Australia losing perspective on Asia

| October 19, 2009
Oct 09 Topic of the Month

Statements like the following from a former Treasury official hardly inspire confidence in Australia’s capacity to stay on top of the Asia game:

There is no strategic framework with China. I don’t know what caused it but it’s a fact. Because of this vacuum you get crap policy.
 
This is Stephen Joske, who left Treasury last year after being the Government’s top China economist, speaking recently. He was detailing a long list of Chinese investments in Australian resource projects that have been deferred, discouraged or disallowed by the Foreign Investment Review Board (FIRB) in Canberra. Uncertainty is the name of the game. Late last month, the Board’s general manager addressed the issue in a public speech, laying down tough new guidelines that appeared to restrict foreign government-owned investors to 50 per cent of greenfield resource projects and to less than 15 per cent of major ones. But as John Garnaut, The Sydney Morning Herald’s Beijing correspondent and a Chinese speaker, pointed out last week, while these guidelines were intended to add clarity to the process, they have instead created a new round of confusion.
 
Those who deal with the Board, Garnaut observes, claim that the system has been enveloped in additional rolls of red tape since its general manager’s comments. Indeed, Garnaut says, a whole industry of lawyers, lobbyists and retired politicians is springing up to earn fees by promising China they can divine the mysteries of Australia’s foreign investment laws.
 
Oct 09 Topic of the MonthWhy worry? That’s what many Australians say when the subject is broached. The Chinese, after all, are no paragons of virtue in this regard, having mastered the art of blocking foreign investment in their own country when they’re keen to protect domestic interests. Their mining industry is notoriously difficult for foreign companies to enter. That’s true, as is the unquestioned prerogative of the Australian Government to protect our national interest.
 
Ultimately though, reality is what it is, before it’s ever what you want it to be. And the stark fact here is that Australia is a country living well beyond its means, a condition only exacerbated by the global financial crisis. So far we’ve been able to weather the storm reasonably well because of China’s great appetite for our resources. We not only need China’s purchasing power but also its investment. And we’re deluding ourselves if we think we can go on much longer indulging in an FIRB process so opaque that one Australian mining magnate, in an unrestrained moment, called it “racist”.
 
As the Lowy Institute’s survey of Australian attitudes, released last week, has shown, our investment restrictions seem broadly popular. Half of the respondents thought Canberra was letting in too much Chinese investment. Joske, however, feels that this disposition is largely of the Government’s own making. He believes there wasn’t strong public resistance to Chinese investment a few years ago, but that indecision from the Government and negative signals created a vacuum in which concerns grew. As soon as the FIRB started to define what the national interest is, he says, they bound their hands without really resolving the issue. Now the Board is being used to fan public opinion and concerns about state-owned enterprises.
 
Older Australians, particularly those involved in the resources boom with Japan some 30-40 years ago, cannot help but recall the challenge to foreign investment in those days. As Japan rebuilt its industry after the carnage of the Second World War, its appetite for Australian resources – especially for coal and iron ore, as with China now – was insatiable. Then prime minister, Robert Menzies, had a much tougher battle with public opinion than anything we’re currently confronting with the Chinese. Anti-Japanese sentiment ran high, with memories of Changi Prison in Singapore and the horrors of the Burma Railway still fresh in the minds of all Australians. Returned servicemen were widespread in the workforce, some of them survivors of wartime atrocities.
 
And yet, in 1957, the Menzies Government pushed through a Trade Agreement with Japan that opened up a huge economic relationship that ultimately served both countries well. In the same year, Australia hosted a visit by Japan’s prime minister, Nobusuke Kishi, who had been minister for commerce and industry in General Hideki Tojo’s war cabinet, serving from 1941 until the surrender in 1945. He was imprisoned as a Class-A war crime suspect. These were heady days and it called for great skill and sense of purpose on the part of the Australian Government and the bureaucracy to articulate to the community why the country needed to go down this path.
 
