KEEPING CHINA’S RISE PEACEFUL

Om Tuesday 11 August 2020, The Hon Tony Abbott joined Tim Harcourt in a Sydney Institute YouTube broadcast. Former Australian prime minister Tony Abbott has been a strong supporter of free trade with China. However, with increasing tensions over the increase in China’s influence and resistance to appeals over human rights, Abbott believes Australia must diversify its overseas trade and relax its dependence on Chinese markets. Tim Harcourt is the J.W.Nevile Fellow in Economics at the UNSW Business School author of the best selling Airport Economist . Gerard Henderson compered a discussion with Tony Abbott and Tim Harcourt following the talks.

KEEPING CHINA’S RISE PEACEFUL

TONY ABBOTT

It was scarcely five years ago. Australia and China had just finalised a free trade deal, Australia had just been admitted into China’s club of “comprehensive strategic partners”, and in our own national parliament, President Xi Jinping himself made the pretty extraordinary declaration that China would be “democratic….by the middle of the century”.

Even though he might not have meant “democracy” in our sense, it still seemed a watershed moment, perhaps the high tide of the optimism about China that most Westerners had cherished since the market reforms of Deng Xiaoping; thinking that more economic freedom would inevitably mean some political freedom; and that sooner or later, China would resemble Hong Kong but on a colossal scale.

As we now know only too well, China’s communist leaders did not see market freedoms as a prelude to political ones. For them, allowing people to trade was a concession to make China richer, not to make citizens freer. After all, the same leader who’d said that “to get rich is glorious” had also advised his comrades to hide their strength and to bide their time. And now, that time has finally come: to banish China’s century of humiliation and, once more, to become the world’s “middle kingdom”, or dominating power.

Clearly, it was a mistake to think that Marxism-Leninism shouldn’t be taken too seriously, or that it wouldn’t reinforce traditional Chinese exceptionalism. And with the communist party’s power unchallenged and with Xi utterly dominant, the prospect of any convergence between China and the West, any time soon, is almost non-existent.

A million plus Uighurs will continue to languish in concentration camps; the rule of law in Hong Kong will slowly be strangled; the capacity to retake Taiwan will constantly be strengthened; Chinese people at home and abroad will endure ever-more pervasive surveillance and control; and countries that object or protest will be increasingly subject to cyber-attacks and trade repercussions.  The new normal is a cold peace at best. And we’d better get used to it.

One of the reasons we struggle to “get” China is that it’s the one country that Australians routinely deal with, that’s quite unlike us. Its businesses are not private. Its citizens are not free, and cannot say what they really think. China does everything with strategic intent. All that really matters is whether it strengthens the Chinese state.

For us, loyalty to the country does not mean being subordinated to the state or to the party. Citizens and businesses are expected to pursue their own interests. What’s more, without centuries of oppressive government, or a history of invasion, our inclination is to take people at face value; to assume goodwill; and to give others the benefit of the doubt.

Of course, as Hong Kong, Taiwan and Singapore prove, let alone all-the-Australians of Chinese descent, there is no authoritarian gene in Chinese DNA. None. Like nearly everyone, Chinese people want freedom and justice, as much as wealth. It’s just that they have no expectation of getting it from their government.

So how does a country like Australia cope, when its biggest trading partner has become its biggest strategic challenge? To start, by not indulging in wishful thinking and self-blame; or by adopting a false moral equivalence between China and the United States; characterised by a massive double standard in judging their leaders.

If China does divert its iron ore and coal imports from Australia, to Brazil and to Indonesia instead, that will hurt. Profits will fall, tax revenue will fall, and jobs will be hit. If China turns off the tap of foreign students, that will hurt too.

But China buys our products because that’s good for China, not because it’s good for us. And China sends its students here because of what it can get, not because of what it can give. China is more than ready, much readier than we are, to take some pain in order to teach us a lesson – to warn its students off, and to subject our exports to bogus safety inspection and capricious hold-ups.

Rather than complain, though, about the alleged inadequacies of our own government, we just have to accept that this is the price of dealing with a thin-skinned dictatorship.

