US-China divorce is set to reshape global power

During the election campaign, Trump will likely argue that only he is capable of confronting the aggressive Chinese Communist Party. Picture: AFP

Beijing and Washington intensified their strategic confrontation last week. Both sides are now preparing tough follow-on actions and pushing for an economic and political divorce likely to result in a major reshaping of global power.

Last week, Chinese President Xi Jinping bypassed the Hong Kong Legislative Council to enact a national security law that removes any semblance of political and economic autonomy for the territory. US President Donald Trump responded rapidly on Saturday by removing Hong Kong’s special trade and investment status, initiating sanctions against the officials who are driving the clampdown and restricting Chinese student access to the US.

The scope for compromise is limited because both leaderships are driven by powerful domestic interests. On the Chinese side, Xi faces some acute challenges. He is striving to maintain tight party control while struggling to overcome the burden of a weakened economy and the regime’s poor management of the coronavirus.

Even before the pandemic, China’s economy was in trouble. The GDP growth rate had halved since 2007, domestic debt had surged past 300 per cent of GDP and the country’s productivity and global competitiveness were falling. Some manufacturing and other enterprises were relocating elsewhere, and many Chinese were moving their funds overseas.

Then, in the first quarter of this year, the virus shrank the Chinese economy by 6.5 per cent and unemployment surged, probably to about 15-20 per cent.

While most Chinese are now back at work and the government has launched another stimulus package, the recovery has so far been sluggish, partly because of low international demand for China’s exports.

The Chinese regime has taken modest steps away from the international economy over 15 years, more than halving China’s exports as a percentage of GDP from 36 per cent in 2006 to 17 per cent in 2019. Last week, Xi told his top economic advisers that China would accelerate its move away from international markets towards a more closed economy in which “domestic circulation plays the dominant role”. This strategic shift will reduce the regime’s vulnerability to international pressures but it will also accelerate China’s detachment from the ­global economy.

Accompanying this drive to introversion, the Chinese Communist Party has been working overtime to distract the people from its mismanagement of the virus, the ailing economy and the serious deterioration in China’s international reputation. Nationalist propaganda has been ramped up, the great firewall of China has been tightened, dissidents have been silenced or “disappeared”, and regime mouthpieces have ­focused on blaming the US and other Western countries for China’s problems.

Meanwhile, across the Pacific, Trump is weighing alternative strategies for addressing China ahead of the November election. In the first strategy, he would celebrate January’s phase one trade agreement with Beijing as a major victory only he could achieve.

The alternative strategy is to follow up Saturday’s tough statement on Hong Kong by walking away from the phase one trade deal, highlighting China’s failure to purchase even half of the US goods it promised to buy by the end of March. Trump would also take the Chinese regime to task for its appalling handling of the virus, its continuing industrial-scale theft of Western technologies and intellectual property, its heightened coercion of Taiwan and the countries of Southeast Asia, its incarceration of more than a million Uighurs and Kazaks and its “wolf warrior” threats to Australia, Asian and European allies among others.

Last week, Trump twice stated that he was prepared to abandon the trade deal with Beijing, apparently in the hope that China would take dramatic steps to resolve the issues in dispute. However, all indications are that Xi is heading in the opposite direction and is unlikely to give much, if any, ground. Hence, in the coming weeks Trump will probably abandon the trade deal with China and announce an extensive suite of new technology, travel, media and other sanctions against Chinese entities. He might also reveal some additional US support for Taiwan.

During the election campaign, Trump will likely argue that only he is capable of confronting the aggressive Chinese Communist Party and only he can protect the US and its allies. Unflattering comparisons are certain to be made with the performance of the Obama-Biden team when it was in the White House.

The tensions generated by the increasingly strident rhetoric on both sides of the Pacific could trigger a major crisis. If Xi feels seriously threatened at home, he may be tempted to launch a military adventure, such as an assault on Taiwan, in an effort to rally the country and advance the “China dream” of “reunification”.

This could easily trigger a major war. We should not underestimate the risks.

Australia will also need to adapt to the emergence of two powerful and more distinct blocs. On the one hand will be China, North Korea, Iran, Pakistan, possibly Russia and a small number of other authoritarian states. On the other will be the US, the Western allies, India, Indonesia and most countries in the developing world. Australians will need to quickly master the changed dynamics and the altered mix of markets.

In the new international environment, we should still be able to export our iron ore, coal, LNG, food and some educational and tourism services to China. But the transfer of many types of advanced technology and cutting-edge intellectual property to or from China will be subjected to ­increased scrutiny.

If we are nimble, the coming major power divorce could have upsides for Australia. There will be some economic and strategic opportunities if we can offer world-class capabilities.

However, to achieve this outstanding outcome we will need to reform our economy, dramatically reduce red tape and markedly improve the performance of all three tiers of government.

Our political, trade union and business leaders will need to act decisively if the country is to achieve the competitiveness needed to thrive in the new international terrain.

Dr Ross Babbage is a non-resident senior fellow of the Centre for Strategic and Budgetary Assessments in Washington DC and CEO of Strategic Forum in Canberra.