Scott Morrison’s delicate dance with the China dragon

‘China’s power is a fact of life... but it will never be more powerful than the quad’.

Illustration: Eric Lobbecke

Scott Morrison is not for turning on China. But few people in our political and security system doubt that China has embarked on a campaign of intimidation of unknown duration to test Australia’s resolution. The nation has crossed a more dangerous threshold with China.

The danger lies not just in the conflict over the Prime Minister’s initiative for an inquiry into the origins of COVID-19. A showdown of some degree was destined to come given a deteriorating relationship for several years and flawed ministerial communication. The deeper risk is a locked-in conflict between two nations defined more as adversaries than partners.

This week Morrison was operating in two guises with China. His government works through the technical trade disputes on barley and beef while claiming in public this is merely a trade dispute, not political retaliation. Yet beneath the surface Morrison is drawing a line against China with his inquiry proposal — the calculation is that if Australia doesn’t push back against China now, even at a price, it will only need to push back later and pay an even higher price.

The stakes for Australia are serious. The world economy and the Australian economy will need China in the post-COVID-19 recovery. That goes to Australian jobs. The dilemma arises from China’s nature as a flawed giant — an economic superpower with an authoritarian system and mindset. It has lied before the world over the virus and engages in naked bullying of Australia and other countries in the quest for submission.

Morrison, by necessity, now wants to cool the temperature. He needs to transition Australia’s non-negotiable campaign for an inquiry into the broader international sentiment for such action while seeking to minimise the damage to the economic partnership based on mutuality. Morrison says trade tensions have long been on the agenda. He canvassed them last year in talks with China’s Premier, Li Keqiang, and pretends the current situation is “completely unremarkable”.

But an Australian businessman with unparalleled ties into China, former Liberal MP Warwick Smith, tells Inquirer it is a “reasonable proposition” to think the trade situation will further deteriorate “in the current climate”.

The problem is China’s method around the world of using economic kickback to advance its political interests. Both nations need the two-way trade but China is less worried than Australia about dialling up disputes. Its government-controlled media is threatening more industries while at home premiers and sections of the Coalition backbench escalate their rhetoric — when what counts is discipline.

Morrison took a big risk front­running on the inquiry. That was poking China in the eye. Every sign is the government’s internal deliberations were not as thorough as such an initiative warranted. It was canvassed among senior ministers, in particular among Morrison and Foreign Minister Marise Payne and their offices.

The government, in private, believes China seeks to teach Australia a lesson, test its resilience under pressure and see if a wedge can be driven between business and government. Given this appreciation, Morrison faces an immensely delicate task — showing Australia has the strength not to buckle yet defusing the overheated and dangerous climate. Talk of a trade war is exaggerated and serves nobody’s interest.

Australia backs the EU resolution to the World Health Assembly — this gives us a degree of “cover” but upholds our stance. The EU draft is not China specific but calls for an “evaluation” to be conducted “in consultation with member states” on “lessons learnt” to establish a global initiative on pandemic preparedness.

Morrison’s domestic position on China remains strong. He has the support of public opinion now turning decisively against Beijing over COVID-19 along with the Labor opposition. Morrison and Payne have conducted an intense global diplomatic campaign to gather support for the inquiry, lobbying dozens of nations. A senior government source said of China: “They are vulnerable on this issue and have no legitimate argument against an investigation.” On display now is the extreme sensitivity of China as the authoritarian state.

Beneath this situation, however, is a sea of uncertainty. The government seems devoid of any strategic game plan to halt the downward spiral in relations with our major trading partner. Senior ministers are operating in the dark. They don’t know if more trade retaliation is likely. In private they won’t rule it out. Communications are impaired when Trade Minister Simon Birmingham cannot get his Chinese counterpart on the phone.

Morrison uses the language of sovereignty and consistency — ideas China espouses — to try to stabilise the relationship. He says certain principles and policies “are not to be traded ever”, nominating foreign investment, technology (witness the ban on Huawei from the 5G network) and human rights (the conflict between authoritarian and democratic states) — yet these issues reach into the heart of the conflict.

The government believes the core problem arises from China’s assertive transformation under President Xi Jinping which severely limits Australia’s capacity to restore relations without com­promising its core interests and principles. The sense of uncertainty and risk has multiple dimensions.

Smith pinpoints big shifts in the relationship: “Chinese direct investment in Australia for the current period has dropped by well over 50 per cent and potentially 60 per cent. Our relationship with China is not just about trade. The fundamental global point is that the biggest single export of China is capital.” His message — the figures point to China scaling back capital investment into this country, ironically the goal sought by the anti-China lobby.

The former head of the Department of Foreign Affairs and Trade, Peter Varghese, tells Inquirer a rethink is needed and, confronting the crucial question, says: “Do not treat China as an enemy but quietly abandon the notion that we can have a comprehensive strategic partnership with China for as long as it remains a one-party authoritarian state.” This strategic partnership was inaugurated by Tony Abbott and Xi in 2014. The Australian government constantly invokes it even when ministers cannot speak with their Chinese counterparts.

“Our strategic interests are not aligned,” Varghese says. “It is not in Australia’s interests for China to dominate the Indo-Pacific.” Varghese calls for an Australian approach to China based on the concept of “engage and constrain”. He says it is imperative for Australia to sort out its thinking fast. “This is because there is a real risk the US will decouple from China, seek to rearrange global supply chains and embrace a containment policy,” he says. “It would be sheer folly for Australia to follow any such US approach, so contrary to our national interest.”

