The Beijing dilemma: right now, we need China more than it needs us

Recent events have shown just how economically dependent Australia is on China. 

The proximate cause — Australia’s call for an independent inquiry into the origins of COVID-19 — will fade.

China was sensitive about it as much due to context as content. US President Donald Trump’s campaign ads are now blaming China for the virus, and pushing the idea that Democratic rival Joe Biden is too close to China. With names flying about, China is concerned about other countries taking sides.

For Australia, China’s sensitivity involved initially broad but undefined threats to trade, and then bit with health bans on meat exporters and, just today, an 80% tariff on Australian barley.

Some commentators have called the proposal for an independent COVID-19 inquiry a question of values and national sovereignty.

There are, of course, values worth sticking up to China for: human rights, press freedom, fair treatment for Australians living in China to name a few.

But the call for an inquiry was not a value. It will help other countries as much as, and probably more than, Australia. Experts think it was going to happen anyway. The Lowy Institute makes a compelling case that national sovereignty is a misleading way to view the question.  

The way this relatively minor issue was escalated does show how some among the commentariat — and our national security establishment — are itching for confrontation with China, regardless of economic cost.

Australia has a longstanding policy of not taking sides between China and the USA.

A minority strand of thought, however, is that China poses a threat and that our national interest is best served by confrontation. That strand has reemerged.

As China under President Xi Jinping becomes more hardline and authoritarian, the case for being wary has strengthened. But there is a big difference between sensible caution and needless provocation.    

Right now we need China more than it needs us. It is our major trading partner by a long way. Its economy is ten times the size of ours — twenty times if measured in terms of purchasing power parity (GDP adjusted by how things cost inside a country) by which measure China has the world’s largest economy. 

China has strengthened its supply chains through the Belt and Road initiative since 2013. While Belt and Road infrastructure in some countries may not survive the economic stresses of COVID-19, much will remain.

In the same period Australia has become more, not less, dependent on foreign infrastructure for exports.

It is clearly desirable to spread our risks, not put all the export eggs into one basket. However, reducing reliance on China won’t be easy.  

Businesses that have spent decades building up the relationships required for trading in China won’t want to give them up. Trade with China requires personal contacts based on genuine understanding. Legal formalities are secondary. Not all connections are mercenary — many businesses that export to China have made friends there. 

A myriad of Australian sole traders have turned the purchase and shipping of consumer goods to China (daigou) into a billion dollar export industry. They have no other options.

Even for businesses that want to, finding alternative overseas markets is hard.

As economist Stephen Koukoulas has pointed out, if other countries don’t want our stuff we can’t make them buy it.

Leaving diversification to the market is a good idea in theory but won’t work quickly and may not work at all.  

Some prospective markets in Africa and South-East Asia expect the Australian government to support exporters — either explicitly through arranging contracts or implicitly through making contacts.

India, frequently touted as an alternative to China because it too has a huge population, is nowhere near as attractive. It is poorer, has huge disparities of wealth and a rigid bureaucracy which is hard to navigate. 

The best alternative country with which Australia should forge stronger links is Indonesia — close, democratic, big (a population of 270 million) and growing strongly. 

But it is suffering badly from COVID-19, relationships will take time to build, and Australian businesses and universities to date have been inexplicably blind to Indonesia’s attractiveness as a trading partner. 

Small and geographically spread countries in the south pacific are worth considering as potential trade partners for services and consumer goods but too small to be a replacement market for bulk exports of mining or agricultural commodities.

Diversification to different countries is thus complex and time consuming. 

Trade Minister Simon Birmingham correctly expects business will, of their own accord, want to spread their risks across numerous markets. But business cannot do everything. 

Australian schools and universities have reduced their teaching of foreign languages, especially Asian languages. The government’s social, education, defence and cultural ties with key partners such as Indonesia are weaker than they would be if they were a serious trading alternative.

Politicians are prone to creating problems, generally inadvertently, with neighbouring countries. These are all barriers. 

Diversification is easy to say, hard to do. It will need support for the long haul.