And now, half a century later, look where we are with China? It’s almost unbelievable. Australia’s experience with Japanese involvement in our resource industry provides a ready-made blueprint for our relations with China. Of course, there are notable differences but still the question is begged, how could we not see the relevance?
 
The only answer is a chronic lack of historical perspective and continuity. And this is a condition that may well prove terminal for Australia if it doesn’t lift its game. The sort of future we define for ourselves in this part of the world is in no way guaranteed – at least, not on our terms.
 
In any debate on Australia in Asia it is commonplace to see Japan ignored, almost as though it no longer exists. Rowan Callick, writing in The Australian on October 14 about the findings of the Lowy Institute survey, put it in context:
 
The message about China that has been repeated relentlessly by the Reserve Bank, Treasury, economists, the business world and politicians has clearly struck home. Since the economic downturn, it has emerged on top of the world, perceived as more powerful by 72 per cent [of Australians], with just 3 per cent dissenting; 95 per cent say China is or will become the top Asian power, up from 86 per cent last year.
 
In this process, however, that remote island country offshore from China – whose name Australians seem to have forgotten – has become completely marginalised. China’s economy is now viewed as more than 10 times more important to Australia than Japan’s. How bizarre, then, to discover that Japan should have bought $52.6 billion of exports from Australia in the financial year to July 1, compared with $39.3 billion bought by China. Japan remains by far Australia’s biggest export target. This element of the poll underlines how remote most Australians, especially those of us who live in cities, remain from the export industries that generate the lion’s share of the country’s wealth.
 
You have to ask yourself, who’s taken their eye off the ball.
 
Joske believes that the investment policy setting is getting worse because of a lack of leadership, hence his statement about the absence of a strategic framework with China and the resulting vacuum that produces “crap policy”. He sees the FIRB as having been allowed to depart from the spirit of the open economy and to effectively dominate the entire economic relationship. Joske acknowledges that Chinese state-owned corporations certainly act differently to non-state companies, but in ways that Canberra seems not to have bothered to understand. This is how he puts it:
 
The issue of Chinese Government control of state-owned enterprises is very complicated and very hard to grasp. This gets back to this mystery as to why the Australian Government has chronically under-resourced its economic engagement with China. The thing that’s inexplicable is the overall approach to China: you’re setting foundations for Australia’s economic future.
 
The Japanese, of course, helping to keep our economy afloat as they do, maintain a keen interest in what we’re about. Sometimes they’re even ahead of us on the strategic front, as they were recently in warning that the Chinese were about to gain control of one of the world’s top deposits of rare earths, in Western Australia. Crucial to modern technology, whether it’s the manufacture of mobile phones or hybrid cars, rare earths have been virtually captured by China, which dominates the global market in terms of both processing and pricing.
 
The Japanese are bamboozled by how we could get our China policy so wrong. They can’t comprehend how, with such a rich endowment in resources, we could lack a strategic perspective to match our investment requirements. One senior Japanese put it this way recently in a candid moment in Tokyo:
 
Back in the 1950s, you Australians were lucky when Britain, your traditional market, announced that it was going to join the Common Market – now the EU – and the Japanese bus came trundling past and saved you. You’re even luckier today that a fleet of Chinese buses services your route. You even have hopes that India will pick up the slack if China pulls back. But watch out. Survival ultimately depends on forethought, cleverness and planning. Luck, as ever, is but a transitory thing.
 
It is perhaps with this in mind that we should judge Canberra’s ill-advised attempt to promote its Asia Pacific Community initiative. Energy wasted on that could better be devoted to understanding exactly what it is that we’re dealing with in the Chinese dragon.
 
 
Warren Reed was an Australia-Japan Business Cooperation Committee scholar in the Law Faculty of Tokyo University in the 1970s. He later worked for Australian resource interests, spent 10 years in intelligence and was chief operating officer of the Committee for Economic Development of Australia (CEDA).
 
 
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