For us, the real economic pain will come after the development of additional, alternative, Chinese-controlled iron ore, gas, and coal supplies in third-world countries that are more susceptible to exploitation. This is where our own scrupulosity on ethical and environmental standards is likely to end up doing more harm than good, with projects like the Simandou iron-ore province in Guinea, and the cobalt monopoly of the Congo falling into Chinese hands, while our own domestic cost structures keep going up.

Even so, our challenge is not to sell less to China, because while China needs our good and services, they’re at least somewhat dependent on us. Our challenge is to buy less from China because having China in our supply chains is what makes us economically dependent on them.

I’m not suggesting abrogating the free trade deal, given that, in practice, it’s been better for our exports than for China’s. Tariffs are a blunt instrument. But there’d be no reason why government, in all its own purchases, shouldn’t have a premium for Australian-made; and, for anything sensitive, a requirement that all the components are sourced from trusted countries. This would be a larger-scale version, if you like, of the decision to ban Huawei from participation in the NBN or the 5G network.

Because China has been so good at exploiting rules that it doesn’t adhere to itself (on emissions reduction, for instance, or on intellectual property law), Australia’s approach, going forward, should be one of strict reciprocity. On accepting foreign investment, on allowing students into courses with strategic spin-off, and on permitting land ownership, we should only allow China or its citizens to do here what they would allow us to do there.

Effectively, that means no further Chinese land ownership in Australia; it means Chinese investment only in joint ventures in the “old economy”; it means being very selective about academic collaborations; and it means hardly any Chinese higher degree students in maths and the hard sciences.

Given that the communist government has never allowed anarchic and encrypted Western social media into China, lest its own people be able to “fly under the radar”, why shouldn’t we take Donald Trump’s lead and ban Chinese government-owned intelligence gathering devices like WeChat?

We can’t, and shouldn’t, disengage with China; but our dealings with them have to be as hard-headed and as strategically-minded as theirs are with us. We should be more conscious of what we have done for China; and less intimidated by what they have done for themselves, or might do to us.

By giving China a measure of resource, energy and food security, Australia has helped in shifting a half billion Chinese from the third world to the middle class in scarcely a generation. All credit to the Chinese people, though; and to the government, since Deng’s time, for at least not standing in the way of the biggest and fastest advance in human well-being in all history.

But can China’s rise remain peaceful? That’s the great question, right now, for the whole world.

In my judgment, the best way to prevent tension escalating into armed conflict is to ensure that no potential adversary ever thinks that a war could easily be won. Although American and Chinese forces were able to fight a serious war in Korea, that stayed contained, we can’t rely on being so lucky again.

Even so, making excuses for aggression, especially towards Taiwan, the most likely flashpoint; or questioning whether the United States should or would honour its security commitments in East Asia, is more likely to embolden the Chinese than encourage them to accept a rules-based international order.

When China’s foreign minister told his Singaporean counterpart at a conference in 2010 that “China is a big country and other countries are small countries; that’s just a fact”, it was the old Athenian ultimatum to Melos: “the strong do what they will and the weak suffer what they must”, only with Chinese characteristics.

To me, Australia’s best role here is to be a contributing member of a Western alliance that responds to the abrogation of the one-country-two systems treaty over Hong Kong with targeted sanctions against China’s leaders, a little like those imposed on Russia for the seizure of the Crimea; and that routinely practices freedom of navigation exercises past the illegal artificial islands in the South China Sea.

To the Chinese government, the only difference between Hong Kong and Taiwan is that Taiwan, now a thriving liberal pluralist democracy of 25 million people, has strong armed forces and is still defensible with American support; despite China’s massive naval build-up. But to a regime that regards any dissent as radioactive within its claimed borders, fostering any real doubt about American support for Taiwan could be creating an opportunity that’s too tempting to ignore.

Sometimes, not making a stand has worse consequences than doing so.

In the absence of official provocation, such as a unilateral declaration of independence, any American failure to help defend Taiwan in the face of a Chinese assault would spell the collapse of the American alliance system around the world. It would mean that America could not be relied upon in a tight corner. For the countries of our region, that would mean accepting vassal status, or arming to the teeth to become all-but-impregnable.

I agree with Paul Dibb, that if Australia failed to provide military support to a US defence of Taiwan, it would be the end of the ANZUS alliance, other than as window-dressing. It would be the first time in our history that we had put the appeasement of a dictatorship ahead of the defence of democracy; and it would be hard to escape the damning judgment that there was nothing much that we would take risks for: no friend or no ideal, short of our own survival, by which time we would inevitably be on our own.

