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CHAPTER 1 Strategic importance of the relationship 25
CHAPTER1strategic importance of the relationship
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Key messAges
ThereisnoeconomicorgeopoliticalfutureforChina,AustraliaortheworldthatwouldnotbeimprovedbyChina’ssustainedandbalancedeconomicgrowth.AndyetthefuturedirectionofChinesegrowthwillbeverydifferentfromthatoverthepastfourdecades.TheforcesofchangethathavealreadyunleashedawaveofconsumptiongrowthareaffectingtherelationshipwithAustraliaprofoundly.EconomicreformandliberalisationcanintensifytheongoingchangeinthestructureoftheChineseeconomyand,whilethesechangesimplyalessheavyrelianceinAustraliaontheresourcesectorforeconomicgrowth,thereareopportunitiesforgrowththatwillrequiresubstantialrepositioningofpolicyandcommercialstrategiesbybothcountriesandthedevelopmentofastillcloserrelationshipbetweenthetwocountries.
ThestructuraltransformationoftheChineseeconomyasitgrowstowardhigh-incomestatuswillbefuelledbydomesticreformsthatmaketheallocationofresourcesmoreefficientandbytheopeningofthecapitalaccount,astepthatshouldbeundertakenincrementallyandwithduecaution.Chinawillreorientitseconomytowardsdomesticconsumption.Australia’schallenge,meanwhile,istocounteractthefallinrealincomesthathasresultedfromthefallincommoditypricesasChinesedemandslows,andtoinvestinfillingtheinfrastructuregapsthatwillactasabrakeonproductivityandincomegrowthifleftunaddressed.
Therecenthistoryofthegrowingtiesbetweenthetwocountriesshowsthatthedeterminedpursuitofadeeperrelationshipyieldstangiblebenefits.TheinstitutionsandpolicyframeworksthathaveemergedtoprovidestructurefortherelationshipinrecentyearsprovideastrongstartingpointforthenextphaseoftheAustralia–Chinapartnership.
Bothcountrieshaveinvestedheavilyintheirpartnership.Thepath-breakingrecordoftheAustralia–Chinapartnershipinopeningtheresourcetrade,foreigninvestment,regionalcooperationinitiativesandChina’saccessiontotheWTOprovidesalegacyonwhichtobuildnewinternationalstandardsintotheirbilateraltrade,investmentandallotherdealings.Theirhigh-levelComprehensiveStrategicPartnershipandChAFTAaremajorinstitutionalassets(embodyingmutualtrustandpracticalcommitment)thatcanbedeployedtomanagechangeoverthedecadesahead.Stillcloserengagementandinstitutionalarrangementsareneededtocapitaliseontheopportunitiesthatthesefoundationspresent.
ChAFTAisablueprintforinitialchange,notanend-pointinthebilateralrelationship.Ajointworkplanforachievingchangewillnotonlydefineprogressinthebilateraltrade,investmentandcommercialrelationshipoverthecomingdecade;itwillalsoprovidethefoundationforAustraliaandChinapushingliberalisationandreformintheAsianregionandsettingoutthepathwaytowardsreformandstrengtheningoftheglobaltradeandeconomicsystems.Precedentexistsininstitutionalframeworkssuchasthe1976BasicTreatyofFriendshipandCooperationbetweenAustraliaandJapanforacomprehensivebilateraltreatytoprovideanoverallguidingstructurefortheAustralia–Chinarelationshipasitmatures.
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PartnershiP for Change
Thescaleandsignificanceofdevelopmentsthatarenowtakingplace—especiallyinChinathroughitstransformationtowardsahigh-incomeeconomy—recommenddeeperbilateralinstitutionalarrangementsbetweenAustraliaandChina.Thesewouldbuildonexistingbilateralframeworkswithboldnewbi-nationalinitiatives,includingintheareasofinvestment,tourism,peoplemovement,science,andeducationalexchanges.Theywillneedtocaptureopportunitiesintherelationship,andmanagetheinevitablerisksandprocessesthatareaconsequenceoflarge-scalechange.
Bothcountriesshouldworktogethertostrengthentheestablishedregionaleconomiccooperationarrangementsandtosecuretheframeworkofpoliticalconfidenceandsecuritywithinwhicheconomicprosperitycanbeattained.ButtherearegapsinregionalpolicystrategiesthatAustraliaandChinamustnowworkmoreactivelywithregionalpartnerstofill.TheAustralia–Chinarelationshipisanchoredinglobalinstitutionalandpoliticalarrangements.Australiahasadirectandimportantstake,inpartnershipwithChina,inworkingtoensureChina’ssuccessintheassumptionofitsroleofsharedleadershipinglobaleconomicaffairs.
Inthecomingdecade,Australia’srelationshipwithChinawillbeatoppolicypriority.TradewithChinaaccountsforalmostaquarterofAustralia’soveralltrade,withChinaabsorbingalmostathirdofAustralia’stotalmerchandiseexports(DFAT2016e).Chinaisthefifth-largestsourceofforeigndirectinvestmentintoAustraliaandformanyAustralianbusinessesChinarepresentsanenormousgrowthmarket(ABS2016f).WhileAustraliaisChina’sseventh-largestsourceofimports,Australiaisalsoamajorandreliablesourceofstrategicindustrialrawmaterialsandhigh-qualityinputs,fromironoretoeducation,whichChinaneedstofuelitsindustrialisationandurbanisation.TherelationshipbetweenAustraliaandChinaisintegraltotheirotherimportantinternationalrelationships.
WithremarkablesuccessintheachievementofhigherincomesandwagesinChina,thepaceofgrowthisslowingasreadysuppliesoflowcostlabourareexhausted.TheshiftinChinafromexport-andinvestment-ledgrowthtogrowthbasedondomesticdemand,andespeciallydomesticconsumption,hascontributedtothedeclineoftheAustralianresourcesboom.
AsChina’sgrowthmodelandfocusshiftsandAustraliaseekstodefineaprosperouseconomicfuturelessreliantonitsresourcebase,bigchangesareboundtooccurintherelationship.Somebigchangeshavealreadytakenplaceandnewopportunitiesareemergingforbothcountries.Thetransformationtowardsproductivityandinnovation-ledgrowth,financialmarketreformandcapitalaccountopennesswillpropelChina’sdeeperintegrationintotheglobaleconomy.AricherChinawithamoreopenservicesindustrywillgainnewstandingamongthemajoreconomiesoftheworld.Australia’sshifttomorehumancapital-drivengrowth,togetherwiththechangesinChina,providetheopportunitytoforgenewcomplementaritiesbetweenthetwocountries,profoundlyreshapingtheirbilateralrelationshipoverthedecadeahead.
AsproductioninsomeofChina’sheavy,resourceandenergy-intensiveindustriesispeaking,thepriceofAustralia’sexportsofcommoditiessuchasironoreandcoalhasfallen.Aseconomicrebalancingtowardsconsumptionandservicesector-ledgrowthcontinues,theshareofheavyindustryintheChineseeconomywillinevitablydecline.YetChinesedemandforresourcesandenergywillremainlargeasurbanisationcontinuesinChinaandAustralia’s
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CHAPtER 1: Strategic importance of the relationship
shareinChina’sresourceimports,whichhasrisenaspriceshavefallen,islikelytostayhigh.Asoneoftheworld’sleadingandmostcompetitivesuppliersofarangeofindustrialinputs,AustraliawillremainamajoranchorinChina’sexternalresourcesecurity.Increasingly,however,thetraderelationshipwilldiversifybeyondcommoditiesintoawiderrangeofgoodsandservices.Thetwocountries’investmentandfinancialintegrationwillbecomedeeperandmoresophisticated.Australiacanaimtobecomeamajorsupplierofknowledge,skillsandproductssupportingChina’snextstageofdevelopment,whichinvolvesanemphasisonhighvalue-addedindustries,innovationandcleanproductionprocesses.IndustrialrestructuringandupgradinginChinawillseeChina’smachineryandequipmentexportsbecomemoreimportanttoAustraliaandwilldiversifyChineseinvestmentintotourism,financeandinfrastructure.
