.

Now ANU’s East Asian Bureau of Economic Research and the China Center for International Economic Exchanges in Beijing have produced ‘Partnership for change: Australia-China Joint Economic Report’. This impressive 300-pages volume, produced with substantial support from both governments, provides some specifics on the keystone of our Asian opportunity: the Australia/China relationship.

Its aim is to define a framework for policymakers and for stakeholders in business, media, research institutions and the community; a framework that enables Australia and China to harness the opportunities that are arising from the profound transformations in their economies.

There is, inevitably, a fair amount of the same lauding of the Asia-proximity opportunity that filled the Asian Century report, but this report has the advantage of focusing on just one relationship, so it goes beyond the feel-good platitudes. It tells the amazing story of what has happened so far (much of it in the last couple of decades).

Two graphs from the report summarise the overwhelmingly dominant element in this narrative. The first says that China’s spectacular growth propelled it into a central role in global resources markets. The second says that that they bought a big chunk of these resources from us.

In short, much of the past success (certainly the success in exporting minerals) springs directly from the synergies of the two countries’ differing comparative advantage. There is something of an inevitability in the story of iron ore and coal: we had the huge resource deposits; they were on track to produce over half of world steel. But here is the important message: even this ‘had to happen’ narrative needed the catalyst of government encouragement in the 1980s and commercial risk-taking by the resource companies. Success is always clearer and more inevitable in hindsight.

Australia rode the minerals boom, which made China our top export destination. But China seems to have reached ‘peak steel’ and coal won’t be the favoured energy source of the future. These resource exports won’t disappear or even decline. But where will the growth come from? To continue to reap the benefits of this bountiful opportunity, we have to find the comparative-advantage synergies in the next phase of China’s transformation from investment-driven growth to consumption-based.

The usual answers are to be found in the report: services and high-end food. Much of the current success in education, tourism and food fads such as baby-formula seem, like resources, to be more about the luck of nature, combined with the mechanical fact that even if we get only a small share of the Chinese market, it will bulk large for us. The key policy question is whether Australia will continue to be dragged along in the slip-stream of China’s spectacular growth.

The answer this report offers is that Australia would still do pretty well even if we just lie back and enjoy the ride. But, says the report, we will do much better if we try harder and play our cards well.

So far the role of policy has been in the background, but important. Iron ore actually required far-sighted initiatives. In the 1960s there was still a ban on iron ore exports, reserving Australia’s deposits for the local industry. Not long after formal diplomatic recognition, a special relationship developed, including at the very top level. In the background, policy was developed to facilitate the initiatives.

On foreign investment, the regulatory environment had to find a delicate balance between encouraging Chinese investment and avoiding a xenophobic backlash in Australia. This policy-development went beyond resources. Behind the influx of Chinese university students was an earlier transformation of our universities to make them capable of providing these services. The influx would be different if visa policy (and the possibility of permanent residence) had not been part of the policy adjustment.

In short, even the seemingly inevitable linkages that have taken the Australia/China relationship to where it is now are not just the product of natural evolution, but required commercial entrepreneurship and government policy.

The special relationships of the 1980s couldn’t continue once China became a major player on the global stage. How will the government’s facilitation role and encouragement of entrepreneurship play their necessary role in the future? The report has a number of suggestions for strengthening the linkages between the two countries, with emphasis on person-to-person relationships at all levels.

The centre-piece would be a Basic Treaty of Cooperation:

This treaty would lock in the practice and principles for cooperation, and: commit to regular high-level government dialogues; set out the principles for managing the relationship that are enunciated in this Report; institutionalise official bilateral exchanges and technical cooperation programs between economic and foreign affairs ministries, including branches of the military; include policy approaches between federal–state governments in Australia and central–provincial governments in China; provide for the comprehensive setting of strategic bilateral objectives in a forward agenda; enfold the agreements, mechanisms and reforms of the ChAFTA arrangement; and entrench cooperation on improving educational, cultural and people-to-people exchange.

This is the high-level long-term plan. The report also spells out the detailed possibilities. A report like this will, by its nature, ‘travel hopefully’. Not all of the ideas explored will prove feasible. It may be too optimistic in seeing Australia as a close partner for China as China seeks to achieve its proper place in international forums, both regional (APEC, ASEAN Plus) and multilateral (G20, IMF): Can Australia join with China to be ‘a powerful force for the strengthening and developing of these institutions’?

The Ausgrid decision provides a reminder of the difficulties in getting the investment relationship right. Here’s the report’s caution:

This will not be achieved if the broader community does not grasp the benefits of foreign investment in both Australia and China. In Australia, this means accepting equal treatment for Chinese investment and reconsidering attitudes towards state-owned investors from all countries. In China, it means building respect for rule of law to make investments secure and predictable for all domestic and international parties .

Elsewhere, the necessary comparative advantage simply may not exist. Australian banks, for example, have shown no aptitude for meaningful overseas operations. The report provides a case study of AMP’s drawn-out efforts to get a toe-hold in the Chinese insurance and funds-management markets, which would have to be described as, at best, a modest success. We have to accept that many Australian businesses have insufficient skills and scale to operate successfully in China, separated by unfamiliar language and custom.

That said, the powerful lesson is that there are opportunities, and these will often require more homework, more institutional infrastructure and more relationships than currently exist. Reaping the advantages of proximity isn’t just about synergies from comparative advantage. It doesn’t just happen.

This report, sensibly, refers to wider security issues only as context with just a box on regional security and a few paragraphs in the text of a chapter about risks. There is no shortage of pundits on the security challenges. We still await the (bold) author who revisits the idea that close economic integration makes open conflict unlikely, even unthinkable.

Image courtesy of Flickr user AK Rockefeller

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