To John Howard’s sunny optimism that Australians would not have to choose between our history and our geography, I always used to add this rider: that we shouldn’t try to make new friends by abandoning old ones. The best way to ensure that the unthinkable remains unlikely is to keep reminding the Chinese government that any move on Taiwan could have the direst consequences.

I fear that our Prime Minister is right to see echoes of the 1930s in these times. Even so, all the Chinese Australians who have chosen freedom and the rule of law, over conformism and state power, boost my confidence that our way of life can be maintained.

DISCUSSION – CHINA TWO VIEWS – TONY ABBOTT AND TIM HARCOURT WITH GERARD HENDERSON

Gerard Henderson: So, thanks for two important addresses. Let’s say we start with you Tony. What do you see as the main problem with Australia’s relationship with China? In your speech there you seemed to be talking about the possibility of China stealing some of our potential mineral markets. Is that the most substantial problem on the economic field apart from foreign policy, what others are there?

Tony Abbott: That’s certainly something we’ve got to be prepared for. I’m not against us selling massively to China. I’m in favour of us selling massively to China. I think, as time goes by and the strategic competition between the United States and China intensifies, China will be more and more reluctant to buy from Western allies like Australia if there are alternatives. That’s exactly what they’re trying to do. They’re trying to develop alternative supplies of the coal and iron ore that we currently sell massively to China in places like Guinea. They’re obviously eyeing off cornering the world cobalt market in the Congo and I am sure they would be much happier to buy more coal from Indonesia than more coal from us.

So while we should sell as much as we can to the Chinese, we have to be careful about buying as much from the Chinese as we currently do, particularly when it comes to things that are of critical importance to our own national security such as drugs, PPE and IT componentry. I also think we need to be aware that the Chinese are most likely going to prefer, as soon as they can, to buy elsewhere as well.

Gerard Henderson: But presumably that would be some years away.

Tony Abbott: I don’t think they could diversify away from us to supply vast supplies of iron ore and coal any time soon. But within five or ten years I certainly think they could make significant changes and that obviously has massive implications for some of our biggest businesses like BHP and Rio.

Gerard Henderson: Tim, what do you see that as the greatest problem on the economic sphere?

Tim Harcourt: The biggest economic problem would be something going terribly wrong with China. As I said in my remarks, the Chinese political system we may think is still omnipresent but it’s got some problems. The governing class in China is under pressure over how they handled the virus in Wuhan and how they shut down the economy and how they let it out and what they did to the doctor in Wuhan, and so on. So, the biggest threat is the Chinese having internal issues that cause problems.

In regard to Tony’s address, one important thing I got from it was that, certainly, China needs Australia. China buys iron ore, coal, LNG, education, agriculture because it’s good for China. It’s good for this massive rise from rural poverty into the middle class. So, they don’t do it to do us a favour. At the end of the day, business is business. We are a very reliable supplier of all these things. So, there will be rhetoric. There will be tension as there’s been for every Prime Minister from Whitlam to Abbott to Morrison and everyone in between. But, ultimately, those same trends will be important for China because they’ve still got 1.3 billion mouths to feed.

Gerard Henderson: The view you’re both expressing there is not all that commonly heard among sections of the academic class in Australia, who seem to regard us as very dependent on China. Also among sections of the business community, who don’t tend to put the view that China needs us as much as we need them. So how do you change that debate in the country?

Tony Abbott: We have a terrible tendency to underestimate ourselves. Sure, we are not the world’s biggest country or the world’s strongest country. But we’re not insignificant by any means. We have to appreciate that we can do a lot for the wider world. So, instead of constantly thinking of ourselves as a small and insignificant country, we should think more of ourselves as a quite powerful and influential country with the potential to do more and to be more. While, obviously, we’re never going to be as populous or as economically strong as China, we certainly are no mean country, even to them.

Tim Harcourt: I must say, Gerard, this always puzzled me. In my Airport Economist series, I went to 60 countries in five years. In every country I saw amazing things – winemakers in Shandong Province, South Australian McLaren Vale technology guys in Argentina, Western Australians in Russia, doing incredible things. I come back to Australia with commentators saying: Australia, we’re so lazy, productivity is terrible, we’re missing the boat on this.