AustraliaandChinahaveplayedakeyroleineconomiccooperationinAsiaandthePacific,regionswhichincludeeconomiesthatarethefastest-growingandmostdynamiccentresofglobaleconomicactivity.Throughregionalandmultilateralforums,bothcountrieshaveworkedcloselytopromotedevelopment,stabilityandstrongerregionalcooperation.Theyhaveadeepintersectionofinterestinstrengtheningestablishedregionalarrangements,suchasAPEC,theASEANPlusframeworksandtheEastAsiaSummit,andinglobalinstitutions,especiallytheG20.Theyalsohaveasharedinterestinsecuringtheframeworkofpoliticalconfidenceandsecuritywithinwhicheconomicprosperitycanbeattained.
ThegrowthofChina’simportanceintheworldeconomyhasoccurredveryrapidlyandhasbroughtwithitnewcapacity,responsibilities,expectationsandchallengesinmanagingitsinterdependencewiththerestoftheworld.
TheChineseeconomyaccountedforlessthan3percentofglobalGDPin1980(OECD2013a).Itisnowthesecond-largesteconomyintheworldinnominalterms,accountingfor13percentofglobalGDPincurrentUSdollars,anditsGDPislargerthanthatoftheUnitedStatesinrealpurchasingpowerparityterms(WorldBank2016).Chinabecamethesinglelargestcontributortoglobalgrowthin2007andhasmaintainedthatpositioneversince(Yueh2015).Chinaistheworld’slargestgoodstraderandisalsotheworld’ssecond-largestimporterofgoodsandservices,makingitamajorelementinglobaldemandfortradedgoodsandservices(Austrade2015a;WorldBank2016).
Untilrecently,Chinawasmainlyarule-takerintheglobaleconomicsystem.Sincethelate1970sithasbenefitedenormouslyfromopeningitseconomyandparticipatinginthepost-BrettonWoodssystem.China’sroleinglobaleconomicgovernanceremainedpassive,constrainedbythesmallsizeandlowcapacityofitseconomy.NowChinaisgrowingoutofthisstageandisthereforebecomingmoreactiveintheprovisionofglobalpublicgoods.Thetransitiontojoiningtheranksofglobalrule-makersisnotautomaticoreasyforeitherChinaortheglobalsystem.ButChinaisnowactivelyparticipatinginglobalgovernanceandactivelyassumingitsinternationalresponsibilitiesandduties.AnimportantopportunityisChina’schairingoftheG20in2016.
Australiahasadirectstakeinworking,inpartnershipwithChina,toensureChina’ssuccessintheassumptionofitsroleofsharedleadershipinglobaleconomicaffairs.ThereisspecialvalueinthedevelopmentofthispartnershipbecauseofAustralia’suniqueroleintheregionaswellasitsclosenesstotheUnitedStates.ThevalueofthepartnershipincludesthechanceofworkingwithChinainthedevelopmentofitscontributiontotheprovisionofinternationalpublicgoods,boththroughestablishedinternationalinstitutionssuchastheIMF,theWTO,theWorldBankandnewinternationalinstitutionssuchastheAIIB.ItalsoincludesAustralia’s
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PartnershiP for Change
workingtogetherwiththeestablishedandemergingpowerstobuildnewplatformstocoordinatearangeofglobaleconomicpolicieswithintheG20andtomanagethechallengestosustainablegrowthfromclimatechangeandotherenvironmentalissues.
Thisisacriticalmomentinafar-reachingglobaleconomictransition.AustraliaandChinahaveavitalopportunitytodefinehowtheywillshapethefuturecourseoftheirrelationshipinadeliberateway,establishingsomecommonreferencepointstohelpmanageitpurposefully,astheyhavewithsomesuccessinthepast,ratherthanmuddlingthroughinthefuture.
CapturingthefullbenefitoftheeconomicrelationshipwilldependonhowboththepublicandprivatesectorsinAustraliaandChinaengageinanddeveloptherelationship.Managingtherisksanduncertaintiesthatcanimpactontheeconomicrelationshipwillbeimportant.Asastartingpoint,gettingthemostforbothcountrieswillrequireafunctionalunderstandingamongpolicymakers,corporateleadersandthebroadercommunityofthechangesthatwillshapeChinaandAustraliainthenext10years.ThisReportcanplayaroleinthis.Theunderstandingthathasbeenbuiltthroughthisworkcanbeembeddedininstitutionalformstohelpfacilitatebettermanagementoftherelationship.ChAFTArepresentsamajorstepinputtinginplacestrongerinstitutionalarrangementsforthedevelopmentoftradeandinvestmentlinks.Butarelationshipofthekindthatwillberequiredbythechangesinbotheconomies,theireconomiccooperationintheregionandtheirpartnershipinglobalaffairsincomingdecades,demandssubstantialjointpolicyinitiativeandstrengthenedinstitutionalframeworks(bothgovernmentandprivate).
In1976,AustraliasignedaBasicTreatyofFriendshipandCooperationwithJapan,anagreementwhichsetouttheprinciplesunderpinningtheirbilateralrelationship,definedkeyareasofcooperation,andpledgedtoenshrineandpreservetheprincipleofnon-discriminationineconomicrelations.Sinceitssigning,theTreaty,andthemutualconfidencethatitgavebothJapanandAustralia,hasprovidedtheframeworkwithinwhichclosertieshaveforged.TheopportunityforevolvingasimilarframeworktounderpintheAustralia–Chinarelationshipshouldnotbepassedup.ChAFTAcanprovidethebeginningsforsuchaframework.
economic transformation in China and Australia
china
TheChineseeconomyisundergoingamajortransformationafternearly40yearsofhigh-speedeconomicgrowth.China’srapideconomicrisehasbeenfuelledbymarket-orientedreformsandeconomicliberalisationthathelpedreducethedistortionsinresourceallocationintheeconomy.Thereformwasmorethoroughinthegoodsmarketthaninfactormarketsforland,labour,capitalandenergy,whichremainedundertighterstatecontrol.Thisgrowthmodelencouragedinvestmentinmanufacturingcapacityandinfrastructure.
WithrealGDPgrowthataround10percentperannumfromthe1980s,manufacturingoutputisnowlargerthanthatinanyothereconomyintheworld.Chinaaccountedforaquarterofworldmanufacturingoutputby2015,upfromlessthan3percentin1990.Chineseconsumptionhasdominatedtheglobalmarketsforindustrialrawmaterials(WorldBank2016).Theexpansionoftheironandsteelindustry,forexample,whichproducedover800milliontonsofcrudesteelin2015,ormorethansixtimesasmuchasitdidin2000,liftedtheChineseshareinworldironoreconsumptionfrom14percentin2000toanestimated65percentin2015(Figure1.1).ThissurgeinChinesedemanddroveamorethanfive-foldriseofpricesintheyearsfrom2000–2008inthescrambleforadditionalsuppliesofironore(RBA2012).
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CHAPtER 1: Strategic importance of the relationship
Australia’sestablishedcompetitivenessininternationalresourceandenergymarkets,relativegeographicproximityandcloseengagementsinceChina’seconomicopeninginthe1970s,madeAustraliaanaturalandcomplementarypartnerinChina’stradeandindustrialtransformation.AustraliahasbeenananchorinNortheastAsianresourcesecurityandapioneerintheexportofhighqualityresourcestoChina.AustraliabecameChina’sprincipalsupplierofimportedironore,coalandarangeofotherindustrialrawmaterialsovertheseyears.In2015,Australiasupplied64percentofChina’simportedironore,forexample,comparedwiththe43percentitsuppliedin2010(Ng2016).TherelationshipwithChinasawmassiveinvestmentintheAustralianresourcesectorinthefirstdecadeofthe21stcentury,andstronggrowthinAustraliathroughouttheglobalfinancialcrisiswhengrowthinotherindustrialeconomieslanguished.
