Inside Story

A pause in the thaw?

Signs suggest the warming of Australia–China relations has slowed to a glacial pace

Hamish McDonald 27 June 2023 2411 words

Trading favours: Australia’s trade minister Don Farrell meets his Chinese counterpart, Wang Wentao, in Beijing on 12 May this year. Ambassador Graham Fletcher is in the background. Michael Godfrey/DFAT via AP

A curious pause has interrupted the slow melting of the freeze in Australia–China relations. Both sides are trying, it seems, to extract concessions from the other before moving to what they call “normalisation.” Even then, it will be a very guarded reconnection.

Security and defence agencies in both countries seem determined to drain any warmth from a relationship founded on a high degree of economic complementarity. In the Pacific, China’s attempts to become the security partner of small island nations have set off alarm bells; on the mainland, a vague new anti-espionage law has rattled foreign businesses. In Australia, shrill warnings continue about China’s influence-building, spying and emerging military threat, and the federal police have charged an Australian IT specialist in Shanghai under the Turnbull government’s foreign interference law.

The international setting isn’t helping. The United States and China, the two contestants for hegemony in the Western Pacific, are in the midst of a profound re-evaluation of the economic paradigms of the past forty years and how their two economies should connect.

China’s longstanding economic model, which fuelled rapid growth out of Maoist poverty, has come to the end of its road. After a decade’s reliance on construction, its domestic economy is burdened by large-scale debt and enormous numbers of empty apartments. Hopes of graduating from simple manufactures into high-tech products are threatened by American, European, Japanese and South Korean moves to retain control of the advanced semiconductors that run them.

America is abandoning the neoliberal doctrines it has followed since the Reagan era, adopting industrial policies aimed at bringing key industries back to home territory or friendly allies, chiefly through the trillions of dollars of subsidies and spending in Joe Biden’s Inflation Reduction Act. Transfers of American intellectual property and advanced equipment to China and other adversaries are under greater scrutiny.

In Australia’s case, an announcement of a Beijing visit by prime minister Anthony Albanese sometime later this year will signal that the thaw is still on. In contrast to his willingness to visit countries aligned in suspicion of China, though, Albanese is not looking at all eager.

“He doesn’t seem to have a lot of enthusiasm for this trip,” says Geoff Raby, a former Australian ambassador to China who is now a trade and business consultant in Beijing. “I’m really not sure what’s going on.”

From late last year, all the signs were that China’s leadership wanted to back away from the trade sanctions and freeze on political contacts imposed in 2020 in response to the Morrison government’s claim that Beijing was hiding the origins of the Covid-19 pandemic. China’s sharp tariff increases and other restrictions on a swathe of Australian exports — coal, barley, lobsters, copper, wine and timber — added up to about $20 billion in lost sales. Though small compared with our major exports to China (especially iron ore, which actually grew in value) the sanctions hit particular industries and regions hard.

At around the same time, a domestic national security case in China saw Chinese-Australian journalist Cheng Lei suddenly disappear from her job with Chinese state television in Beijing. She later underwent a closed-court trial for allegedly passing state secrets abroad, though no verdict or sentence has been announced. All China-based correspondents for Australian media were withdrawn by their employers for fear of arrest.

The defeat of Morrison’s government in May 2022 changed the atmosphere. Informal talks on the fringe of multilateral meetings — notably Chinese leader Xi Jinping’s encounter with Albanese at the G20 summit in Bali last November — led to foreign minister Penny Wong’s meeting with China’s senior foreign affairs minister, Wang Yi, in Beijing on 21 December. It was the first Australian ministerial visit to China in more than three years.

Steps to ease the trade sanctions soon followed. The ban on Australian coal lifted in January, with exports jumping to the point that Queensland’s budget had an unexpected surplus for the year just ending. China’s consul-general in Perth visited a major lobster fishing cooperative, suggesting that the ban would soon end. In Canberra, Chinese ambassador Xiao Qian expressed a hope that the two countries would come back to “a normal kind of relationship” and praised Albanese’s “pragmatic approach.”

Talks ensued between senior officials at Davos and elsewhere. Australia agreed to suspend its action at the World Trade Organization over the barley ban. Then, in early May, trade minister Don Farrell went to Beijing to meet his counterpart, commerce minister Wang Wentao.

