Peter Drysdale and Shiro Armstrong: Australia must find common purpose with China

Jul 1, 2022
Two chairs with flags of China and Australia isolated on white
Image: iStock

Both nations depend heavily on a multilateral trading system. Strengthening it together is a way of managing their troubled bilateral relationship.

What might become the new normal in Australia’s relationship with China is a major question for the Albanese government. There will be no simple reinvention of the old relationship. But the change in government in Australia provides an opportunity for both countries to articulate and pursue again common imperatives that flow from shared global economic interests.

The starting point is acknowledgement and support of multilateral principles and interests in the conduct of their trade and economic relationship. That will also contribute to strengthening the global economic order.

The large Australia-China economic and political relationship was built on both countries’ commitment to that open multilateral system. China, as the world’s largest trading nation, has a huge stake in that. Despite its transgressions against Australia and other countries, China has substantially complied with World Trade Organisation law.

Trade law is nonetheless incomplete and inadequate in several respects that relate to China. But the existing law has provided, and still provides, the framework for entrenching the country’s large-scale interdependence with the rest of the world, and what law there isn’t is a joint agenda for WTO reform.

The breakthrough Geneva Package last weekend in the WTO bolsters global governance and the rules-based order that protects Australia, and of which China is a crucial part.

With the US alliance underpinning security, Australia’s economic and political priorities still lie squarely in the regional neighbourhood. The new government signalled this with a state visit to Indonesia by Prime Minister Anthony Albanese and three trips to the South Pacific by Foreign Minister Penny Wong straight off the back of their trip to Tokyo for the Quad summit.

Australia’s economic interests are heavily concentrated in East Asia, which accounts for 66 per cent of Australia’s foreign trade (compared with only 17 per cent with the trusted Five Eyes allies, or 27 per cent with the G7 industrial economies). All of East Asia’s economies are deeply interdependent with China: decoupling would have grave consequences for regional prosperity and security.

Chinese trade sanctions on Australian goods, both explicit and through informal mechanisms, were blunted in their effect because the multilateral trading system provides a buffer against such policy shocks. Many Australian exporters were able to find other markets in an open global trading system.

The sanctions were costly for Australian exporters but a bigger cost was borne by China, politically and reputationally, causing a loss of trust in China and mobilising political support behind Australia.

Both Australia and China must shift. Australia needs a clear indication that China is not backing away from its multilateral commitments. That includes commitment to the lifting of trade sanctions.

The toning down of thoughtless anti-China rhetoric by the new Australian leadership and Defence Minister Richard Marles’ engagement on clear terms with his counterpart Wei Fenghe in Singapore are a start.

Another small measure would be to review the over 100 anti-dumping cases against China that predate the deterioration in the relationship but are an impost on Australian industry and consumers, especially at a time of cost pressures, and run counter to the multilateral norms Australia professes.

Opportunities to work together

Much more is needed, including Australia’s acknowledgement of China’s global and regional role.

Enfolding China in multilateral arrangements, economically and politically, together with regional partners is the best way forward for both Australia and China to manage their big bilateral relationship. There are immediate opportunities in regional and global arrangements – especially within the Regional Comprehensive Economic Partnership (RCEP) and the G20 – to work on shared multilateral interests and overcome the trust deficit in bilateral relations.

Diversifying Australia’s trade shares away from China is not the answer. To do so would mean lower incomes and bigger government debt. Australia’s recent trade agreement with India will not fundamentally change the structure of Australia’s regional trade and economic ties.

The hard arithmetic is that if China stopped growing tomorrow, India’s economy would not achieve parity with it until 2050 even if it doubled its income every decade.

Instead of trying to fight the forces of economic gravity with a costly retreat from the Chinese economy, which is highly interdependent with Japan and the whole East Asian economy, Australian national economic and security interests are served best by a framework that effectively constrains states’ abilities to exert economic pressure for strategic ends.

Multilateral commitments diffuse raw power. That interest is shared by Australia’s regional partners.

China’s interests in the established economic order are demonstrable. Along with Australia and two dozen more members, it is part of the EU-led Multi-Party Interim Appeal Arbitration Arrangement, or MPIA, a substitute for the WTO’s rule enforcement body that the United States has neutered.

China is a member of RCEP and has declared its interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. These are platforms for positive engagement with China and our partners in the region that can frame productive bilateral ties.

If China can demonstrate commitment to the high-standard rules – the very rules that the US led the writing of with Australia, Japan and others, and with China in mind – it is in Australia’s and the region’s interest to have China work through the reforms that would qualify it to join the CPTPP.

The way forward is to pursue shared interests with China, with as many partners as possible. The frameworks are already in place to do so. Quite apart from engaging over CPTPP, RCEP has built-in mechanisms to engage ministers and leaders in an agenda of economic and political co-operation that kicks off this November.

Australia’s neighbours have been crying out for Australian action and leadership in multilateral affairs – from action on climate change to supporting open trade – that embraces China. Doing so in the months ahead provides a safe and sure path to the restoration of common purpose in our bilateral relationship.

Peter Drysdale is emeritus professor of economics and head of the East Asian Bureau of Economic Research and East Asia Forum at the Crawford School of Public Policy at the Australian National University.
Shiro Armstrong is director of the Australia-Japan Research Centre and editor of East Asia Forum at the Australian National University.

First published in Australian Financial Review on June 24, 2022

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