WhileChina’sinvestment-ledgrowthdeliveredastonishingoutcomes,italsoledtostructuralimbalancesthatincreasinglythreatenedsustainablegrowthandstability.
China’sreformsnowaimtoremovethosedistortions,especiallyinthefinancialmarket,andnurtureconsumption-andservice-ledgrowth.TheChinesegovernmentisalsoimplementingmeasurestoclosedowncapacityinheavyindustries,suchasironandsteel,thatdoesnotembodybest-practiceproductiontechnologyorenvironmentalprotection.Thisentailssubstantialcostsofadjustmentandtheneedtomanageeconomicaswellassocialdislocation.Thefocusofgrowthisnowonthe‘neweconomy’.Thechangeingearfromdouble-digittosingle-digitgrowthisexpectedtoputtheeconomyonamoresustainable,butstillrelativelyhigh,long-termgrowthtrajectoryoverthecomingdecade.
Figure 1.1: Chinese and global steel production
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AmongthenationaleconomicpolicycommitmentsthatarelikelytohavethemostprofoundeffectonChina’srelationswithAustraliaandothercountriesistheChinesegovernment’s13thFiveYearPlancommitmenttobuildanopeneconomicsystem,deepenfinancialsystemreform,liberalisefinancialmarketsandacceleratetherealisationofChinesecapitalaccountconvertibility.
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PartnershiP for Change
CapitalaccountliberalisationisessentialtomakingChina’srenminbiatrulyglobalcurrencyandincreasingChina’sroleininternationalfinance.InclusionoftherenminbiintheIMF’sSpecialDrawingRightsbasketisafirststepinthisprocess.Fortherenminbitobecomeatrulyinternationalcurrency,however,Chinaneedstohaveanopencapitalaccount.Butthesignificanceofcapitalaccountliberalisationismuchmorewide-rangingthanrenminbiinternationalisation.
FinancialreformandcapitalaccountliberalisationarecentraltorebalancingtheChineseeconomyandfosteringinnovationandproductivitygrowth.Marketreformsandmarket-determinedinterestratesandexchangerateswillcorrectthemisallocationofcapitalthathasuntilnowfavouredparticularregions,state-ownedenterprisesandthestatebankingsector,andcrowdedoutfinancingandinvestmentfromthemoredynamicprivatesector.Healthyandwell-managedfinancialinstitutionsareattheheartoffinancialandeconomicstability.ThesechangeswillhelpChinatomovethroughtheso-called‘middle-incometrap’andtobecomeahigh-incomesociety.Capitalaccountliberalisationcouldalsoassistwithgeopoliticalstabilityintheregionthroughgreatereconomicandfinancialintegration.
ThescaleofChina’scross-bordertradeandinvestmentpaymentsandtheimportanceofusingmarketmechanisms(inparticularafullyflexibleexchangerateandarobustandmoreefficientfinancialmarket)tomanagetheinteractionbetweenthedomesticandinternationaleconomieseffectivelyrequirethemovetoanopencapitalaccount.
LiberalisingChina’scapitalaccountisanenormouschallengeanditwilltaketime.ThenervousnessininternationalmarketsaboutChinesestockmarketvolatilitiesandthemovetoanewforeignexchangerateregimewithmoreflexibilityagainstacurrencybasketoverthepastyearisaharbingerofthedifficultiesinmanagingthispolicychange.Theoverridinglessonoffinancialhistoryaroundtheworldisthattransitionsarenevereasyorsmooth.ThishasbeennolesstrueinChinathanithasbeeninothereconomiesthatareintheprocessofprofoundtransformation.Therehastobepolicytrialanderror,andtherewillinevitablybesomemissteps,butallcountrieshaveaninterestinensuringthatChina’sreformssucceed.
Theprocessofcapitalaccountliberalisationneedstobeincremental,builtonrobustinstitutionsandmarkets,andcarefullystagedandtimedtoavoidpotentiallysubstantialfinancialandforeignexchangerisks.Thisisnotjustatechnicaleconomicchallenge.IntegrationofChinaintointernationalcapitalmarketsrequiresChinatohaveamuchmoreopen,transparentandpredictablesetofinstitutionalarrangementstobuildinternationalconfidenceindealinginChinesefinancialassets,andthiswillpushattheenvelopeofpoliticalreform.
Thetrajectoryofgrowthisslowinginthistransition.Manufacturingandexportgrowthisslowing.WhileChinawillremainabigexporter,exportgrowthislikelytoslowasthestructureofexportsisupgraded.ThemassiveurbanisationthathasalreadytakenplaceinChinawillcontinueastherateofurbanisation—nowat56percentofthepopulation—stilllagsbehindthatinmanydevelopingeconomieswithsimilarincomelevels,letalonethatinadvancedeconomies(CCTV2016).Thisrequirescontinuing,albeitslower,expansionofinfrastructureinvestment.Newinvestmentwillalsobedrivenbytheneedforcleanenergyandenvironmentalprotection.
HigherChinesewagesasthelabourmarkethastightened,aswellastheremovalofsomedistortionsthatfavouredinvestmentratherthanconsumption,havemeantthatgrowthisincreasinglydrivenbyconsumerdemand.Thistrendhasbeenunderwayforsometime,with
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CHAPtER 1: Strategic importance of the relationship
consumptionnowovertakinginvestmentasthemaingrowthdriver(Prasad2015).Servicesalreadyaccountforover50percentofnationaloutput,whilemanufacturinghasfallentowards30percent(Figure1.2).
Theconstraintsonlabourmobility,andinter-provincialfiscalandincomedisparities,continuetobifurcatethegeographicpatternofChineseeconomicdevelopment,meaningthatinnerprovinceshavelowerincomesandlowerratesofurbandevelopment.Ifeconomicconstraintswithanegativegeographicalimpactwererelaxed,theseinnerprovincescouldbecomeasourceofstrongpotentialfuturegrowth.ThetimingofpolicyandinstitutionalreformsthatreducethesedistortionswillaffecttheimpactoffuturegrowthonChina’sexternaleconomicrelations,includingwithAustralia.
China’s‘newnormal’growthpath—withitsstructurallydecliningbutstillrelativelyhighgrowthrate,partiallytighteninglabourmarket,shifttoconsumption-ledgrowth,andsteadyshifttoservicesawayfrommanufacturing—willfundamentallychangeChina’sinteractionwiththeinternationaleconomy.
TherewillcontinuetobegrowthopportunitiesintheChinesemarketoverthenextdecadeasnewbusinessopportunitiesemerge.China’sgrowthwilllikelyremainatmorethantwicetheglobalaveragegrowthrate.Despitemoderatingratesofgrowth,Chinawillcontinuetomakeasizeablecontributiontoglobalgrowth,asitwillbegrowingoffamuchlargerbasethanafewyearsago.SevenpercentgrowthinChinanowisequivalenttoanadditiontoincomeof10percentjustfiveyearsago.China’sgrowthratewas6.9percentin2015,muchlowercomparedtogrowthof10.6percentin2010,butinbothyearsChinastilladdedRMB3.8trilliontoglobalGDP(inconstant2010RMB).Since2008,China’scontributiontoglobalGDPeachyearhasbeenequivalenttoaneconomyaroundthesizeofMexicoorthree-quartersthesizeofAustralia.
Figure 1.2: sectoral value added as a percentage of Chinese gDP
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PartnershiP for Change
AsFigure1.3suggests,theIMFexpectsthatChinawillcontinuetoaddmoreeachyeartoglobalGDPoverthecomingdecade(inUSdollars).ChinaislikelytoremainthebiggestcontributortoglobalGDPgrowthforthenextfiveyears,addingmoretoglobaloutputthantheUnitedStates,ormorethanIndiaandalloftheotherAsianeconomiesputtogether.