The classic was at the Sydney Olympics 2000. Carly Fiorina came out here and said “It’s the new economy. If Australia doesn’t close down all its rocks and crops and its old economy and start selling software like Taiwan, the Australian dollar will be 30 cents here in 10 years time.” And we saw the biggest boom in terms of trade in our economic history. From what I see, in terms of economic performance and the great efforts of Australian entrepreneurs overseas and at home, it just seems incredibly disconnected with the public view that Australia is hopeless at everything and we’re weakened, we’re this little power. Even the best will say we’re this little country punching above our weight. We’re not a little country. We’re a medium sized economic power with a lot of success.

Tony Abbott: Exactly right. We are much better than we think we are. And often enough we’re our own worst enemies.

Gerard Henderson: As you mentioned, Tony, one of the lessons out of COVID-19 for the West, Australia, United States is the dependence on pharmaceuticals, and other medical equipment, coming out of China. That didn’t happen suddenly. It probably happened over ten to 20 years. How do you turn that around without substantial protection for increasing the local production of drugs?

Tony Abbott: Interestingly, the Australian Pharmaceutical Benefits Scheme is effectively one of the world’s largest drug purchase schemes. Which is one of the reasons American drug companies have always been so keen to get us to change the rules to reduce our purchasing power. If, as a government, we decided that the PBS was going to preference locally made, or trusted friend-made drugs and other medical supplies, we could certainly make a big difference.

At different times we have had quite a substantial growth of manufacturing industry in Australia. It’s diminished somewhat in recent times. Basically, because so many businesses have taken globalisation to an extreme and have just gone for the cheapest. Well, as anyone who is in personal contact business knows, cheapest is not necessarily best, because it’s not just the price, it’s the reliability. It’s the relationship that you’ve got with your supplier which is critical. And what we’ve seen with the corona crisis is that we can have these things turn off like a tap. And we can’t afford to have something as vital to our wellbeing as lifesaving drugs as precarious as that.

Gerard Henderson: We know about the controversy about governments putting money, or the demand that governments put more and more money into renewables. Would you suggest that governments should put money into pharmaceuticals?

Tony Abbott: I’m saying that we should do more to use our purchasing power to encourage our Australian industry, and an industry which is as reliant as it is on one sometimes capricious supplier.

Gerard Henderson: Is that too protectionist?

Tim Harcourt: When you think about coronanomics, or the economics of the corona crisis, we actually have more flexibility and capacity in manufacturing than we thought we had. What Tony says about us underestimating ourselves. We saw Geckos mineral processing in Ballarat, that sells to 60 countries, switch to ventilators. You saw Detmold in Adelaide. Even in Botany where one brewery went from craft beer to making hand sanitizer. Our manufacturing capability is a lot better and a lot more nimble than we think. And when you think of pharmaceuticals, medical health, we’ve got the Cochlears, we’ve got Resmed, we’ve got Blackmores, we’ve got the Garvan Institute in Melbourne. We’ve actually got a lot of capability in that area that has abilities without protectionism. We’ve actually done it pretty well. Perhaps haven’t celebrated as much as we should.

Tony Abbott: I grant you all those points Tim, and they’re very important points. But it’s also true that a lot of things those great Australian companies did onshore, are now happening offshore. As an act of national policy, without bringing in tariff walls, we can offer all sorts of encouragements to see more of that produced domestically.

Gerard Henderson: Some might call that Trumpism. Bringing Australian companies back. It seemed to work in the US a bit.

Tony Abbott: That’s a very fair point. Trump’s style, to put it mildly, is very abrasive. But, prior to the Coronavirus, even the most jaundiced observer would have to accept that the bloke was doing a fair job. And one of his strengths is that he has brought a clear-eyed view of China to the American polity that wasn’t there before. He has permanently shifted the way the American polity looks at China. That was a necessary and overdue correcting.