A few days later, Beijing announced it would resume timber imports from Australia, with no mention of the pest infestations cited as the reason for the ban. The trade had previously been earning Australian exporters about $700 million a year.

Xiao, the ambassador, also expressed concern for the imprisoned Cheng Lei, who has not seen her children in “such a long time.” “Personally, as a Chinese ambassador to this country, I can share with you: I have my personal sympathy to her and to her family,” he said. “So based on humanitarian grounds, I have been trying, I will continue to try to do my utmost to facilitate more access, that she could have some kind of access granted to her partner and friends and families to let them know that she’s OK.”

Further steps are awaited. Australia’s ambassador in Beijing, Graham Fletcher, who was barred from attending Cheng Lei’s trial in early 2022, was able to visit her in prison recently, but detected no change in her situation. Punitive tariffs on Australian wine and the halt in the lobster trade remain. No date has been set for a visit to Australia, mooted for July, by China’s new foreign minister, Qin Gang. (Qin replaced the long-serving Wang Yi, who remains in a supervisory role as head of the Chinese Communist Party’s foreign affairs department.)

“They’ve achieved stabilisation — that’s good. Cabinet ministers are all disciplined in what they say about China — all that’s good, but I think the whole thing’s stalled in the last couple of months,” says Raby. “There’s not a lot of activity at the moment. The foreign minister’s dates haven’t been announced and July’s on us now. And they’re dicking around over the prime minister’s visit.”

But James Laurenceson, head of the Australia–China Relations Institute at the University of Technology Sydney, sees improvement, with China’s share of Australia’s trade starting to rise again after a sharp dip in the last two years and new items — electric vehicles from China and lithium ore going the other way for their batteries — gaining importance.

A new Lowy Institute poll, meanwhile, shows the Australian public’s concern about a threat from China easing, though still high and (short of sending troops) in favour of helping Taiwan defend itself. As a major threat, China has been overtaken by worries about cyber attacks from various sources.

Even if there has been a pause in the thaw, Australia’s experience still makes for quite a contrast to the state of relations between the United States and China, which US secretary of state Antony Blinken’s recent visit to Beijing to talk with Qin have barely warmed. Blinken pushed the line that Washington sought a “de-risking” of economic ties with China rather than “decoupling” and assured Qin that Washington doesn’t support Taiwan’s independence from China.

China seems not to have been mollified — and president Joe Biden’s subsequent reference to Xi Jinping as a “dictator” hasn’t helped. Chinese warships and aircraft continue to cut across US patrols through the Taiwan Strait and the South China Sea. In Washington, Congress members and senators on both sides of the aisle compete in tough talk about China. The Chinese defence minister is still refusing to talk to his US counterpart, Lloyd Austin, or re-open a military-to-military hotline.

While not directly accusing China, Albanese has aligned his government with America’s assertive defence manoeuvres in the Western Pacific and its cultivation of closer strategic ties with Japan and India. But for Biden’s debt-ceiling negotiations with the Republicans, Australia would have hosted all four leaders of this Quad in Sydney immediately after the recent summit of the Group of Seven advanced economies in Hiroshima.

And, of course, Albanese has fervently adopted the AUKUS agreement forged by Morrison to equip the navy, one day, with nuclear-powered submarines capable of projecting power far from Australian shores. The agreement has drawn predictable condemnation from Beijing, though it hasn’t been an economic deal-breaker.

Perhaps China’s leaders anticipate the AUKUS deal eventually collapsing under the weight of its contradictions, as a Marxist would say. Its embassy will be keenly watching the groundswell against AUKUS in Labor branches ahead of the party’s national conference in August. More broadly, the Lowy Poll found the Australian public “somewhat” supportive of AUKUS but unsure about its rationale or benefits.

China’s willingness to overlook far-off defence postures by minor powers is evident in this week’s visit to Beijing, Shanghai and Tianjin by NZ prime minister Chris Hipkins and a large business delegation. It’s only a few months since Qin, the Chinese foreign minister, blasted his NZ counterpart Nanaia Mahuta over former prime minister Jacinda Ardern’s strong warning about China’s attempts to form security partnerships in the South Pacific.