Meanwhile Kevin Rudd recently has issued a bleak assessment of the COVID-19 fallout, saying: “My greatest anxiety is, coming out of this crisis, we don’t end up with China up, or America up” but with both nations damaged along with a weakening of global governance institutions “and a trend to what I describe as global anarchy”. Rudd sees the “beginnings of economic decoupling” between the US and China and an emerging “ideological competition” between the authoritarian and democratic state. He talks of a Cold War 1.5. Comparing the US and China, Rudd says he feels China “emerges from this pandemic equally damaged and probably more so” than America. Not only did the virus come out of Wuhan, raising questions about China’s notifications within its own country, to the World Health Organisation and to the rest of the world, but this was followed by “clumsy attempts by the Chinese wolf warrior diplomats to manage the international messaging”.

People forget Morrison has been steeped in the big China decisions taken during the Turnbull government. This includes the toughening of foreign investment policy on security screening and the banning of Huawei from the 5G network on security grounds, a decision he advocated and announced. Morrison is a pragmatist who wants to secure the economic partnership but, like Malcolm Turnbull, he has seen too much of China’s behaviour and its crossing of acceptable boundaries not to espouse a tough pushback stance as a national-interest PM. That won’t change. The COVID-19 crisis has weakened China’s leverage in the sense that public opinion is more hostile to its well-advertised bullying, thereby giving Morrison more leeway.

During the week, Morrison said the government did not subscribe to the Wuhan “laboratory” conspiracy promoted by Donald Trump and Secretary of State Mike Pompeo. This is essential. Every sign is that more distance from Trump on China policy will be critical for Australia. “We have always been independent,” Morrison said. “We will always stand our ground when it comes to the things that we believe in and the values that we uphold.”

Morrison must manage two challenging big-power relationships, not just one. He doesn’t know which direction China will move on Australia. But he knows the key is being consistent and taking the long view. As Trade Minister, Birmingham got it right. “Our approach is to respond thoughtfully, carefully, methodically to the representations we get,” Birmingham said of China’s pressure on Australia over barley and beef. “Australia’s not in any sort of war.”

The ultimate issue, however, is what price Australia may need to pay to maintain its sovereign values in dealing with China. The likely upshot is a period of prolonged strain. These events have raised doubts about Payne as Foreign Minister yet she retains Morrison’s support and her diplomatic campaign in support of the inquiry was tireless.

Smith, chairman of the Business Council of Australia China leadership group and deeply involved in China trade and finance, says it is a time for calm, patience and working through issues case-by-case. He warns, however, that China has fundamentally changed.

He says Chinese banks are playing a vital role in the Australian market yet that story has changed dramatically. The 2018 annual survey of China’s direct investment into Australia done by KPMG and Sydney University showed a fall of 37 per cent. The 2019 figures, soon to be released, will show a further significant deterioration. They reveal a major decline in investment from China’s state-owned enterprises.

“That will be of concern to the market,” Smith says. On trade, he says: “Diversity is an ideal outcome but diversity in trade takes time. It can’t be backfilled quickly with other markets. For Australia, there are no other markets for the iron ore and coal trade in the near term.

“I would make a plea for no quick judgments and no emotionalism as Australia charts this new course. China has changed and we must recognise that. China changed in 2012 with the assumption of Chairman Xi. We now rely very much on education and tourism, which are discretionary spends by China, along with the long-term contracts in our merchandise trade. We had a free-trade agreement in 2014. Whether that continues to be a real support for us is yet to be tested.

“But we’ve had a very good trading relationship with China over 45 years. There’s mutuality here and that’s important. But the world has changed. It’s not just COVID-19; there’s the technology impact, the change in China’s cultural outlook — it never wants to relive the subjugation it suffered over 100 years ago. An independent approach from Australia is important. We need to find our own way in our own region.”

Varghese says the current megaphone diplomacy is counter-productive and underscores the need for a better Australian framework in dealing with China. “We can neither turn our backs on China nor can we pursue a stand-up-for-our-values campaign against China,” he says. “China’s power is a fact of life. There is no point pretending otherwise.”

Expounding on his “engage and constrain” approach, Varghese says Australia must “hold firm” to its values and “strengthen its capacity to resist coercion.” Yet it must engage with China and look to expand areas of co-operation. “Our task is to find a domestic consensus around the ‘engage and constrain’ framework,” he says. “But we need to re-establish communication channels with China. At present we cannot talk at the appropriate senior level.”

Going to the power dynamic in the region, Varghese says: “The reality is that China cannot be more powerful than the collective power of the ‘quad’ — the US, Japan, India and Australia — and I think Indonesia and Vietnam can be added into that. It becomes pivotal in achieving a new strategic equilibrium in the Indo-Pacific with the capacity and commitment to constrain coercive behaviour by China and to impose costs for such behaviour.

“It changes the nature of leverage — leverage becomes a two-way street, not just a one-way street that we see China using against Australia. Each of these nations has its own reasons for not wanting to see China dominate the region. Their common purpose is ensuring this does not happen. China must understand there are consequences flowing from its behaviour. Australia cannot impose those consequences on its own but they can be imposed through collective power.

“We must make it clear to Washington that Australia will not support a policy of containing China or re-engineering supply chains to exclude China. But we will support greater diversification of supply chains,” he says.

Quizzed about how Australia deals with its over-dependence on China in economic terms Varghese says: “Our objective should be diversification, not diversion.

“The important thing is not to withdraw from our arrangements with China but to advance other markets in the US, Japan, India and Southeast Asia.”