ThehugescaleofChina’seconomytoday,nonetheless,needstobeunderstoodinthecontextofitsambitionsforgrowthinthefuture.China’spercapitaincomeisstillnothigh,beingonly24percentofthatoftheUnitedStatesor34percentoftheOECDaverage(OECD2014a).Chinesepolicymakershavetomanagethetransitiontohigherincomesandkeepclosingthisgapinthecomingdecades.
Australia
China’sremarkableexpansionthroughthefirstdecadeofthecenturybroughtstronggrowthinAustralia’sminingsector.GrowthinWesternAustraliaapproachedgrowthratesinChinaduringsomeoftheseyears.Australianincomegrowthandhouseholdlivingstandardsbenefitedfromtheterms-of-trade-inducedstrengthoftheAustraliandollarasimportpricesfell.HalftheriseinAustralianincomesduringtheminingboomresultedfromtheboosttoAustralia’stermsoftrade(Downesetal2014).ItwasnotonlytheAustralianminingsectorthatbenefitedfromChinesegrowth:Australia’seducationexportsandtourismservicesgrewstrongly,accompaniedbysharprisesinChina’sshareofthesemarkets(Austrade2015b).China’sshareofAustralianexportsgrewstronglyandishigherthanthatofothermajorexportcustomers(Figure1.4).Whiletheeconomyasawholeunambiguouslybenefitedfromtheminingboom,somesectors,suchastrade-exposedmanufacturers,sawdemandfortheirproductsfallbecauseofAustralia’selevatedexchangerate.Asdramaticastheywere,thesechangeswerepartofalong-termstructuraladjustmentintheAustralianeconomythatwasalreadywellunderwayandwouldhavesubstantiallyoccurredevenwithouttheminingboom.
Figure 1.3: China’s gDP growth (RHs) and its contribution to global output (LHs), 1990–2020
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CHAPtER 1: Strategic importance of the relationship
Figure 1.4: exports to China as a share of total exports, Australia and other major exporters
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Source:Gruenwald,ContiandRana2016;UNCTAD2015.
SlowergrowthinChinesedemandfor,andincreasedglobalsuppliesof,industrialrawmaterialshavesentironoreandothercommoditypricesdramaticallylower.ThedropinpriceshascausedtheshareofcommoditiesinChina’simportstocontract.ButAustraliahasincreaseditsshareinChina’simportsofindustrialrawmaterials(althoughimportvalueshavedroppedsharply)becauseAustraliacontinuestobeoneoftheworld’smostcompetitivesuppliersofcommoditieslikeironore.Newenergyprojects,inthegasanduraniumsector,willalsocomeonstreaminthenearfuture.ButgrowthinresourceexportstoChinaisunlikelytoreturntotherateseenduringthe2000s,andpricesarelikelytoremainsubdued.
Asinpastcommoditycycles,priceshavefallen(alongwiththetermsoftrade)asnewmineshavecomeonlineinAustraliaandaroundtheworld,draggingAustralianrealincomesdownatthesametime.Thistrendislikelytocontinue,althoughthereislikelytobevolatilityaroundthistrend.Australiawillovercomethisdragonincomegrowthonlythroughitsowneconomictransformationandthroughliftingproductivityacrossthewholeeconomy.
SuccessfuladjustmentandsustainedgrowthoverthecomingdecadewillrequireashiftinAustralia’seconomicstructurebacktoamorenormaltrajectory:awayfromanabnormalexpansionoftheresourcesector(evenifenergydemandcontinuestogrow)towardsresumptionofgrowthintheshareofservices,high-endmanufacturingandhighvalue-addedagriculturalproduction.Thisstructuralchange,aswellasAustralia’sstrongpopulationgrowththroughmigration,willneedlarge-scalerenovationofurbaninfrastructure,investmentininter-urbantransportandcommunications(becauseofgrowingurbancongestionandnationalconnectivitydeficiencies),newinfrastructureinvestmentandintegratedlanduseplanninginthenorthofthecountry(becauseofthelocationofnewagriculturalanddevelopmentopportunitiesthere),andinvestmentininnovation,researchandeducation.
Thesechanges,througharelativelyflexiblelabourmarketandresponsivecapitalmarket,arealreadytakingplace,butmajorchallengesremaininundertakingtoughreformsthatmaketheeconomymoreflexibleandhelptorestructureandupgradeindustry.Moreover,themarketsinwhichtheseopportunitieslieforAustraliaarefiercelycontestedinternationallyandAustraliadoesnothavethesameestablishedadvantageasithasinnaturalresources.Unless
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PartnershiP for Change
Australia’sprivateandpublicsectorinvestmentbecomessmarter,andunlessAustraliacanmobilisecapitalathomeandfromabroadtoinvestmoreefficientlyininfrastructure,itisunlikelytoachievethe3percentGDPgrowththatithascommonlyenjoyedoverthepastfewdecades.Itwillnotbeaneasytask—totalproductivitygrowthhasbeenstagnantforsomeyears—andwhiletherearesignsofimprovement,itneedstoimprovefurther.
HoweffectivelythesechangesaremanagedwillshapethefutureoftheAustralia–Chinaeconomicrelationship.
strategic partnership for change
Inmanagingthechangeanticipatedoverthecomingdecade,boththepublicandprivatesectorscandrawuponsubstantialassetsthatalreadyexistintheestablishedbilateralrelationship.TheAustralia–Chinarelationshipisdistinguishedbyahistoryofpoliticalcommitmentatthehighestlevels,sincediplomaticrecognition,toapartnershipthathasembracedChina’sopenness,itsreformanditseconomicrise.DevelopmentoftherelationshiphasalsobeenfacilitatedbyAustralia’sopeneconomy,stronginstitutionsandrichmineralendowment,ChineseperceptionsofAustralia’sbusiness-friendlyenvironment,aswellasAustralia’sgoodstandingwithothercountries.Thoughtheyhavedifferentpoliticalandsocialsystems,bothcountriesacceptthisdifferenceandrespecteachother’sachievements,includingtheremarkableelevationoflivingstandardsandimprovementinsocialconditionsthrougheconomicreformsandliberalisationthatbothcountrieshaveputinplaceoverthepastfourdecades.
Thedeepcomplementarityoftheestablishedeconomicrelationshipandthehighpoliticalcommitmenttoitsdevelopmentbybothcountriesprovideasecurefoundationonwhichtobuildanewanddynamicpartnership.
AustralianandChinesepoliticalleadershaveinvestedheavilyintherelationshipandarenowcommittedtoitselevationasastrategicpartnershipthroughregularhigh-levelleadershipdialogues.
Maintainingtheclosenessintherelationshipatthetopleadershiplevelisapriorityforbothgovernments.Itisasignalofpoliticaltrustandgoodintentioninthepartnership.
ChAFTAisinplace—themostopenandliberalisingsucharrangementthatChinahasenteredintowithanydevelopedeconomyandonewhichgoesfurtherinitspartnercountryliberalisationthanAustralia’spreviousagreements.
Whatdothebigchangesinthestructureofbotheconomiesmeanfortheirbilateralrelationshipanditsmanagementoverthecomingdecade?
Asconsumerincomesriseandpreferencesshift,thenewpatternsofChineseconsumptionwilldrivehighergrowthinimportsofrecreationalservices(liketourism),educationalservices,healthservicesandfinancialservices.Theconsumptionandimportofhighvaluefoodstuffs,inwhichAustraliahasastrongcomparativeadvantage,areexpectedtogrowrapidlyoverthenextfewdecades.Forexample,therealvalueofbeefconsumptioninChinaisprojectedtorise236percentbetween2009and2050(ABARES2014).ChAFTAopensthedoorwidertogrowthetradeinmarketsforhighvaluegoodsandservices.ChAFTAofferstheprospectofsignificantgainsinAustralia’sshareinmarketsforimportsacrosstheboard,fromdairyproductsandhealthproductstoeducationandtourism(seeChapter3).
