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Handle with care: Australia’s changing relationship with China

Handle with care: Australia's changing relationship with China

By Andrew Parker, Partner, PwC Australia

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Several new words have entered the public discourse this year, and not all of them related to COVID-19. Terms such as “debt-trap diplomacy”, “wolf-warrior diplomacy” and “hostage diplomacy” have been used in the media to describe the changing foreign relationships of the People’s Republic of China (PRC or China). From the United States (US) to the European Union (EU), and from India to Canada, China’s foreign relationships appear challenging on several fronts. This includes ties with Australia, which need to be handled carefully not least because the strategic rivalry between the US and China looks like it may increase.

Australia has to find a way to work with the PRC

The PRC is the largest economy in the Asia Pacific region, and the second largest in the world. It’s Australia’s biggest trading partner by a significant margin. Over the past decade, 70% of the increase in Australian exports was to China, and our reliance on China – both as an export market and as a supplier of goods and services – was never more evident than during the pandemic when borders closed and supply chains were disrupted. Add to this the impact of trade sanctions, such as 80% tariffs on Australian barley and the prospects of further economic coercion by the PRC including consumer boycotts and travel warnings, and it’s clear Australia must find constructive ways to engage with China without compromising our values.

This starts with open political dialogue. The last time an Australian Prime Minister visited China in his or her capacity as Prime Minister was back in 2016. More recently, Australia has angered the government in Beijing by leading calls for an independent international inquiry, with powers equivalent to those of a United Nations weapons inspector, into the origins and early handling of COVID-19.

Australia should stick to its principles. Our democratic values are fundamental to Australia, and this creates natural questions in the relationship on a range of issues including human rights. While there are no easy answers, Australia must approach the relationship balancing both aspects of our national interest - our security and economic concerns. 

Now is the time to prioritise stabilisation and work hard to avoid deterioration of the relationship. While it is easy to focus on our differences, we should not lose sight of our shared interests in areas like climate change and regional development where Australia and China can work toward achieving common goals.

Australia has no choice but to repair its relationship with the PRC. The task is daunting. But in the past, Australia’s diplomats, when unleashed, have proven deft and risen to the challenge.

Diversification is key

On a macro level, economic complementarity has meant that Australia has become more dependent on China. Over one third of all our exports, including 80% of our iron ore, 75% of our wool and 40% of our wine, are sold to the PRC. 

At a micro level, should Australian companies be rethinking their business relations with the PRC? The reality is that for many companies, China remains their single biggest growth opportunity. But there are also increasing risks associated with doing business in China, and some are beyond Australia’s control.

Take, for example, the upcoming US election. If President Donald Trump wins the election, we can expect his ’America First’ approach to foreign policy to continue. Under Joe Biden, America’s tough foreign policy stance on China may remain much the same. It may be more predictable but no less resolute on several key issues. However, Biden will want to engage with Beijing on combatting climate change. A Biden victory will be good news for US allies in the region who have become increasingly concerned about President’s Trump’s challenging view towards alliances. It is unlikely, however, to change the view cited in media in Beijing that Australia is Washington’s ‘lap dog’.

On a practical level, the challenging bilateral relationship has seen Australia’s Department of Foreign Affairs and Trade warning Australians that they may be at risk of arbitrary detention in China.

Economically, specific industries could be adversely affected by any more friction with Beijing. In particular, high tech industries are at risk. Increasing tensions between the PRC and the US will have a huge impact on the sector, and Australian businesses need to prepare for a possible day when the US stipulates that –in order to collaborate with US high-tech research units – Australian organisations must refuse funding and/or research cooperation with PRC universities. Currently, Australians are unprepared for this.

Diversification is now key. That does not mean Australian businesses should not be looking to Chinese consumers, but it is time for Australian organisations to consider forgoing margins in the short term, in order to have a broader customer base in the future.

We ignore Taiwan at our peril

Alarmingly, another potential flashpoint for military escalation is not the South or East China Seas, where China is backing its territorial claims with military power; nor Hong Kong, where Foreign Minister Marise Payne expressed “deep concern” about changes to national security laws and their impact on civil liberties; rather, it’s Taiwan.

The political status of Taiwan remains unresolved. It’s an independent society with its own political system, currency and military; and increasingly people in Taiwan feel they have a separate identity from the people on the mainland. However, Taiwan is not recognised as a sovereign nation by the vast majority of countries worldwide. Beijing looks on Taiwan as a renegade province. President Xi Jinping has said that “these issues cannot be passed on from generation to generation” and that reunification was unstoppable describing it as the “great trend of history”.

President Xi has also said that “We make no promise to abandon the use of force, and retain the option of taking all necessary measures” to ensure reunification. If other nations – in particular countries in our region, the US or European countries – were to make a move toward recognising Taiwan as a sovereign state, a military response is possible. Reunification is intricately linked to the legitimacy of the Communist Party of China so Beijing’s threats should be taken seriously. Australia can no longer prepare for the possibility of a military conflict in the Taiwan Strait as a distant possibility. And several analysts have speculated that such a conflict could escalate into war between the PRC and the US. This would have huge implications for Australia’s economic and political relationship with the PRC, as well as for trade and stability in the Asia-Pacific region.

Just how well Australia manages its China challenge will, to a large extent, determine the extent of our prosperity for decades to come.

This article was drawn from an interview with Linda Jakobson, Founding Director and Deputy Chair, China Matters. Readers can  watch PwC’s CFO Collaboration Series Virtual Event: Australia’s changing relationship with China to learn more.

Contact us

Andrew Parker

Andrew Parker

Partner, Asia Practice Leader, PwC Australia

Tel: +61 418 278 996

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