WE NEED CHINA – CHINA NEEDS US – CHINA, DIVERSIFICATION AND POST-COVID19 ECONOMY

Tim Harcourt is the JW Nevile Fellow at the University of New South Wales (UNSW) Sydney, a former chief economist of the Australia Trade Commission and host of The Airport Economist www.theairporteconomist.com . On Tuesday 11 August, Tim Harcourt joined former Australian prime minister Tony Abbott to speak about ongoing Australia/China relations in the face of growing trade tensions between the two countries. The speeches were followed by a discussion chaired by Sydney Institute Executive Director Gerard Henderson.

WE NEED CHINA – CHINA NEEDS US – CHINA, DIVERSIFICATION AND POST-COVID19 ECONOMY

TIM HARCOURT

Australia and China have known each other for quite a while now.

The Chinese people have engaged with Australia from almost the beginnings of British settlement of the continent that became our nation.

In the mid-nineteenth century, Chinese migrants came to the goldfields and developed a retail industry. In fact, many of these same migrants went back to China, and established the first retail department stores in Shanghai and Canton (now Guangzhou).

At the end of the nineteenth century, Australian colonial governments engaged with China and sent trade missions. After Federation we set up our first Australian trade office in Asia, in Shanghai, in the 1920s despite much Foreign Office opposition in London.

The Great Depression and World War II intervened and, of course, the Chinese Revolution in 1949.  Records suggest the Chifley Government almost recognised China in 1949 (the UK did so in the 1950s).

But it took until 1971 for Australia to engage with China officially as the People’s Republic. After the revolution, China was isolated from the world and it took a bold move by an Opposition leader, Gough Whitlam, in 1971 to go to Peking – as it happened in step with Henry Kissinger and Richard Nixon.

When I interviewed his long-time political opponent, Doug Anthony, he described Gough Whitlam’s China move as his finest hour:

Gough surprised us all on China. Gough always wanted to take a risk and make a big statement on everything including foreign policy. And he deserved the credit for doing so in the case of China. 

Since then, Australia’s relations with China have mainly been bi-partisan but it’s brought us tensions as well as trade. We’ve seen some ups and downs with China under all our prime ministers. For example:

• We saw tears from Bob Hawke over Tiananmen, that actually helped relations
• We saw Paul Keating stick up for China’s WTO membership against wishes of the Clinton Administration.
• We saw some tense early days between John Howard and Jiang Zemin that recovered and ended up with the LNG deal
• We saw Kevin Rudd expanding our diplomatic vocabulary over climate change
• We saw Tony Abbott sign a free trade agreement

Now in the twenty-first century, we have more tensions, some trade related, in terms of beef and barley.

These problems were brewing before the Coronavirus, but they have intensified given the way the Chinese government handled the spread of the mystery virus from Wuhan, to the rest of the China and the rest of the world, and its response since.

As the Lowy Institute’s Richard McGregor has pointed out, China’s mishandling of the Coronavirus, its suppression and shutdown of its economy, and diplomatic stance since, has exposed both the weakness and strength of the Chinese political system.

The current trade tensions with China has prompted a polarised debate in Australia.

In the so called “Blue corner” – the defence and security community has argued that trade-wise, we must diversify away from China at any cost. They mainly see the world in terms of defence and security alliances and are concerned at the influence of China on Australian institutions.

In the so called “Red corner” there is the pro-China business lobby. They are less interested in the “spooky” matters of defence and cyber security and think we should pretty much do whatever China wants as they are our biggest “customer”. This has led some prominent Australian business people being quite vocal and activist at the relationship. One told our diplomats to “show more respect towards China” and another even invited a Chinese diplomat to speak at the press conference of an Australian cabinet minister (much to the minister’s surprise). For them it is always, as my grandfather used to say, “business is business”.

How is this debate practical or helpful as we think about the future of China-Australian economic relations? In assessing the merits of the Reds and the Blues, there are a few points to consider.

Firstly, can we diversify? The answer is we are always diversifying in terms of trade. That’s why governments negotiate bilateral trade agreements and the like. Just as China diversifies its import sources (like with Brazil and Australia with iron ore). Just as businesses diversify customers and investors do the same. After all, the famous Yale economist James Tobin won the Nobel Prize for his optimal portfolio allocation theorem – which is basically winning the Nobel Prize for saying, “Don’t put all your eggs in the one basket.”