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CHAPtER 1: Strategic importance of the relationship
ChAFTAopensthedoortonewopportunitiesintheservicestrade,ininvestment,intourismandinthecommoditytrade;buttherearemanyobstaclestorealisingtheseopportunitiesthatstillneedtobeovercome.Theobstacleshavetodowithhowcommercialpartiesrelatetoregulatoryinstitutionsbeyondnationalborders.Theyalsohavetodowithbuildingdeeperprivatebilateralbusinessnetworksandassociationstofacilitatebusinessbetweenthetwocountries.ThereisareviewprocessbuiltintoChAFTA—inthissense,ChAFTAisalivingagreement.Yetthenatureofthearrangementembeddedintheagreementisthatitisreactivetospecificproblemsolving—ratherthanstrategicinitspurpose,seekingopportunitiesthroughtheagreementandbeyond(seeChapters4,5and6).
AsChina’sindustrialupgradinggatherspace,Australia’simportsfromChinawillbeincreasinglydominatedbyhigher-valueappliances,equipmentandmachinery.ManyofChina’sexports,ofcourse,involvesubstantialvalue-addfromothercountriesintheregion,includingJapan,SouthKoreaandtheUnitedStates.AlargeproportionofJapanesebrandimports,fromexample,nowarriveinAustraliaviaChina.
China’scommitmenttofreeingupinvestmentabroadinthepastdecade(the‘goingout’strategy)sawAustraliaemergeasaleadingdestinationforChineseoutbounddirectinvestment.ThereformsthatarenowbeingputinplaceinthefinancialmarkethavealreadyseenChinesebanksandnon-financialenterprisesliftinvestmentinAustralianassets.Inthecomingdecade,thesereformsandwiderliberalisationofthecapitalaccountcouldfundamentallychangethestructureofeconomicrelationsbetweenthetwocountries.
FinancialmarketreformandcapitalaccountliberalisationwillalsofundamentallychangeChina’sstandingandroleintheglobaleconomy—anditsinfluenceandimportanceintheAustralianeconomy.ItwillincreasethesizeandrangeofChineseassetsheldbyAustralianinstitutionsandcorporations,aswellastheportfolioofAustralianassetsheldbyChineseinstitutionsandenterprises.ItwillseeChina’scurrencyusedmoreextensivelyininternationaltransactionsandborrowing.Chinesehouseholdsandinstitutions,notonlyenterprises,willincreasetheportfolioofassetstheyholdinAustraliaandelsewhere.
Arrangementsthatbuildconfidenceinundertakingforeigninvestmentineachcountryareapriority.DespitetheprogressmadeinChAFTA,thereremainsconfusionaboutthetreatmentofAustralianandChineseinvestorsundertheothercountry’sforeigninvestmentregimes.Policiesthatenshrinenodiscriminationagainstthesameclassofforeigninvestmentacrossforeigninvestmentsourcesandentrenchthenationaltreatmentprincipleneedtobetheanchorsofeachforeigninvestmentregime.Mechanismsfordirectcollaborationinsharinginformationanddataoninvestmentandinvestoractivitiesneedtobeputinplacebetweentherelevantagenciesineachcountry.
ThenewphasesofChineseandAustraliangrowthandtheirchangedinternationalcircumstancesrequireanewmodelofeconomiccollaborationwhichencompassesanupdateandoverhauloftheinstitutionalarrangementsthatsupportAustralia–Chinaengagement.
Aninstitutionalframeworkthatdynamicallydrivesbilateralstrategicengagement,promotingthenewopportunitiesfortradeandinvestmentintherelationshipthroughandbeyondChAFTA,willprovidesubstanceattheworkingleveltothestrategicpartnershipbetweenthetwocountriesatthetop.
Thetaskistocapitaliseonandmanagechange.ItwillrequireenergisinganddeepeningtheinstitutionalarrangementsthatarealreadyinplacebetweenAustraliaandChinato:
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PartnershiP for Change
buildtrustaroundcommoninterestsineconomicandpoliticalrelationships;managetheuncertaintiesthatinevitablyarisethroughchange;anddeveloptheup-closecommercialandbusinessengagementneededasthestructureoftheeconomicrelationshipshiftstowardsservicesandconsumers.
Thisisanationaltaskforeachcountry.Itisalsoabi-nationaltaskthatembracesnewundertakingsandagreements.
TheframeworkofanewmodelforeconomiccollaborationwouldincludejointmechanismsandworkinggroupsthatbuilduponestablishedpartnershipsingovernmentsuchastheComprehensiveStrategicPartnership,theStrategicEconomicDialogueandtheJointMinisterialEconomicCommissionattheleaderandministeriallevels,aswellasofficialagencypartnershipssuchasthatbetweentheAustralianTreasuryandChina’sNationalDevelopmentandReformCommission(NDRC)andthetiesthataregrowingbetweentheReserveBankofAustralia(RBA)andthePeople’sBankofChina(PBoC).Thesepartnershipsshoulddrawuponbusinessandoutsideexpertise,asrequired,to:
• adviseinthedevelopmentoftheComprehensiveStrategicPartnershipdialogues;
• supportjointtaskforceorworkinggroupactivityonissuesflowingfromthedialoguesorotherbilateralinitiatives;
• workwithstateandprovincialauthoritiesindevelopinginitiativesintherelationship;
• encourageprogramsofresearchwithinandbeyondgovernmentonallaspectsoftherelationship;
• engagewiththebusinesssectorsinbothcountriesinundertakingitswork;
• promotejointtrainingandthedevelopmentoflong-termworkingassociationsinkeyareasamongtheofficialsofbothcountries;and
• reflectuponcommunityinterestsandconcerns.
Thisframeworkwouldalsoincludeabi-nationalinitiativetoestablishanAustralia-China(Ao–Zhong)Commissionforboostinghigh-levelresearch,scientific,politicalandcommunityexchangestobuildthecapacitiesinbothcountriesforcomprehendingandrealisingtheopportunitiesinwhatwillbecomeanincreasinglyup-closerelationship.Thisbi-nationalgovernmenteffortwillbepartneredbybusiness,governmentdepartments,statesandprovinces,asitisinasimilarthoughlesscomprehensivewaythanenvisagedherebytheAustralian–AmericanFulbrightCommission.
ThesearrangementswillunderpintheAustralia–ChinaStrategicPartnershipforChange.Theinitiativesandstandardsthatbothcountriesdeveloppragmaticallywithinthatframeworkshouldalsobeconsistentwiththeirinternationalandregionalambitionsandresponsibilities.
Thisframeworkwilltaketimetoputinplace,butthisprocesscanbeginimmediately.
Itwillrequireinstitutionalinnovationinbuildingthecapacityforengagementstep-by-stepineachbureaucracy,throughtrainingandexchange.ButthisReportdemonstratesthewillandtheincentivetomakeitwork,intheinterestsofbothcountries.Itwillrequirepartnershipwiththebusiness,academicandthinktanksectors.TheframeworkmustbeguidedbyenunciationoftheunderstandingsandprinciplesidentifiedinthisReporttowhichbothpartnersaspireintheconductoftheirrelationship.ThecollaborationestablishedbetweentheChinaCenterfor
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CHAPtER 1: Strategic importance of the relationship
InternationalEconomicExchanges(CCIEE)andtheEastAsianBureauofEconomicResearch(EABER)andtheirgovernmentandnon-governmentpartnersinbothcountriesthroughthisReportprovidesanaturalandusefulfoundationforcontinuingthisinitiative.
