Standing up to China on trade

| February 7, 2023

The Albanese government deserves credit for its handling of the China relationship. Its dual-stream strategy of ‘co-operating where possible and disagreeing where necessary’ has so far enabled diplomatic re-engagement without compromising Australian policy. But is the approach sustainable, or is it only feasible when the streams do not cross?

The government, and in particular Foreign Minister Penny Wong, has wisely referred not to a ‘reset’ but a ‘stabilising’ of relations. But what does stability mean in the long term? For Australia, it means making routine the protection of national sovereignty and adherence to international rules. Beijing, however, will seek a stability that means no new Australian policies it regards as ‘anti-China’.

These objectives are not compatible, which means either we need to live with ongoing tension and intermittent disagreements, or one country compromises on its strategic interests.

A test of the approach’s sustainability was inevitable—and in fact it has already arrived. In 2021, Australia launched two World Trade Organization cases against China relating to wine and barley, which were among the exports Beijing targeted in a series of coercive trade strikes aimed at getting the Australian government to change its policies on non-trade issues such as the South China Sea, foreign interference, 5G, human rights, Taiwan and Covid-19.

Beijing has suggested that it might end its spurious trade measures if Australia drops its WTO cases. This would be a major mistake by Australia and would constitute the first backward step on Australian policy—an unacceptable Rubicon that would signal Canberra is prepared to put short-term economic gain ahead of sovereignty and international rules.

Trade Minister Don Farrell told The Australian in late December that Australia preferred to resolve the disputes ‘by discussion’ than by WTO arbitration, and even referred to the possibility of Beijing’s reducing its coercion as ‘goodwill’—an unfortunate phrase suggesting that Australia might even return such goodwill.

The measures have both been in place for more than two years. That’s more than two years of unjustified economic loss that we do not get back.

A simple abandonment of the disputes through a deal outside of the WTO would mean China faces no consequences for its coercive behaviour. It would signal to international vandals that they can trash the rules and then, when their outlaw behaviour doesn’t pay off, simply walk away.

As a country that believes in a system of rules—both because it reflects our values and because it protects our national interests—Australia should be setting an example: unfair trade practices need to be properly dealt with by adjudication and the costs properly accounted for.

True, the WTO encourages parties to resolve disputes themselves. But this is only the best course if resolution is managed quickly, not when one party has inflicted years of unjustified cost on the other. There is an understandable desire to end the pain for affected wine and barley producers. But the WTO is expected to rule on the cases by the middle of this year, so there is no strong argument on pragmatic grounds that we should just cut our losses.

Many observers have no faith in the WTO. But that shows the need for responsible nations such as Australia to take action and support reforms that make international institutions more effective, which in turn means showing confidence that the institutions can work.

Granted, the penalty system is not perfect. But the real consequence for Beijing would be at a higher level. The reputational cost of a finding against China by an international institution would be more powerful than a single country’s claim alone, and it would galvanise international support for rules and disincentivise future coercive tactics.

We should look at the example Japan set after Beijing halted shipments of rare earths in 2010, in an attempt to coerce Tokyo over the disputed Senkaku Islands while also giving Chinese companies a competitive advantage in products such as hybrid car batteries.

After diversifying its sources of rare earths to avert a manufacturing crisis—and to make sure the coercion couldn’t be repeated in the future—Japan still went through with a WTO case. The WTO found in Japan’s favour and China was forced to drop its export restrictions.

These trade disputes aren’t just about the economic relationship. Trade is inseparable from strategy and security. China itself has demonstrated this by using trade to ­coerce Australia over sovereign decisions it made in other realms.

And this year will not be a year in which Australia can hide from the truth of its strategic circumstances. The defence strategic review and the decision on the ­optimal pathway for Australia’s nuclear-propelled submarine are both responses to China’s aggressive rise.

Our diplomacy should not suggest otherwise. In international affairs, a good cop (foreign ministry), bad cop (defence ministry) routine does not work. All it does is project inconsistency that authoritarian regimes can exploit.

The forecast investment in defence capabilities and technology is vital for our ­future. There must be a complementary and overarching narrative that brings the public—here and abroad—along for what will, at times, be a bumpy ride.

Japan, as this year’s G7 host, has made it clear economic coercion will be a major item at the summit in Hiroshima in May. Our partners and allies—many of whom have also experienced Beijing’s economic coercion—will be watching more closely than ever.

Consistency is essential, and that means passing this test on trade. A strategic win for Beijing would likely nudge us on to a path on which we become tempted to speak more softly or even self-censor on Chinese transgressions, whether they be in the Taiwan Strait or Xinjiang, or cyberattacks and foreign interference.

This can quickly push leaders and policymakers into the habit of second-guessing or delaying policies that are in our national interest but might upset Beijing. Once you are in this position, it is hard to get out.

Withdrawal from the WTO cases without consequences for Beijing would also involve Australia withdrawing from our international leadership because it would boost the likelihood that Beijing repeats its coercion against other, smaller nations.

Above all, dropping the cases would mean Australia is no longer able to say the government’s approach to China has not involved any major change to foreign, defence or strategic policies. The precedent will be set that ­policy can be changed to appease Beijing.

Like it or not, strategic competition is here. We are competing for the shape of the evolving regional and international system—of which fundamental principles such as trading fairly according to rules that apply to all economies is a central feature.

If Australia chooses not to participate, we forgo our chance to have an influence. The competition will continue without us, and our future will be in the hands of others, including those who are ready to take advantage of any weakness.

This article was published by The Strategist.