How best to manage our relationship with Beijing

There is no quick fix for our challenges with China. But clarity of objectives, holding firm when it matters, discipline in messaging and a clear-eyed sense of the national interest will help stabilise the relationship.

As I explain in a China Matters policy brief, “engage and constrain” should be the two guide rails of our approach to China, starting with the following assumptions:

• For the foreseeable future China will retain its authoritarian political system and likely remain our largest trading partner.
• China is not an enemy but it is not in Australia’s interests for an authoritarian state to dominate the region, set its rules or shape its strategic culture.
• The United States will stay deeply engaged in our region and is determined to remain the predominant strategic power. That is in Australia’s interests but not if it is pursued through a full-throated containment policy.

Too much of our public debate is focused on whether China will overtake the US. The narrative is distorted by assertions about China’s inevitable rise and the terminal decline of the US. Neither is assured. China may or may not overtake the US. We must be prepared for either contingency.

The US has been written off before. But despite its political dysfunction, its economy retains great depth and flexibility. It is a powerhouse of innovation and higher education. Although China is catching up militarily, especially in East Asia, the US’s firepower and reach are unmatched.

The law of large numbers, on the other hand, suggests that the scale of China may ultimately prevail. But we should be cautious about projecting past growth long into the future. And even if China overtakes the US, it will predominate with few allies and in a different world with many more major powers than the US ever had to contend with.

Nevertheless, let us assume that China’s leadership keeps the bicycle upright and that China continues to shift relative strategic weight in its favour. Also, that Beijing’s instinct to leverage economic power (real or imagined) for strategic gain continues to fuel a more assertive and coercive foreign policy.

To break through the dead-end debate on who will come out on top, why not start from a different position? Namely, China cannot be stronger than the aggregate weight of the US, Japan, India and Australia (the so called “Quad”) plus any other regional country – such as Indonesia and South Korea – that judges that China’s strategic predominance of the Indo-Pacific is not in its interest and is prepared to act accordingly.

This is not a call for a grand anti-China military alliance. Indeed, some of the members of this group are allergic to the very idea of alliances. Rather, it is a means of managing China’s ambitions in a way that puts constraints on how far Beijing is prepared and allowed to go. It signals that leverage is a two-way street.

It is also a rejection of “hope for the best” engagement. It is saying to Beijing that we want a relationship of mutual benefit, but we also want China to pursue its interests in a way that respects the sovereignty of others and avoids coercion. And if China behaves otherwise, there will be collective pushback from countries that are capable of effectively doing so.

Beijing may well portray this as containment by another name, but we should not give it a veto over our strategic policy. Besides, constraining China differs from containment – the ultimate logic of which is a rejection of engagement. Containment seeks to thwart and weaken China. Constraining seeks to manage a powerful China.

Constraining China will require a new strategic equilibrium in the Indo-Pacific that will take time to construct. The Quad currently has neither the unity of approach nor the will for serious collective action. But China’s behaviour is shifting perceptions as more countries watch with unease what an assertive China looks like. This will increase the appetite for collective action.

Unilaterally resisting Chinese pressure is hard and unilaterally constraining China impossible, except possibly for the US. It is better to do it collectively and certainly a better option than the unilateral US containment of China. I say unilateral because I cannot see Japan, India or Indonesia supporting containment and I hope Australia will have more sense than to embrace it.

Although containment may currently look like a straw man, it is gaining traction in the US and it even has its cheerleaders in Australia. We should not underestimate the policy momentum that it might develop.

It is not easy to contain a country as integrated into the global economy as China, unless of course the strategy is to dismantle that global system and the supply chains that support it, which is precisely what some advocate.

For most countries, the costs of decoupling China from the global economy would be obvious. For Australia, decoupling our largest trading partner would be sheer folly, irrespective of the legitimate complaints levelled at China’s trade and economic behaviour.

Even before COVID-19 there were signs of deglobalisation. That trend may now accelerate. Some deglobalisation makes sense, including diversifying supply lines for critical goods. Technology may also make it easier to onshore what has up to now been offshored. There will even be times when we choose to make things in Australia which may be made more cheaply abroad because we put social or political objectives ahead of efficiency.

But at the heart of globalisation sits comparative advantage in trade and the efficient allocation of resources – and we abandon these concepts at our economic peril.

Australia has been a beneficiary of globalisation and we have managed its politics and the equitable distribution of its benefits better than most. Donald Trump is US president in part because the US did not.

Our wealth as a nation and the living standards of our citizens are best served by an open economy and a liberalising trade system. COVID-19 does not change that and neither does Beijing’s strategic ambitions nor its economic behaviour.

Are we too dependent on China? The answer will not be found only in percentages. While China takes more than one-third of Australia’s exports, more than the next five export destinations combined, in an earlier age the United Kingdom took an even larger share of our exports. The difference now is the political character of China. It is an authoritarian system prone to threatening trade consequences if we do or say something that Beijing does not like.

Usually this is bluster designed to make enough nervous business leaders go running to the government to warn that we need to be nicer to China. But it would be unwise to assume that it will remain bluster. So it makes sense for Australia to diversify its trade connections: not by deliberately slowing trade with China, which would not be in our interests, but by growing trade with other countries such as the US, Japan, South Korea, India, Indonesia, Vietnam and a post-Brexit UK.

It is however markets not governments that drive trade. Some products would struggle to find additional markets, including iron ore, which is by far our largest export to China. It is also unrealistic to expect individual Australian businesses to turn their back on profitable trade opportunities with China. But the government can help businesses to expand other markets through negotiating easier access and in other ways.

We cannot unilaterally set the terms of engagement with China. But we can frame the relationship around the following principles:

• Engage with China where our mutual interests are served and over time look to expand areas of engagement and cooperation, including in regional and global organisations. The UN system, the G20, the East Asia Summit and APEC provide ready platforms to build on this multilateral engagement.
• Hold firm to our values and strengthen our national capacity to resist coercion whatever the source. This should include increased investment in defence and diplomacy. Both are vital to our future but only defence is being resourced adequately.
• Quietly abandon the notion that we can have a comprehensive strategic partnership with China as long as it remains a one-party authoritarian state.
• Make it clear in Washington that Australia will not support a policy of containing China or decoupling China from global supply chains, but that we will support greater diversification of those supply chains.
• Lower Australia’s trade dependence on China by expanding access to other markets. Reject diversion but embrace diversification, not least through expanding other markets and through domestic economic reforms that raise productivity, build national resilience and lift our international competitiveness.

This is an edited version of a China Matters policy brief released on 26 June 2020. This version was published in the Weekend Australian, 27 June. 2020