Strengtheningtheframeworkfornationalgovernmentinstitutionstodeveloptherelationshipwillbeineffectiveifitisnotcomplementedbyongoinginitiativesatthestateandprovinciallevel,andbybuildingcapacitiesthrougheducationalandresearchinstitutionsandacrossthecommunity.MuchoftheinteractionbetweenChineseandAustralianbusinessandgovernmentsineachcountrytakesplaceatthelocallevel.Muchofthecommunityengagementtakesplacethroughstateandprovinciallevelprogramsandthroughsister-cityrelationshipsandeducationalexchangesdeliveredatthegrassrootslevel.Thepeople-to-peopleassociationsestablishedthroughtheseprogramsarefrequentlythefoundationsofbusinessandcommunitypartnershipsthatdriveinitiativeandthedevelopmentoftherelationship.Thesharpgrowthintourismbetweenthetwocountriesisfullofpotentialtostrengthenpeople-to-peoplelinks,understandingandappreciationofeachother’sculture,circumstanceandcountry.
Thereisarangeofmodelsofsuccessfulengagementacrosslevelsofgovernmentandacrossthecommunity—throughtheorganisationofstateandprovinciallevelprograms,businessassociations,youthandprofessionaldialogues,academicinstitutionsandprograms,culturalandartisticcommunities,andcommunityandschool-levelexchanges.Thesearetargetsfordevelopmentandpromotionthroughthenationalandbi-nationalinitiativesheadlinedabove(seeChapters3,5and6).
Opportunities and risks
AcriticalelementinthesuccessoftheAustralia–Chinarelationshipoverthecomingdecadeswillbetheunderstandingof,andmanagingtheuncertaintiesfrom,thehugechangestakingplaceinbotheconomies.Thesearechangesthatwilltransformbothsocieties—withthenationalambitioninChinatobeonthewaytolivingstandardsequivalenttosomeadvancedcountriesbytheendofthisperiod—althoughtheircourseisimpossibletopredictexactly.In2025,China’seconomywillbemuchbiggerthanitistodayanditsinstitutionswillcontinuetoevolvefromwhattheyaretoday.Australiawillalsohavechangedsignificantly.Apremiseintheconductoftherelationshipiscommitmenttosharedambitionsfornationalchangeandtoengagebilaterallyinregionalandglobalaffairsinawaythatmanageseffectivelytheadverseconsequencesofunforeseenorunwelcomechangethatwillinevitablyoccurfromtimetotime.TheprinciplesandcommonunderstandingsoutlinedinthisReport,andthearrangementsandinstitutionsthatitrecommends,aredesignedtomanagebothproactiveengagementandunexpectedshocks.Themanagementofadversechangebecomeseasierwhenbothcountriesarecloselyengagedandhavethebestaccesstoinformationandanalysisthatispossiblethroughsucharrangements.
TheopportunitiesintherelationshipwithaneconomythesizeofChina’sarehugeformanyofAustralia’sbiggestcorporations,includinganincreasingnumberoffirmsandenterprisesthatwerenottouchedbyChina’searliergrowthphase.Nonetheless,theyhavetomanagetherisksofcyclicalandstructuralchangeintheChineseeconomy,astheydoinothermarkets.Chinesepolicymakersusedtoworryaboutover-dependenceonAustraliansuppliersofironoreintheup-phaseofthecommodityboom,althoughthoseanxietieshavesubsidedinitsdown-phase.Insuranceagainstriskfromhighlevelsofresourcetradedependence,ofcourse,
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isprovidedbydeepandintenselycompetitiveinternationalmarketsforthesecommodities(includingenergy).Chineseenterprisesthatundertakelarge-scaleinvestmentinAustralia,especiallywhensuchinvestmentisneworunfamiliar,inevitablyfacethesamerisksthatotherlarge-scaleinvestors,Australianorforeign,havetofaceintheAustralianorothermarkets.Theserisksareanormalpartofanycommercialrelationship.
Therearealsorisksassociatedwithpolicyandinstitutionaluncertainties.IneconomicandpoliticalsystemsthatareevolvingasrapidlyasthoseinChina,theserisksareanimportantpartofcommercialcalculation.InAustralia,eventhoughtherearerobustmarketandlegalinstitutions,thereareresidualrisksthatrelatetopolitical,policyandinstitutionaluncertainty,althoughmostofthemarelegallycontestablebyforeignaswellasnationalentities.China’saccessiontotheWTOaswellasitsongoingmassiveeconomicandlegalreformservestoamelioratetheserisksinChina.Animportantobjectiveinthedevelopmentoftherelationship,nonetheless,istoreducegovernance-relateduncertaintiesforenterprisesandpersonsdoingbusinessintheothercountry.Agoalintherelationshipoverthelongertermshouldbetoembedtheseprotectionsinacomprehensiveagreementorbasictreatybetweenthetwocountries.
Thereisstrongprecedentforsuchatreatyframework.TheBasicTreatyofFriendshipandCooperationbetweenAustraliaandJapan,signedin1976,committedbothcountriestocooperateonissuesofmutualconcern.FollowingdecadesofpopularuneaseandpoliticalcautionintheAustralia–Japanrelationship,thisTreatyhadalargeandanalyticallymeasurableimpactongrowingtheoverallbilateraleconomicrelationshipevenaftertheresourcesphaseofbilateralexchangebeganlevellingoff(Drysdale2006).Itimprovedwhatwerethenpoliticallycontroversialinvestmentflowsandledtoconsequentimprovementsinpeoplemovement,servicestradeandregionalcooperation.TheAustralia–JapanReportthatledtoandwasassociatedwiththeconclusionoftheTreatychangedtheinstitutionalstructuresthoughwhichbothcountriesengagedwitheachother,andlaidaframeworkofcollaborationoneconomicissuesthatledtotheformationofAPEC.ApplyingasimilarapproachtotheAustralia–Chinarelationshipcouldyieldsimilareconomicandpoliticalbenefits.
ThemacroeconomicrisksofvolatilityinChina’slargereconomycanbemanagedwithinthemacroeconomicandflexibleexchangeratepoliciesthatcushionthedomesticimpactinAustraliaofsuchinternationaleconomicshocks.Focusingonbuildingstrongerbalancesheetsoffinancialinstitutionsandcompanies,bothstate-ownedandprivate,isafoundationforcrisispreventionandcrisisresolution.
Systemicfailuressuchasfinancialmarketcrisis,shouldtheyoccurinChinaastheydidintheUnitedStatesduringtheglobalfinancialcrisis,willneedtobemanagedthroughdomesticandinternationalmechanismsthatprovidelinesofcreditandregulatorydisciplinestoameliorateoravoidthem.TheadequacyofthesemechanismsisdiscussedinChapter8.ActivepartnershipwithChinainregionalandglobaleconomiccooperation,andindiplomacytosecuredynamicpoliticalstabilityinAsiaandthePacific,arekeyinstrumentsforhandlingtheserisks.
Partners in regional and global affairs
Morethanonanyotherfactor,economicandpoliticalstabilityinthe21stcenturywilldependonhowglobalgovernanceadaptstotheriseofChinaandotheremergingeconomies,andtotheroletheyplayinshapingthearchitectureofglobalgovernanceinthefuture.Australiaand
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CHAPtER 1: Strategic importance of the relationship
ChinahaveadeepstrategicinterestinensuringthisinternationaltransitiontakesplaceinamannerthatisconstructiveandbenefitsChina,regionaleconomiesincludingAustralia,andtheworldatlarge.
Strong,inclusive,rules-basedandmarket-promotingglobalinstitutionsareimportanttoeconomicprosperityinbothAustraliaandChina.BothcountrieshavebenefitedgreatlyfromglobalinstitutionsthatwereputinplaceattheendofWorldWarII.TheUnitedNationsframeworkandtheBrettonWoods-inspiredeconomicinstitutionscontinuetoserveasthefoundationsofglobalgovernanceandhaveprovidedaframeworkforglobalstabilityandeconomicprosperity.
