Australia becomes China’s Western whipping boy

From Gideon Rachman at the FT:

Australians of a nervous disposition should probably avoid reading the Chinese press and social media at the moment.

A combination of tensions over the South China Sea and the Olympics has made Australia the target of wild invective by Chinese nationalists.

The current problem started with last month’s adverse ruling by an international tribunal on China’s claim to most of the South China Sea. Along with the US and Japan, Australia called on China to respect the verdict.

The reaction in Beijing was furious. The Global Times, a nationalist newspaper that is a subsidiary of the Communist party’s People’s Daily, accused Australia of a “delirious” reaction to the ruling and added: “China must take revenge . . . If Australia steps into the South China Sea waters, it will be an ideal target to warn and strike.”

Even the Olympic swimming pool has become disputed water. When Mack Horton, an Australian swimmer, accused a Chinese rival, Sun Yang, of being a ” drug cheat”, the media in China lit up with abuse aimed at the “racist” and “uncivilised” Australians.

These events should not be dismissed as silly summer stories. Their significance goes beyond the confines of Sino-Australian relations. They speak to the broader tensions between a rising China and the west.

…Australia, an outpost of the western alliance on the edge of the Asia-Pacific region, is in danger of becoming a lightning rod for Chinese anger towards the west in general and the US in particular.

…Until recently, it was relatively unproblematic for Australia to place its economic bets on the rise of China – while looking to the US as its main security ally.

In the present climate, however, both China and America are becoming more demanding partners.

The Americans have made it clear that they would appreciate some company from the Australian navy if and when the US conducts future “freedom of navigation operations” and sails past the artificial islands that China has constructed in the South China Sea.

The Chinese have made it clear that they might react very harshly to any Australian participation. Chinese pressure is still more likely to be psychological and diplomatic rather than military or economic.

But the chances of a Chinese backlash aimed at Australia are likely to increase if Beijing feels that Canberra is discriminating against Chinese investors.

All of these developments suggest that, unlikely as it currently sounds, Australia could emerge as a geopolitical flashpoint in the coming decades.

As I wrote yesterday, current leadership is ill-equipped to deal with this sudden trouser tear in our Great Power straddle. It is entirely unclear where the Turnbull Government sits on these issues with a China hawkish loon pond governing from the rear and Sinophile PM.

A framework for clarity on the issues was released yesterday by the Crawford School:

A major new study of the relationship between Australia and China, supported by both governments, has outlined a new vision for bilateral ties and pointed to significant economic and social benefits of stronger engagement and cooperation.

The report, the Australia-China Joint Economic Report (ACJER), is the first major independent study of the Australia-China relationship, compiled with support from both Beijing and Canberra. It is a joint report by The Australian National University (ANU) and the China Centre for International Economic Exchanges (CCIEE).

The report, delivered to Prime Minister Malcolm Turnbull and Chinese Premier Li Keqiang on Monday, is a comprehensive analysis of the state of the relationship.

It examines the potential to improve trade and economic growth as the drivers of China’s economic growth change and as Australia’s economy shifts from its reliance on resource exports.

Report co-editors Emeritus Professor Peter Drysdale, from Crawford School of Public Policy, and CCIEE Executive Vice-Chairman Mr Zhang Xiaoqiang, said the report outlined ways to reshape the Australia-China relationship.

“Australia and China have a great opportunity to turbo-charge an already close relationship, to become stronger partners over the coming decades,” said Professor Drysdale, Head of the East Asian Bureau of Economic Research at ANU and Editor-in-Chief of the East Asia Forum.

“Australia has been a trusted partner in China’s ‘reform and opening’ since the 1980s, and is seen in China as a valuable international testing ground and pilot zone for economic policy reform,” Professor Drysdale said.

China is Australia’s largest trading partner with bilateral trade worth more than A$150 billion in 2015, while Australia is China’s seventh largest source of imports and 13th biggest export market. The China-Australia Free Trade Agreement (ChAFTA) entered into force in late 2015.

Community and cultural links are also increasing, and China is the largest source of foreign students in Australia, with 120,000 Chinese students in 2015.

The report’s main finding recommends the governments of both countries work to elevate their close trade and investment ties to a new and unique level through a special Comprehensive Strategic Partnership for Change.

This is important because while Australia and China are currently ‘Comprehensive Strategic Partners’, there are two-dozen other countries that also have a Comprehensive Strategic Partnership with China, including much smaller economies, such as Algeria and Peru.

A unique diplomatic framework for the Australia-China relationship will send important high-level signals to policy and business actors on both sides.

The report also recommends:

• A new Australia-China Commission, supported by both governments and similar to the Australian-American Fulbright Commission, to promote academic, cultural, policy, government, business and community exchanges;
• High-level policy cooperation on the maritime economy as maritime powers with common interests in seaborne supply routes; and
• Negotiation of a new negative-list Agreement on Investment within the ChAFTA framework to further liberalise investment flows. The agreement would set an early precedent for China’s Bilateral Investment Treaties with the US, UK and EU and could lead to a multi-lateral regime for foreign investment.

The report said the new Comprehensive Strategic Partnership for Change could have a dramatic benefit to both countries, through increased trade and growth, and a shared interest in the institutions of global governance and 21st century economic and security challenges.

It shows how China’s economic transition away from investment, exports and heavy industry and into consumption, innovation and services will open new opportunities for trade and investment for both countries.

“Both Australia and China gain from growing and diversifying their economic relationship through new flows of tourists, students, investors and migrants,” Professor Drysdale said.

Despite China’s economic transition, the report gives an upbeat assessment of China’s economic outlook. It said if China’s economic reforms succeed, it could achieve annual GDP growth of around six per cent over the next 10 years.

“Even in a pessimistic scenario, in which average Chinese growth is below five per cent over the next 10 years, our estimates suggest that Australian exports to China would still grow by 28 per cent and Chinese exports to Australia by 20 per cent,” the report says. “A baseline scenario has Australian exports growing by 72 per cent and Chinese exports by 41 per cent over the same period.”

However, it said much greater benefits would flow if Australia and China implemented the reforms recommended in ACJER report.

“If this reform agenda is prosecuted successfully, Australian exports to China will grow by 120 per cent in real terms, and Chinese exports to Australia by 44 per cent,” it said.

“For China, this is conditional on the implementation of a reform agenda that embraces financial and factor reform, state-owned enterprise reform, increased openness to foreign investment, and capital account liberalisation.

“For Australia, it means increased competition in sheltered industries, openness to foreign investment and skills, and facilitating investment in social and physical infrastructure.”

A nice goal, certainly. Positioning Australia as an agent of manageable change within a Chinese liberalisation process is a way to manage our economic and strategic tensions.

Whether it’s realistic as China simultaneously pursues liberalising economic reform coupled with de-liberalised politics is another question entirely.