More recently, a New Zealand frigate sailed through Chinese-claimed waters in the South China Sea and was challenged by Chinese warships. But Wellington’s diplomatic deftness in recent years — not thrusting itself forward on things like the Covid investigation or security risks in Chinese telecom systems — has enabled it to keep channels open.

Australia’s hesitancy may come from the American mood playing into Canberra, Raby believes. “I think the pressure comes from the security and intelligence area in the US, through Shearer [Andrew Shearer, head of the Office of National Intelligence] and the security and defence people in Australia,” he says. “We are hobbled by these people. They don’t care if the New Zealand prime minister goes and takes a trade delegation and gets some deals. That’s not their agenda at all. Their agenda is to stay as close to the US as possible.”

Meanwhile, outside the defence–intelligence camp, other departments are working to keep up the economic momentum. Raby says talks are going on privately to extract the best advantage from a prime ministerial visit. “There is a negotiation about a package of outcomes,” he said. “And while everyone probably knows where you land, for some reason it seems to be difficult — I think on our side — to get there.”

Albanese has indicated that a complete lifting of the 2020 trade restrictions is required. He would also be hoping for resolution of Cheng Lei’s case, and preferably her release. “It would be very hard for Albanese to go without getting some concession on Cheng Lei,” says one of Canberra’s leading China specialists, who asked not to be named.

Beijing would want assurances that discrimination against Chinese foreign investment on national security grounds would be eased back from the absurd paranoia that ruled under Morrison’s government, when treasurer Josh Frydenberg blocked a Chinese company from taking over a Japanese-owned milk depot in Victoria.

In return for a resolution of Cheng Lei’s case, China would also want a promise that Australia won’t oppose its bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a trade agreement covering e-commerce and intellectual property as well as conventional goods. Taiwan’s parallel application to join the CPTPP complicates this issue.

Given the barely concealed message of much mainstream media commentary in recent years — that seeking business deals with China amounts almost to treason — Albanese won’t want to look too enthused. Despite the easing of public concern about China, the Lowy Institute poll also found that 70 per cent of respondents want Australia’s supply chains to run through friendly countries.

For economist John Edwards, this is at odds with how Australians actually behave. “Australian homes are chock-a-block with Chinese-made kitchen equipment, refrigerators and washing machines, their garden sheds with Chinese-made tools, their desks cluttered with Chinese-made phones, computers, printers and peripherals,” Edward wrote last week in the Australian Financial Review.

“We wear clothes made in China and are now beginning to buy cars made in China,” Edwards went on. “In a roundabout way, these imports are paid for with exports of iron ore, coal, lithium, and other metals and minerals, often to China. They are also paid for by revenue from Chinese students in Australia, and Chinese tourists in Australia, with China the predominant source of both.”

A vast number of imports also come from third countries like South Korea and Japan that use Chinese components for their products. Allies like Britain and the United States meanwhile account for a very small proportion of Australia’s trade. For all its talk of “friend-shoring,” the Biden administration’s main focus, subsidising semiconductor manufacture in the United States, will be at the expense of two friends, Taiwan and South Korea.

And it’s not just Australian households that are chock-a-block with Chinese goods. The difficulty of disconnecting from China was shown in an interview this month by the chief executive of the huge US defence and aerospace group Raytheon. “We can de-risk but not decouple,” Greg Hayes told the Financial Times. “Think about the US$500 billion of trade that goes from China to the US every year. More than 95 per cent of rare earth materials or metals come from, or are processed in, China. There is no alternative.”

If Raytheon were to withdraw from China it would spend many years rebuilding its supply chains either in the United States or friendly countries, Hayes said. “We are looking at de-risking, to take some of the most critical components and have second sources but we are not in a position to pull out of China the way we did out of Russia.”

Raytheon is deeply involved in Australia’s defence. It provides the combat system for the Collins-class submarines, air defence for the army and missiles for the air force, and it helps run the space warfare ground station at Exmouth, Western Australia. All, it seems, reliant on Chinese-made components — and paid for, in large part, by our exports to China. Trading with “frenemies” is the international norm. •