Thesystemofglobalgovernancethattheseinstitutionsunderpinisnotstatic.Itmustcontinuetoevolvesoastocomprehendnewissuesandstakeholders.Therapidchangeinthestructureoftheworldeconomyanddepthofglobalintegrationthathasbeendeliveredbyeconomicopennessandthecommunicationsandtransportationrevolution,hascreatedenormouspressuretochangeandstrengtheninstitutionsforglobalgovernance.TheglobalfinancialcrisissawtheG20Summitemergeasthepreeminentforumforguidingthischange.
Nocountryalonecandictatethischange:itmustbeforgedthroughaconsensusamongallthecountriesthatareaffectedandfeeltheneedforchange.ButtherearesomeareasinwhichcollaborationbetweenChina,Australiaandtheirpartnersinglobalinstitution-buildingwillbeofspecialimportanceinthecomingdecades.
Globalgovernanceisinparttheresultofwhatlargeeconomiesdobetweenthemselvestomanagetheirinteractionwithothereconomiesandpolities,aswellasbeingtheresultofcooperativeorcollectiveactionamongtheeconomicpowers,largeorsmall.InmanywaysChina’sownchoicesininternationaleconomicpolicystrategynowexertinfluenceontheshapeofglobaleconomicgovernancealongsidetheactionsandinitiativesChinatakesdirectlyincollaborationwithothercountriesthroughinternationalforumsandinstitutions.TherelationshipbetweenAustraliaandChinawillthusbeshapedbyChina’sowneconomicpolicystrategiesalongsidethecommitmentsthataremadebybothcountriesinglobalandregionalsettings.AustraliaandChinahaveinthepast,andshouldseekevenmoreactivelyinthefuture,tobestrategicpartnersinboththeatres.ThereisnomoreobviousexampleofthisinthepastthanChina’schoicetoseekaccessiontotheWTOandconformtoitsmultilateralobligations.BilateralpoliticalinitiativesopeneduptradewithChinabeforeWTOaccession.ButparticipationintheWTO,notnarrowlybilateralarrangements,isthecornerstoneofthelargeandconfidenttraderelationshipsthatAustraliaandothercountrieshavewithChinatoday.ThissystemisundersomechallengeandbothcountrieshaveaprofoundeconomicandpoliticalinterestinworkingtogetherandwithpartnerstoensurethatpreferentialregionalandbilateralarrangementsdonotcorrodethemultilateralframeworkthatisanchoredintheWTO.
China’seconomicintegrationintotheEastAsianandglobaleconomyhasoccurredwithinaglobalframeworkthatpromotesfreetradeandinvestment.Australiahasprosperedunderthesameframework.CooperationintheAsiaPacificregionhasbeensignificantlydirectedtoreinforcingglobalgoalsandobjectives,suchaswhenAPECwasfounded,tolendweighttotradeliberalisationintheinterestsofAsia’semergingeconomiesandagriculturalexporterssuchasAustralia.RegionalcooperationinAsiaandthePacificfosteredmarket-ledintegration.Asianeconomiccooperationhasbeeninclusive,hasavoideddiscriminatoryarrangementsthatweakentheglobalsystemandhasledregionalpoliticalcooperation.
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Figure 1.5: Asia’s weight in the global economy
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Source:HubbardandSharma2016.
Withthehugechangethathastakenplace,andthatwilltakeplaceoverthecomingdecade,inthestructureofregionalandglobaleconomicpower(Figure1.5),thereisaneedtorethinktheroleofregionalcooperationasapillarthatsupportsaninclusiveglobaleconomicsystemandmanagesneweconomicandpoliticalchallenges.
APECandtheASEANPlusregionalarrangementsprovidethefoundationalframeworkforregionalcooperation.Thesearrangementsandtheirevolutionhavebeenconsensus-driven.Theyarecharacterisedbyinclusiveness,intermsoftheglobaldimensionoftheiragendasandtheirroutineopennesstodialogueswithothers.Theseprinciplesareanenduringfoundationforregionalcooperation.
WiththeglobalprocessesoftradereformstalledandproliferationofpreferentialbilateralandregionalFTAs,animmediatepriorityistoensurenewandexistingtradingarrangementssuchastheTrans-PacificPartnership(TPP),RegionalComprehensiveEconomicPartnership(RCEP)andFreeTradeAreaoftheAsiaPacific(FTAAP),areinclusiveandcomplementary.Inthiscontext,bothAustraliaandChinahavealargestakeinthesuccessoftheASEANEconomicCommunity(AEC),whichwasestablishedbeforetheTPPwassigned.TheAECwillbefurtherdevelopedinparallelwithTPPdomesticratificationprocesses.ThereisacrucialopportunitytosimultaneouslyconcludeRCEPandadvanceopennessoftheregionaltraderegimebystrategiccommitmentstocomprehensivetradeandinvestmentliberalisationthatissupportiveofthegoalsofASEANandinclusivenessacrossthePacificandtheworld.Theeconomicimperativesforcooperationhavebecomemoreimportantand,sofar,theflexibilityofAsianregionalarrangementsprovidesanopportunitytoconnectexistingarrangementsinwaysthatallowthemtoaddressnewchallengesandopportunities.
Theshifttowardsamorecomplex,multipolarorderhascreatedsomenewtensions,anddifferentpoliticalallegianceshavebecomeacomplicatingfactor.
ThemajorchallengesnowfacingtheinternationalcommunityrequireinnovativesolutionspromotedbyeffectiveregionalcoalitionsthatincludeChinaandtheUnitedStatesandtherebymanagetheUS–Chinarelationship,whichisarguablythemostimportantbilateralrelationshipintheworld.
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CHAPtER 1: Strategic importance of the relationship
Fourforcesunderscoretheneedforpower-sharing,cooperationandpolicyadaptationinourregionoverthecomingdecade:transitioninthegeopoliticalorder;theshiftinthestructureofthefinancialgeographyoftheregion;theopportunitiesofchangingtechnology;andtheimpactofclimatechange.
Geopolitically,territorialdisputesandstrategicrivalrieshaveopeneduptensionintheAsiaPacificregion.ManagingcompetinginterestsintheSouthChinaSeaexemplifiesthechallengethereisasChinaprojectsitsperipheralpower.ThisisatestingtimeinwhichitwillbecriticaltoexertcommonsenseonthesharedinterestbetweentheUnitedStatesandChinainmaintainingmaritimesecurityandregionalstability,whilemanagingstrategicdifferences.
Australia’sroleasahistoricalallyoftheUnitedStates,combinedwithitsgeographicalpositioninAsiaanditsdeepinterestinitseconomicrelationshipwithChina,opensaspaceforitsleaderstoplayavitalroleasaninterlocutorwithacompellingandsincereinterestinthepeacefulaccommodationofChinaasanewpowerwithintheregionalandglobalorder.
TwomajordevelopmentsinthetransitiontoanewfinancialgeographyoftheAsiaPacificunderlinetheneedforgreaterregionalcooperation.ThefirstwasChina’smovetoestablishtheAIIBasanadditionalchannelofdevelopmentfinance.Thebank’screationcameinthecontextofUSdelayintheimplementationofthe2009G20agreementtowidenIMFreform,includingexpandingChina’svotingrightsintheIMF,andtheobstaclestocontributingadditionalequitytomultilateralfinancialinstitutionstofillthehugegapindevelopmentfinancing.In2015,theIMFagreedtoincludetherenminbiintheSpecialDrawingRightsbasket.TheAIIBoffersopportunityforproactiveAustralianpartnershipwithChinainbuildingexperienceintheprovisionofanimportantinternationalpublicgood,andinvestmentininfrastructuredesignedtopromoteregionaleconomicintegration.Itisanopportunitythatcannowbeactivelyembraced.
