PETER DRYSDALE. Return to prosperity depends on mending China ties (AFR 20.5.20)

The global economy has taken a huge hit as the world’s major economies shut down economic activity in turn to fight the spread of Covid-19.

The GDP of China, Australia’s largest economic partner, dropped 6.8% in the first quarter this year. Its total trade fell 6.4% (exports 11.4% and imports 0.7%). In that period, Japan’s GDP dropped 3.4% and the United States fell 4.8%. The crisis hit China first and hard.

In the same period Australia’s exports to China grew by 4.3% on a year ago, twice as fast as Australia’s total exports. China’s share in Australia’s trade rose to 35.8%, despite a 12.8% drop in Australian imports from China. Exports of beef were up 30.3%. China has cushioned the initial economic shock of the Covid-19 crisis on the Australian economy. Earnings from Chinese tourism and international students dived, of course, a consequence of the Australian government’s policies to protect against spread of Covid-19.

These outcomes are the product of the huge market reform over the past 40 years that made China the largest trader in the world. They are a product too of its commitment to the rules-based trading order through accession to the WTO 20 years ago that integrated its markets with those across the world. They’re a product of both Australian and Chinese governments allowing businesses to lift their own and national incomes by finding the best deals in international markets.

These facts, one might have thought, put the Australia–China trade relationship in a sweet spot, buffeted though both nations are by the Covid-19 crisis. Yet the largely un-broadcast good news about the relationship is totally lost in a fracture of trust that now surrounds it.

Despite the vigour of the bilateral economic relationship, foreign investment perhaps excepted, it has soured badly over the past half-decade. In dealing with each other, both Australia and China are tripping over their increasingly complicated relationships with Washington and the reality that China is now a great power too — perhaps more sensitive than most because of the way foreign criticism plays into domestic politics.

The latest brouhaha was sparked by Australian Foreign Minister Marise Payne’s call for an independent, global inquiry into the origins of the Covid-19 pandemic and Prime Minister Scott Morrison’s pile-on. There was furious agreement on the need for review of the pandemic experience from Beijing to Brussels before Australia claimed ownership of the idea. Indeed it is part of the WHO’s established practice, once a global health emergency is over, to conduct comprehensive reviews to establish exactly what happened and what lessons can be learnt to manage emerging emergencies better, by national governments as well as the international community.

Thus the question was never about the justifiable desire for greater knowledge about the pandemic now taken forward in the World Health Assembly so that we’d be better prepared for contingencies of this kind in future. The question has been about the nature and the timing as well as the febrile international political context into which Australia lobbed the idea.

There was no developed Australian proposal. There was no consultation with neighbours or partners in the region, and not only China, they all were stunned at the guilelessness with which Australia and peddled its idea over the one to which it’s now signed on with the WHO.

Tensions have ratcheted up over China’s use of economic sticks to punish Australia over this political dispute. Chinese Ambassador, Cheng Jingye, floated the possibility of economic retaliation by a Chinese public that was ‘frustrated, dismayed and disappointed’ with Australia’s ‘politically driven’ call for a global inquiry. He criticised the Australian government for ‘pandering’ to the United States and argued that any future inquiry should be undertaken ‘without any hidden political agenda or any political purpose’.

Activating the long-brewing Chinese anti-dumping action against Australian barley exporters and the suspension of licences to four Australian abattoirs — however much both governments tried to present these as separate technical matters — have fuelled tensions.

China’s use of economic punishment is infrequent, despite the oft-cited cases of rare earth minerals, bananas, salmon, canola, and the Lotte department store boycott; it almost never works; and it is subject to international legal disciplines which China has accepted. Australia can take the barley issue to the WTO; just like China could contest Australia’s multiple anti-dumping actions on steel and aluminium products, but hasn’t.

Other big powers like the United States are also active users of economic muscle. China’s heavy breathing over Australian agricultural exports is more threatening in the context of its extra-WTO legal phase-one trade agreement with the Trump administration. This deal requires China to purchase an additional US$32 billion worth of agricultural imports from the United States over the coming two years. Welcome to a future of managed trade.

The Australia–China relationship desperately needs adult supervision and getting back on track. Beyond Covid-19 it’s a relationship central to the ambitions of the Australian community for economic recovery and reconstruction; it’s crucial to forging cooperative strategies that preserve prosperity and political stability in the Asian region; and it’s critical to help secure the rules-based global order. On these three issues Australia’s and China’s strategic interests converge.

Australia and China have much work to do to make up lost diplomatic ground. But they have an opportunity to join with partners in the region in getting international cooperation on Covid-19 on fast track. A strategic foreign policy priority for both is to work together with neighbours to engineer more rapid economic recovery from the crisis. China will be a central part of the cooperation and recovery effort. National action to arrest the pandemic now must be combined with proactive regional and global coordination on public health, financial and trade policies if there is to be anything like a V-shaped recovery from its economic effects.

Reprinted with permission of the author,

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Peter Drysdale is Head of the Asian Bureau of Economic Research and Editor-in-Chief of East Asia Forum in the Crawford School of Public Policy at The Australian National University.

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