Commentators writing about Prime Minister Tony Abbott’s trip to three of our largest regional trading partners — China, Japan and South Korea — have almost all emphasised that it will be a difficult and delicate trip for the relatively new Australian leader when it comes to his visit to China and desire to advance free trade agreement negotiations.
Take Australian Ambassador to China from 2007-2011 and occasional Business Spectator columnist Geoff Raby, who told us in a Bloomberg interview over the weekend that “China is the ascending power and Japan is the declining power and there’s nothing that Abbott or his values can do to change that.”
Raby continues: The Prime Minister’s willingness to criticise China means “he will be under a great deal of scrutiny about his messaging and whether he can get the balance right”. Prominent Australian National University strategist and former senior defence official Hugh White agrees. According to White, “he’s (Abbott) still going to be on probation… The challenge will be whether he can refrain from causing further offense and salve the wounds in Beijing”.
These well regarded commenters on the Sino-Australian relationship are supported by a number of other pundits, business people and even former prime ministers such as Paul Keating and Malcolm Fraser. Are they correct?
These commentators generally assume that, in economic terms, China ‘rewards’ those countries that pay it political homage, and ‘punishes’ those countries that do not. The problem with this line of argument is that while it might be true that China can sometimes use economics as a carrot and/or stick for political gain, it has hardly been successful at extracting meaningful political gains from these same countries.
In fact, the evidence suggests a tense political relationship with Beijing does not preclude a good economic relationship between China and its major economic partners.
First things first: it is true that the current government has been having a somewhat rough diplomatic relationship with Beijing.
Abbott appeared to ruffle some Chinese feathers when he called Japan “our best friend in Asia” late last year. Foreign Minister Julie Bishop was rebuked by Chinese counterpart Wang Yi after Bishop warned that Beijing’s unilateral establishment of an Air Defence Identification Zone over disputed areas in the East China Sea could threaten peace and stability in the region.
In a speech in late March to the Asia Society in Melbourne, Abbott appeared to refer to the dreaded ‘d’ word (democracy) when he argued that “as liberalisation spreads from the economy into other elements of Chinese life, I am confident that Australia will be a valued friend and strategic partner… to the Chinese people and government”. In other words, the Sino-Australian relationship is hindered by the lack of political and economic reform in China.
Whether the latter sentiment is true or not is a topic for another time. The point is that the Abbott Government has been frank and fearless about its relationship with China — and on its points of disagreement. Such diplomatic boldness is normally reserved for countries such as Russia, with which Australia has no great economic relationship. But China is our biggest trading partner and the Abbott Government is committed to concluding an FTA with China as soon as possible. Has the current government shot itself in the foot?
To be sure, China has used economic coercion to intimidate smaller countries. For example, Beijing blocked shipments of Filipino bananas into its country on the basis that the fruit contained pests in the midst of a dispute in the South China Sea. It then began slowing inspections of papayas, mangoes, coconuts and pineapples from the Philippines and Chinese travel agencies were instructed to halt organising tour groups to the Philippines.
Similarly, China halted export of rare earth metals to Japan during a dispute in the East China Sea in 2010 during a diplomatic crisis involving the detaining of a Chinese fishing vessel operating in disputed waters. Other examples include Beijing’s decision to freeze FTA negotiations with Norway and the imposition of regulatory obstacles on imports of Norwegian salmon after the Oslo-based Nobel Prize Committee (which has nothing to do with Norway’s government) announced that it would award the Nobel Peace Prize to Chinese activist Liu Xiaobo.
Let’s look at some lessons from recent history.
During the first three years of Kevin Rudd’s first tenure as prime minister, the Sino-Australia political relationship reached a generational low. Yet Chinese imports of Australian iron ore continued to break records. This is preliminary evidence that China trades with Australia because it needs what we have to sell, not because Beijing likes Australia’s political policies of the day.
Could it ban Australian iron ore, or some other commodity – agricultural products into the future perhaps? Yes, it could. But the same principle applies: countries buy products from other countries because their economies need to, and there is always a significant disruption to the economy and livelihoods of citizens of that trading nation in the event of politically motivated disruption. Powerful Chinese steel mills would have something to say to their government if Australian iron ore shipments were halted.
Now consider China’s top seven trading partner countries in descending order: the US, Japan, South Korea, Taiwan, Germany, Australia and Malaysia. Beijing has political disputes with all of these countries that occasionally flare up.
All of these countries have hardened (not softened) their political stance vis-à-vis China over various issues over the past few years. Malaysia might be an exception in that it has a no-criticism policy towards China even though it is privately very critical of Chinese policies in the South China Sea.
But the point is that none of these countries have offered major political concessions to China when their interests are at stake, and will speak up when disagreements arise. Should Australia be different? Would it really improve our economic relationship with China?
Finally, what about an FTA with China? Would a softer diplomatic touch help the Abbott government conclude an agreement with China by the end of the year?
Perhaps, but as I argued in The Australian over the weekend, the drivers of China concluding a meaningful FTA are domestic, not external. No amount of cuddling up to China will persuade Beijing to sign something that it doesn’t believe to be in its interest.
Beijing might have offered Australia some very minor concessions that could be the basis of a watered-down FTA if Abbott made more positive noises about China in the region. But the gains for our exporters would have been slight and Australian diplomatic neutrality with regards to China will have been bought at a very low price.
Using economics as a political lever is very difficult against maritime countries tapped into the regional and global trading system, such as Australia. China has used economic coercion and intimidation against countries such as Mongolia with good effect, but Mongolia is a landlocked, developing country uncomfortably nestled between China and Russia.
Meanwhile, the unexceptional reality is that Australia will continue to pursue its interests — as will China. Sometimes they will converge, and other times not. The economic relationship between Australia and China will continue to expand if it is in the interests of both countries, and not because of diplomatic niceties or skill.