Thesecondeventwasdivergenceinindustrialcountries’quantitativeeasingstrategies,withtheUSFederalReservebeginningtoreverseeasingandtheEuropeanCentralBankandBankofJapanbothstillcommittedtofurtheraggressiveeasing.Thisdivergenceinmonetarypolicybetweenthemajorreservecurrencycountriesopenstheprospectofaphaseofdollarstrengthening.AstheBankofInternationalSettlementshaspointedout,theLatinAmericandebtcrisesofthe1980sandtheAsianfinancialcrisisofthe1990swerebothassociatedwithperiodsofstrengtheningoftheUSdollar.Astrongdollar—particularlywhentheUSeconomyisnolongertheengineofimportgrowthitwasinthepast—createshugetensionsandadollartrapforemergingmarkets.Capitalflowsbacktoadvancedmarketstendtoputadeflationarypressureonemergingassetmarkets.Thiswillputpressureonregionaleconomiesandwillrequiretheirclosecooperationintheregion.
Regardingtechnologyadvancement,technologicaldisruptionhasprovedmorepervasiveanddamagingoftraditionaleconomiesthanwasanticipatedbecauseitdiffusedpowertonewcentresandweakenedincumbents.AsianandMiddleEasternoil-producers’wealthisbeingundercutbyinnovationsinshaleoilandrenewableenergytechnologies.TheseareissuesonwhichthereisacloseintersectionofinterestsbetweenAustraliaandChina,andtheirregionalpartners.Asrobotisationreducestheneedforcheapandunskilledlabour,governmentsaroundtheworldarefindingitdifficulttogeneratenewjobsforgrowingpopulationsofunemployedyouthandlow-skilledworkers.Atthesametime,non-stateplayersareusingtechnologytocreatecentresofsocialchangeordisruptionorconflictthatcannotbedealtwithbynationalpowerwithconventionaltools.Thesearealsoissuesonwhichbothcountriescanencouragebothregionalandglobaldialogue.
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Climatechangeisalsoresponsibleformajorsocialupheaval,resultinginahigh-pressureyearforglobalgovernanceinstitutionsintheleaduptotheParisagreements.Aswaterstresses,airpollutionandElNinoeffectsbecamemoremarkedacrosstheworld,globalopinionswungenoughtohelptheParisCOP21negotiationsonclimatechangereachconsensusinDecember2015.Thisoutcomehelpfullyembedsconcertedunilateralmitigationandisatestamenttotheurgencyofconsensusandcooperationinthewaronpollutionandclimatechange.ThenewconsensusprovidesabasisforAustraliaandChinatoworkwithregionalpartnersindevelopingcooperativestrategiesonputtinginplacetheinstitutional,technologicalandpolicyinnovationsneededtoaddresstheseproblems.
Twopriorityareasforcollaboration,buildingonChina’sG20presidencythisyear,aredevelopingamorecohesiveglobalfinancialsafetynetandstrengtheningthemultilateraltradingsystem.Whiletheseprioritiesrelatetotradeandfinance,otherimportantareasforcollaborationareonglobalenergygovernanceandclimatechange.AustraliaandChina’sactiveparticipationwithintheG20iscrucialtoalloftheseambitionsandbothcountrieshaveincentivestobolstertheG20andbuilditsroleasthepreeminentforumforglobaleconomiccooperation.CollaborationalsoneedstoextendbeyondtheG20,forexampleindevelopinganewandproactiverolefortheWTOnowthatpreferentialarrangementsareovertakingthemultilateraltradingsystemandtradeliberalisationattheborderisnolongertheprimaryprobleminthepromotionofmoreopenandcontestableinternationalmarkets.ThequestionofhowdifferentregionalarrangementssuchastheTPP,RCEP,AECandtheproposedFTAAPaffecttheglobaltradingsystemaremattersthattheG20shouldconsiderintheareaofinternationaltrade.
TheG20is,however,thepremierforumthroughwhichChinacanarticulateitseconomicpolicymakingstrategiesandintentions.Thisismoreimportanttoothereconomies,whichnowneedmoreinformationandanalysisofdevelopmentsintheChineseeconomytoincorporateintotheformationoftheirowneconomicstrategies.ThisisnotaboutsecuringChina’splaceagainstothercountries.ThestepsthatChinatakestodaywillbeofimportancetoIndonesia,IndiaandAfrica,withthelastinglegacyofamorerobustglobalsystem.
Inthecontextofthebigforcescurrentlyshapingthefinancialgeographyoftheregionandoftheworld,amorecohesiveapproachtotheissueofinfrastructureinvestmentneedstobetakenwithafocusonimprovingintermediationbetweeninfrastructureinvestmentopportunitiesandglobalsavings(particularlyfromAsiaandthebigpensionandsuperannuationfundsinadvancedeconomies)aswellasprojectpreparationandprioritisation.Moresensitively,theG20andregionaldialoguesprovideanopportunitytoopeninformalpoliticaldialogueonsomeofthestressesoftechnologicalprogress,likeenergytransformationandcybersecurity.
ThecurrentpressuresininternationalfinancialmarketsreinforceChinaandAustralia’sinterestinastrong,inclusiveandresponsiveglobalfinancialsafetynet,centredontheIMF.Fragmentationhaspresentlyreducedthesafetynet’scapacityandagilitytorespondtocrises,whichreducesmarketconfidence,actstoconstraintradeandinvestmentflows,anddiscourageseconomicopenness
Ontrade,thereisanopportunitytoadvanceglobaltradereformandeconomiccooperationthroughleadershipinAsianreformandliberalisation.WhileAustraliaandChinacooperateatalllevelsoftheglobaltradingsystem,bothcountriesgainthemostfromthemultilateraltradingframeworkandfromtradeliberalisationwhenitismultilateralratherthanbilateral
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CHAPtER 1: Strategic importance of the relationship
orpreferential.AustraliaandChinahaveaparticularinterestinensuringtheglobaltradingsystemsupportsregionalandglobalvaluechainsbyfacilitatingtradeandinvestmentflowsacrossallborders,notjustthoseconfinedtoparticularbilateralorregionalarrangements,andworkingwithregionaleconomiesindefiningapathwaytoglobaliseachievementsinregionalliberalisationandreform.
TheEastAsianmembersoftheG20canstepforwardindefiningwhatroletheregioncanplayinreshapingglobaltradegovernanceandensuringasustainedandeffectiverecovery.
ThereisopportunitytouseregionalarrangementssuchasRCEPtoraisethestandardforcohesiveregionalagreements,topushforbettercollaborationbetweentheWTOandregionalagreements,andtodeliverambitiouscommitmentsundertheTradeFacilitationAgreementbygivingthestructuralreformsthathavebeenpledgedintheG20growthstrategiesastrongertradefocus.
Finally,onenergy,theG20hasdevelopedhigh-levelprinciplesonenergycollaborationundertheleadershipofAustralia,ChinaandtheUnitedStates.Existinginstitutionsandmechanisms,liketheInternationalEnergyAgency(IEA)andthestockpilingobligationsunderitstreaty,aredramaticallyweakenedthroughexcludingChinaandotheremergingmarketeconomies.Butthesecountries,quiterightly,willwantasayintherulesandnormsthatapplytothem.Amongotherthings,theG20recognisedtheimportanceofmakinginternationalenergyinstitutionsmorerepresentativeandinclusiveofemerginganddevelopingeconomies.Chinacanbuildonthesesmallstepsand,alongwiththinkingaboutlow-emissionstransformationofenergy,useitsG20hostyeartobolsterglobalenergysecuritythroughreformstoglobalenergygovernance.
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This text is taken from Partnership for Change: Australia–China Joint Economic Report, by East Asian Bureau of Economic Research and China
Center for International Economic Exchanges, published 2016 by ANU Press, The Australian National University, Canberra, Australia.