Secondly, should we diversify? Sure, there are good stories to tell. If we look at other markets in North East Asia, certainly in food and energy security, South Korea and Japan are important. ASEAN – if all the very distinct countries are taken together – is a huge market for Australian exporters and India is up and coming, not to mention the emerging markets of Europe, the Middle East and Africa (EMEA) and the Americas.

It is a good idea to build up other markets but there’s no need to underestimate our China economic relationship, especially when it accounted for 46 per cent of goods exports this year (to June) despite the headlines and with COVID-19 interrupting relations. Especially when there’s more middle-class purchasing power from China to come. For example, DFAT’s White Paper, in 2017, depicts a base case that the increase in China’s purchasing power to 2030 will grow by more than the increase in US, Japan, India and Indonesia combined. Size matters.

The China trade itself is worth $235 billion compared to just over $88 billion with Japan and even if you look at numbers of small business exporters there’s almost 8000 exporters selling goods to China with almost 6500 to Hong Kong. This overshadows the numbers selling goods to Indonesia and the UAE at just over 2,500 each, well ahead of India on only just a tick over 2,000.

Plus, there are 3,000 Australian businesses based in China (compared to just 100 in Japan, for instance). And that’s even before we look at the numbers of students and tourists and the export of other services.

Thirdly, in a democracy, can the Federal government really tell a business to diversify and that’s that? For instance, in The Airport Economist TV series I interviewed South Australian wine exporter Pip Crawford, who had developed Shearer’s Hill, a special red wine just for the city of Qingdao in Shandong province. Pip has put a lot of time and investment into the that regional market (foregoing the bigger cities of Shanghai and Beijing) and has been very successful. How could the government tell her to suddenly walk away from that lucrative contract and go somewhere else? She wouldn’t be keen to switch cities let alone countries.

But it is true, trade is not all about the free market. There’s a lot of government fiat involved – direct regulatory decisions that affect trade – and the government itself is involved in trade. When you think of defence, Education Research and Development (R & D) and healthcare a lot of trade is government to government.

Fourthly, the economic relationship is not just about trade – there’s also investment. A lot of investment is by governments via State Owned Enterprises. But even so, if we look at Foreign Direct Investment (FDI), China is not a big player yet in terms of FDI compared to the USA, UK, Europe (the Benelux countries), Japan and Singapore.

Finally, we think it’s all about us. But Australia is not alone, there are tensions between China and other nations too, such as India, South Korea, France, the UK, the Czech Republic, Belgium, Japan, the United States and now Ecuador just to name a few.

China’s regime is under incredible pressure due to the nature of how it let the virus spread internationally from Wuhan and the nature of its dealings with the World Health Organisation (WHO). This has put economic and social pressure on Xi Jinping and the governing class in China. Hence, some of the overreaction diplomatically and fraught nature of its handling of the “one nation, two systems” principle in Hong Kong.

In conclusion, Australia has had relations with the Chinese people for a long time and the Chinese state in its current form since Gough Whitlam’s famous visit to Peking. But whilst Gough Whitlam, rightly or wrongly, is sometimes heralded by some as an idealist, when it comes to China he was a realist.

As Stephen Fitzgerald, Australia’s first Ambassador to the People’s Republic, pointed out, Gough Whitlam was “neither a Sinophile nor a Sinophobe”, and reflects of his old boss:

For him, for Australia to have relations with China was rational and logical, and self-interested… he said we must accept China as a permanent and significant part of the international political landscape, whatever its colour, a view similar to that taken two decades earlier by Churchill. 

The nature of this bilateral relationship has taken many twists and turns especially as China has become an important player in the world trading system. This will continue, given China’s importance to Australia.

Australia Needs China. But, given China’s enormous need for energy security, food security and for an excellent education for its younger generation, China needs Australia too.

In these times of COVID-19, with closed borders and changing alliances, we are not going to see an outright rejection of globalisation but a re-set, and that includes a reset of our economic relations with China, something that all nations will be contemplating not just Australia.

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.