Doomsday view of China hurts vital economic interests

• The Australian
• 12:00AM August 25, 2016
• 

  Economics Editor

  Canberra

  

When researching a book on Australia’s relationship with China five years ago, I was told by a senior defence official it was accepted that in the event of a war between China and the US, China would “take out” the joint Australia-US Pine Gap communications facility.

A professor of strategic relations later called me to say this was the first confirmation that Australia anticipated a nuclear attack from China. The defence official had not mentioned the N-word but the academic said the only way China could reach the facility, near Alice Springs, would be with an intercontinental ballistic missile.

So the Department of Defence has been working with scenarios for a cataclysmic end to Australia’s most important economic relationship for some time. It was China’s new ability to reach out and “touch” Australia, as defence strategists put it, that inspired the Rudd government’s defence white paper, with its focus on building up maritime power with submarines and frigates to defend the sea lanes that carried Australia’s trade. In 2009, Kevin Rudd prepared a still-confidential cabinet paper on the China relationship that argued Australia should “engage” and “hedge”. We should engage fully in our economic, political and even military relationships with China, boosting co-operation and mutual understanding wherever we could. Joint naval exercises have followed, as has greater economic and cultural interchange. There were more than 120,000 Chinese students in Australia last year.

However, Rudd also urged we should hedge against the possibility that good relations break down and be prepared for a military conflict. His defence white paper canvassed the possibility that we also might have to hedge against a “diminution in the willingness or capacity of the United States to act as a stabilising force” in Asia— a possibility that seemed remote at the time but would be immediate were Donald Trump to win the US presidency.

Rudd’s engage-and-hedge strategy survived the Gillard and Abbott governments. The Abbott government was able to pull off a free trade agreement with China that went further in opening China’s services sectors to Australian investment than it had ever offered any other partner. He elevated Australia’s relationship with China to a “comprehensive strategic partnership”, which formalised annual ministerial meetings across a range of portfolios.

At the same time, Abbott was able to complete a defence agreement with the US governing the stationing of US marines in Darwin (something first negotiated with Julia Gillard) while also sealing a defence agreement with Japan over the sharing of military technology and joint exercises.

A new and much darker vision of Australia’s relationship with China is being articulated by Australian Strategic Policy Institute executive director Peter Jennings and is understood to be influencing the Turnbull government. When rejecting two Chinese bids for NSW’s “poles and wires” company Ausgrid, Scott Morrison declared that national security was his paramount concern when assessing foreign investment, trumping all economic issues.

Jennings, a former deputy secretary for strategy in the Defence Department, argues that the Treasurer should also reject any Chinese bids for the privatisation of the Melbourne and Fremantle ports, learning the lesson from the lease of the Darwin port to a Chinese company. He also views past sales of electricity assets to Chinese interests in South Australia, Victoria and Western Australia as a mistake. His argument that Australia should treat China primarily as a threat to our security reflects his view that, under President Xi Jinping, China has become more aggressive in its cyberattacks in the West, while also building military airfields on artificial islands in the South China Sea and fostering a closer relationship with Russia.

Some of this is debatable. A forthcoming book from the Lowy Institute by the British authority on Russia affairs, Bobo Lo, argues there is far more substance to China’s relationship with the US than with Russia, which has always been marked by mutual suspicion. China’s claims in the South China Sea are not new; there were photos of Chinese soldiers standing on coral outcrops in the 1970s and the development of airfields there was likely planned well before Xi assumed the leadership. Xi has certainly been more repressive than his immediate predecessors but the “engage and hedge” strategy articulated by Rudd does not require turning a blind eye to China’s potential threats.

It does call for a clear vision of our economic interests. The Chinese economy is not going away. Even if its growth slows to 3 per cent or 4 per cent — more pessimistic than any official forecasts — it would be adding the equivalent of the entire Australian gross domestic product to global demand every two years. Just 25 years ago, its GDP was only 25 per cent larger than Australia’s.

As the impressive Australia-China Joint Economic Report released last week by the Australian National University and the China Centre for International Economic Exchanges argues, there will be abundant opportunities ahead for Australia as the drivers of China’s growth shift from resource-intensive investment to services-intensive consumption. Its modelling predicts growth in Australian exports to China of at least 70 per cent and potentially 120 per cent across the next decade. But the next phase of China’s growth will depend much more on the mutual flow of investment than on container ships and bulk-carriers criss-crossing the South China Sea. Australia has strengths in industries such as education, finance and tourism, but we’re in competition with the rest of the advanced world and are not China’s only realistic option, as has been the case during the past decade with resources.

National security starts with economic security. Elevating the advice of security agencies, which always deal in dystopias, above that of Treasury and economic agencies will jeopardise our economic security, particularly if we cease to engage and start approaching China as a hostile power.