Tim Harcourt: On this point, some of our Australian champions, such as Cochlear, have got some place in Europe to get that market. In the same way, on the Eastern seaboard of Thailand, some people have a base there to be close to the manufacturers. They’re creating jobs. So you can do both. Having said that, and this is where I agree with Tony, we talk about belonging to global supply chains and they’re not China supply chains. They’re not meant to be one market. So, you don’t put all your eggs in the basket of one market. In the same way you don’t leave everything at home, but you diversify your global supply chains. What perhaps misses the point, when we talk about relative trade patterns, is that Japan runs a lot of the Asia Pacific supply channels in which Vietnam and Thailand and so on, make contributions.

Tony Abbott: Again Tim, one of the points I was trying to make it is that China is different from almost every other country, even Vietnam, although Vietnam remains a communist autocracy. China is hegemonic. It aims to be a hegemon as it were, in a way that almost no other country does.

Tim Harcourt: Which is not a free market.

Tony Abbott: Not surprisingly, China is very similar to the old Soviet Union in terms of its geostrategic approach. Yet we never let the old Soviet Union into our supply chains. The Soviet Union didn’t actually want to be in our supply chains. The Chinese in their shrewdness did decide at some point post Mao that they wanted to be in our supply chains. We, from an abundance of goodwill, were happy to have them. And now we have a situation where China is a much more intimidating competitor than the old Soviet Union ever was. Russia was a first rate military power, sustained by a third rate economy. China is a first rate economy becoming stronger all the time, or at least until recently becoming stronger all the time, and rapidly becoming a first rate military too. This is why we have to accept China is not just another country. It’s not India. It’s not Indonesia. It’s not even Vietnam. It’s quite different.

Tim Harcourt: Imagine how great it would be if it was democratic.

Tony Abbott: Exactly right.

Tim Harcourt: If it was like Singapore or Taiwan or South Korea.

Tony Abbott: Exactly right. And you see, the long term hope, which has been utterly misplaced so far, is that over time we will see that kind of evolution in China. As I keep stressing, there is no authoritarian gene in Chinese DNA. We see Chinese people leave the Middle Kingdom and they’re entrepreneurial, sort of liberal pluralists, the way most people are if they’re given a chance. But historically, and particularly since 1949, there has been this thoroughgoing totalitarianism in China itself.

Gerard Henderson: The Soviet Union, as you know, broke down partly because the economy broke. But, also, the nationalities broke away from the Russians. China doesn’t really have a nationality problem.

Tony Abbott: But look at what they’re doing to the Uyghurs.

Gerard Henderson: They’ve got a minor problem.

Tony Abbott: They’ve got a much less significant problem and they treating it with utter ruthlessness. If the reports coming out of western China are correct, it does look like something approaching genocide going on there.

Gerard Henderson: Otherwise, the regime is fairly stable, you would think, would you?

Tim Harcourt: Well, I actually agree with Tony’s point about the entrepreneurship of the Chinese people like the story of the Chinese migrants to the goldfields in Victoria and elsewhere in the nineteenth century. They developed the first retail emporiums and took them back to China. Those Chinese Australians. And you see that today.

Tony Abbott:  Chinese shopkeepers were a staple of nineteenth century Australia.

Tim Harcourt: In fact, my ancestors who had the general stores and the Wandering Jew paddle steamer in rural New South Wales sold their shop to a Chinese family who lived downstairs from me in Randwick. So, there you go.

Gerard Henderson: But this has been a very repressive regime now since 1949 when it came to power in Beijing, and in parts of China before that. It goes back 70/80 years, the Chinese Communist Party regime. It’s not going to be easy. You wouldn’t expect it to fall over would you?

Tim Harcourt: Those members of the ruling party and government have been a bit surprised over the last five years by the aggression. China’s never been an expansionist power, but there’d be people at senior levels who would think the current leader is very different from Hu Jintao or Jiang Zemin. It’s a very different leader to the one Tony Abbott was dealing with as prime minister or John Howard was and Bob Hawke was. That was a surprise. And that could put on a lot of pressure.

Gerard Henderson: One of our members sent in a question about the free trade agreement, which was a product, as you know, of the Abbott government and the Chinese government. But look what they’ve done to our beef and barley. Was it worth it?

