Scott Morrison faces two wicked policy problems. One is the coronavirus, the other China. The second problem is far more intractable and challenging over the longer term. This is because Beijing is becoming more aggressive across every area of international power, while we have foolishly allowed ourselves to become uniquely dependent on China.
This dependence is sketched in an important new report by British think-tank the Henry Jackson Society. Entitled Breaking the China Supply Chain: How the Five Eyes can Decouple from Strategic Dependency, it makes sober reading for any Australian.
It does not analyse all forms of national power — defence capabilities, alliances, soft power, economic size et cetera. Instead, it examines trade dependence in strategic areas of each of the Five Eyes’ intelligence partners — Australia, the US, the UK, Canada and New Zealand.
The Five Eyes nations, the report notes, have been the most important international advocates of hyper-globalisation since World War II. This has led, paradoxically, to an international system that has disproportionately benefited China.
This is partly because Beijing reaps the benefits of globalisation without obeying the rules, although the report doesn’t use precisely that formulation. The pandemic has exposed the dangers of this distorted system and led to a significant push in all the Five Eyes nations for a “decoupling” from China.
This does not mean containment or isolation of China. It does not mean an economic boycott or rampant protectionism. But it does mean securing reliable supply chains in critically important strategic industries.
The really bad news for Australia is that we, of all the Five Eyes allies, are the nation most strategically dependent on China.
The report takes a fairly broad definition of strategic products and processes and concludes that Australia is strategically dependent on China across 595 categories of goods. This compares with the US at 414 and Britain at 229.
Whichever way the report slices and dices the different categories, Australia is the most dependent on China. It concludes that in 167 categories of goods that service critical applications, Australia is dependent on China.
Until COVID-19, the strategic dependence of the key Western allies on China was growing, according to this report. And the future looks just as bad for Australia in terms of strategic dependency because Australia is dependent on China for 35 categories of products that are critical in the technologies and processes of the fourth industrial revolution.
This is essentially the digital revolution applied to everything, living and inanimate, and accelerated in scope, power and velocity at an almost exponential rate. It will transform everyday life and whole economic and industrial structures. It will, among other things, transform medicine. It will also lead to systems that are extraordinarily capable but which, to achieve that capability, are built on extraordinary complexity, and therefore vulnerability.
And in these spheres, Australia is more dependent on China than any other of our Five Eyes allies.
But while we are in the most dependent position, all our allies are similarly vulnerable in key sectors. The report notes that in 2018, China produced 80 per cent of the world’s magnesium, which is central to many cutting-edge technologies in transport, energy, construction and other fields.
In a related area, the US and Australia are co-operating in an effort to create a non-Chinese alternative in rare earths minerals, which are essential to much modern technology, such as mobile phones. The way this sort of industry has worked in the past is that Beijing establishes it by state fiat, prices its exports to win strategic markets, gains market domination and then possesses a huge strategic lever.
China is also by a vast distance the biggest, indeed the dominant, producer of active pharmaceutical ingredients.
The report identifies three types of decoupling that can take place: negative, positive and co-operative. While it certainly doesn’t recommend the Five Eyes allies seek confrontation with Beijing, it does suggest they should enhance their efforts to help each other with strategic decoupling.
It further suggests that each nation should conduct research and then publish the results of its own dependence on China in raw materials, components and complex supply chains. And beyond that, each capital should conduct a national review of its strategic industries.
Federal Liberal backbencher Andrew Hastie, the chairman of the parliamentary joint committee on intelligence and security, has contributed a paper that will be published as part of the report on Thursday.
In it he cites the “thinly disguised threats of economic coercion from China’s ambassador to Australia in our national media”. He could easily have cited editorials in the Chinese state-controlled Global Times, which say that with relations deteriorating, trade is bound to be affected.
And now we have international wire reports of Beijing drawing up a hit list of Australian exports to punish.
Australia’s supposed sin in all this, recall, is to have publicly called for an independent review into how COVID-19 originated and how it was managed so that we can learn lessons for the future.
But Hastie identifies the roots of Beijing’s recent trade intimidation as existing long before the COVID-19 crisis.
He comments that the Henry Jackson Society report makes “troubling reading” and argues: “Our strategic dependency on critical imports makes us vulnerable to not only economic coercion, but also supply chain warfare.”
Hastie’s most striking policy response is to call for the Morrison government to create a “strategic industry plan”. The purpose of this plan would be “to build self-reliance in key pharmaceuticals, medical supplies and other critical goods”. He advocates some departure from recent economic orthodoxy for this effort: “Encouraging firms to build and expand domestic production capacity will require government support, such as time-limited tax incentives. This should be a bipartisan effort.”
Hastie believes Australia should conduct a review of all trade-exposed products, industries and sectors, and sort them into three categories: goods so critical that we must be self-reliant in any crisis; goods and materials where we are too dependent on authoritarian governments but could embrace international supply chains among friendly nations; and those products for which open, global supply chains are OK.
These are debates we are entitled to have and must have. They are not provocative and we should not be intimidated into accepting that they are.
Beijing’s own “Made in China” program embraces self-reliance as a national goal. And these issues will become more acute in coming months and years.
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