CoverStory

China won’t weaken our close US security ties

Don’t believe the media hype surrounding the Prime Minister’s visit to the People’s Republic

By John Lee

Julia Gillard’s first meeting with China’s new generation of leaders in April led to the conclusion of several agreements, including an annual Strategic Economic Dialogue between the Australian Prime Minister and the Chinese Premier Li Keqiang, future military-to-military exercises and port visits by Chinese warships, and a direct currency exchange deal. During and immediately after Gillard’s trip, China-based journalists such The Australian’s Sid Maher and the Australian Broadcasting Corporation’s Stephen McDonell labelled the visit a bilateral “breakthrough” that signalled the most significant development in Sino-Australian relations since Gough Whitlam recognised Communist China 40 years ago. Representing a rare Australian media consensus about the success and significance of the trip, Fairfax’s Mark Kenny labelled the agreements a “triumph” and “coup” for the Gillard government.

A domestic consensus by commentators that the visit represents a sea change in Australia’s relations with China is essentially driven by this argument: because Australia’s future belongs to a China-dominated Asia, its strategic ties with America will inevitably weaken. Indeed, China’s state-backed Global Times ran several editorials and opinion pieces arguing that the suite of agreements signed between Canberra and Beijing was a “big strategic victory” for China and indicated Australia was finally recognising that it needed to take a more “balanced” strategic approach by moving away from Washington and gradually towards Beijing.

But although the agreements are significant, they hardly represent any such developments. They neither represent a sea change or turning point (for the better) in Australia’s relationship with Beijing. The visit also provides scant evidence that China’s economic and strategic leverage is inexorably strengthening, and that it has scored a strategic victory at America’s expense by forcibly pushing Australia one step further away from Washington’s embrace. Instead, it is the normal stuff of a growing engagement with a major trading partner that is neither surprising nor groundbreaking. A few deep breaths, and skepticism of a narrative that sees every announcement with China as a historical turning point for Australia, is the more sensible interpretation of events from early April.

The Prime Minister used the term “strategic partnership” to describe the enhanced relationship while China’s President Xi Jinping indicated that the bilateral relationship had been taken to a “new level”. Prima facie, the rhetoric appears justified. China has only formalised an annual dialogue involving its Premier with a handful of players in the US, Russia, Germany, the UK and the European Union. Australia is the first regional country (if we exclude Russia) to have this formal arrangement with China. Although the structure of the future Dialogue remains unclear, it is likely to also allow the Australian treasurer and foreign minister to meet with senior Chinese counterparts in an additional formalised exchange. The currency deal which allows Australian dollars to be exchanged directly for Chinese renminbi, and vice versa, is only the third currency afforded this privilege after the American dollar and Japanese yen. And discussion about closer military-to-military links with the People’s Liberation Army in the form of live firing exercises and exchanges clearly goes further and deeper than anything the Australian Defence Force has ever initiated with the PLA.

Let’s begin with the Strategic Economic Dialogue. It is noteworthy that the annual leader’s meeting is between the Australian Prime Minister and the Chinese Premier, not the latter’s President. Although Premier Li Keqiang has a lead role in economic policy and execution, it is the Chinese President Xi that sits atop the all-powerful Standing Committee of the Politburo, the country’s peak political decision-making body. It is also President Xi, and not the Premier Li, who is the country’s commander-in-chief and Chair of the Central Military Commission (China’s peak military-decision making body). The point is that the Australian Prime Minister has an annual audience with China’s second, and not the most, powerful political leader.

Moreover, the fact that Beijing offered up the Premier rather than its president indicates that China intends to pursue a largely transactional relationship with Australia that is focused on trade and other economic issues. The currency deal which will lower hedging and transaction costs of trade is consistent with this interpretation. The excluding of difficult strategic and defence differences from the normal agenda is hardly indication of a genuinely comprehensive strategic partnership evolving between the two sides.

As far as the leader’s meeting is concerned, the early indication is that China will use it to push for the lowering of Australian regulatory oversight and restrictions placed upon Chinese foreign direct investment in sectors such as mining, agriculture, and telecommunications. Australia will want to discuss ways of attracting even more Chinese students and tourists into the country. Canberra will also want greater access to the Chinese domestic services market for Australian firms. This is all evidence of a greater desire by both sides to enhance win-win economic cooperation where possible, and to further the economic interests of the country and its corporate firms — no more and no less.

The Chinese have used the same approach of a Dialogue led by its premier to argue for the watering down and eventual elimination of high-technology export controls imposed by the advanced American and European economies against China. It also uses the Dialogues to voice its interests and concerns as a major holder of American dollar and Euro-denominated bonds and other fixed-income assets. Advanced Western economies use the Dialogues to press China on removing obstacles to its domestic markets, improve intellectually property protection, and to increasingly demand action against Chinese entities engaged in cyber espionage.