Tony Abbott: We have traditionally been a very open economy. Free trade deals, even with countries with rather different wage rates and standards, have tended to be beneficial for us. If you look at the last five years of our trade with China, yes, China’s exports to us have gone up by 8 per cent. But our exports to China have gone up by 15 per cent. So, I would say that the free trade deal that my government finalised has been more beneficial to us than it has been to China. As I said, I want us to sell as much as we possibly can to China. But I want us to be much more careful about what we buy from China. What I particularly want us to be much more careful about is allowing ourselves to become too dependent on Chinese components in our supply chain. That’s the big problem the West has got at the moment. China has permeated so much of the Western supply chain, that we have a very unhealthy dependence upon a country that sees trade as geopolitics by other means.

Gerard Henderson: Tim, free trade agreement, worth it?

Tim Harcourt: Free trade agreements are necessary but not sufficient. You have a few areas where there are agricultural barriers and so on, they can be very helpful. But, at the end of the day, there’s behind the border issues. There’s cultural and regulatory issues that matter more. When you look at free trade agreements, whether they be with China or the US or other countries, they’re quite a good marketing tool. They’re a good way to feel good about the relationship. But ultimately, exporters have many new things on their plate. Even with Indonesia, where we’ve had tensions over bombings and terrorism and so on, we’ve still seen the numbers of companies going to Indonesia growing. Agreements help but they’re not everything and, most of the time, it’s good to have the government badge on the ground. When you’re an exporter in Shandong or in Wuhan or out in the west,  having the ambassador or the Austrade office or the trade commissioner there helping you in a country run by the government is really important. That matters in Indonesia or the Middle East as well where we have a lot of government involvement.

Gerard Henderson: Someone sent in a question on how do we moderate people in the business world who want to placate China? Is that necessary? Is there a problem with Twiggy Forrest talking his book?

Tim Harcourt: Rowan Callick wrote a very good piece in The Australian about this. He was of course the Beijing correspondent for The Australian and the Fin Review. He’s now in Queensland at some university. He’s followed this for a long time. Having 8000 or so Australian small businesses in China, doing things in China, is great. You get people-to-people relationships, you get to understand people better, and so on. But business people have to be very, very careful not to be put in a position where they’re running the party line for China here. Because ultimately that’s not helpful to the people of China. It’s not helpful for their business partners. And it’s not in Australia’s national interest.

Gerard Henderson: Okay. Why is it not helpful for their business partners?

Tim Harcourt: They don’t particularly want tensions between Australia and China. They want things to progress. James Packer or Twiggy Forrest criticising the Australian Government, causing sparks to fly in Beijing, is not what they want. They want stability. They want people flying under the radar. You can understand people talking the book but on the ground in China they actually prefer things nice and quiet and stable rather than sparks flying.

Gerard Henderson: Tony, you were a successful Prime Minister, you and the Australian Government had a good relationship with China. And you were a senior minister before that. Looking back on it now, what’s your recollection of those couple of years you were Prime Minister and the China relationship? Is there anything we can do better? Did you learn any lessons or anything we can do better?

Tony Abbott: Two things have changed, if you like. China has changed and our perceptions of China have changed. I certainly got the impression from Xi Jinping in 2013 and 2014 that this was a man we could do business with, not a man who was necessarily our soulmate, or even particularly like minded with us, but nevertheless, someone we could do business with. If you go back and read the speeches that he gave in Australia, back in late 2014, they were remarkable. They were genial. They certainly seemed decent.

But so much has happened since then. In China, obviously at the behest or at the instigation of the government, it hasn’t been genuine or decent at all. The treatment of the Uyghurs, is outrageous, an abomination. The treatment of Hong Kong, wrong, dead wrong. The threats to Taiwan, unconscionable. Whatever you might think about China’s long term claim over Taiwan, and the tensions on the borders, invariably China is responsible. What we are seeing now is a hegemonic power. Clearly a hegemonic power.

Tim made the point that China has never been expansionist; I think that was the term he used. Yes and no. In the old days China dominated the only world it knew, completely. You were either an enemy or a vassal. There was no real concept of an independent sovereign state which China dealt with on equal terms. And what we’re seeing now is the compounding of traditional Chinese exceptionalism with a large dollop of rather vicious Marxism Leninism.

Gerard Henderson: Well, that’s an interesting thought on which to conclude from your own personal recollection. So many thanks to number 28, Tony Abbott, and many thanks to the Airport Economist Tim Harcourt.