The point is that these Dialogues are entered into by China and its major trading partners to assert and defend their economic interests. They take place not just because the economies of the countries are important to each other but also because there are enduring and possibly intractable economic differences and disagreements. And as for the strategic significance of holding these economic dialogues with China, one could hardly argue that America, Germany, Britain, and the EU as a whole are drifting closer to China’s strategic orbit, and at each other’s expense. It would therefore appear strange to apply a different logic to Australia’s Strategic Economic Dialogue with China.

Bear in mind that the side meetings between the Australian treasurer and foreign affairs minister with Chinese counterparts is also less than it seems. As The Australian’s foreign editor Greg Sheridan points out, the treasurer will not meet the vice-premier in charge of economic policy but the chairman of China’s National Development and Reform Commission. The foreign minister will not meet the Chinese state councillor in charge of foreign affairs, who is the real political decision-maker, but the Chinese “foreign minister”, who is more akin to a chief bureaucrat of the ministry. In summary, Australian ministers will not be formally meeting Chinese counterparts with similar decision-making powers and policy authority.

 

The error of exaggerating the substance of the recent agreements between Australia and China is one thing. The tendency to begin with the assumption that China’s strategic and economic hand is irresistible and will soon overwhelm Australia and the region is something broader and deeper afflicting many Australian and regional commentators. The latter error is largely behind the overreach in commentaries when it comes to claims that the past fortnight represents a huge strategic victory for China at America’s expense.

The stubborn narrative that China is systematically shifting Asia’s strategic orientation away from America and towards itself flies in the face of ongoing regional reality. Since his confirmation as China’s president, Xi has pledged to “strengthen” military cooperation with Russia, advance a “new type” of strategic and military relationship with America and India, vowed to “boost” military ties with Malaysia and Indonesia, and most recently voiced a desire for a “comprehensive partnership” with Australia. This is widely interpreted as evidence of China’s growing clout. It appears to escape many China watchers and Asia hands in Australia and the region that China’s recent charm offensive is as much a product of its weaknesses and vulnerabilities as its strength.

Beijing is well aware that despite its economic importance, it is rising as an extremely lonely strategic power alongside a wary region. China has become the largest trading partner of Japan, South Korea, India, Australia, and many of the ASEAN countries. At the same time, all of these countries are balancing and hedging against the prospect that China’s rise will not be peaceful by reaffirming, reinforcing, or else developing closer political, strategic and military ties with America, and in many cases, with each other. Even Vietnam is publically appealing for an even greater American military presence in the South China Sea — a scenario that could not have been imagined several decades ago. This is driven by the long-standing grand strategy in every major regional capital to balance against the prospect of dominance by another Asian great power.

Since China’s defence budget has been growing at rates in excess of its GDP increase every year for the past 15, there are few who believe that Beijing’s military is designed only to prevent Taiwanese independence, as its official justification goes. China already unofficially spends almost three times more than Japan on defence. Despite the sound logic that China needs a peaceful and stable environment within which to continue its economic growth, Beijing seems to be less prepared to compromise over claims in the East and South China Seas now than it was a decade ago.

All these reasons give the major regional maritime capitals a powerful incentive to remain wary of China’s rise. It also explains the regional enthusiasm for Japan, South Korea, Australia, and Singapore reaffirming and upgrading their strategic and military cooperation with the United States. Despite the emergence of China as Asia’s central trading hub, no major capital has “chosen” China in strategic terms over America — thereby minimising any pressure on Australia to do so. This makes the argument that recent events signal the beginning of Australia’s inevitable strategic drift toward China even more difficult to sustain.

Finally, the logic that increasing trade with China will sooner or later force regional states into the Chinese strategic orbit assumes that deepening trade with China will always significantly increase Beijing’s strategic leverage. For small and weak countries with poor economic prospects such as Cambodia, Chinese leverage is indeed considerable. But for diversified trading economies such as Australia, Japan, South Korea, and many of the other ASEAN countries, increased trade with China is not proving strategically decisive. In other words, even as trade between China and these countries has increased, there is little evidence that Beijing’s strategic leverage has strengthened over these capitals.

Part of the reason for this seeming anomaly is that over two thirds of regional trade with China is processing trade, with the majority of end products being shipped to America and the EU markets. It is net demand that ultimately creates manufacturing and services jobs for Asian firms. The domestic consumption market in America and the EU are both about US$11 trillion in size, compared to a Chinese domestic consumption market of US$2.5 trillion. Additionally, the most lucrative sectors of the Chinese domestic market remain largely closed to foreign firms. The bottom line is that while China remains the more exciting market with growth potential, the Western consumer is far more important to Asian firms and will remain so for decades.

For Australia, commodities comprise the majority of exports to China. Even as political and diplomatic relations between the two countries reached a generational low under former prime minister Kevin Rudd’s government from 2009–2010, Australian exports to China grew impressively. The lesson here is that China buys Australian resources because it needs to. Beijing has limited scope to either reward or punish Australian commodity suppliers for the strategic policies of our government.

There would be little concern in Washington over Gillard’s visit to Beijing or with the agreements signed during the meetings. China is now Asia’s most formidable great power. But overestimating Chinese strengths, and underestimating its vulnerabilities, leads to inaccurate commentary and, even more seriously, poor policy.