Adaption challenge: Australia and the new geo-economics

By James Bowen

Container ships and plane iStock

Image: iStock


Australia's liberal middle power status and complicated external partnerships mean it faces considerable liabilities seeking to adapt, rather than adapt to, Chinese geo-economic strategies.

Australia’s 2017 Foreign Policy White Paper warned of how Indo-Pacific trade, investment and infrastructure development were increasingly being used to build regional strategic influence, as well as commercial advantage. It said these types of geo-economic interactions risked departing from previous commercial relations and intensifying rather than diluting strategic rivalries. Such concerns are in keeping with Australia’s historically stated preferences for economic relations that put the concerns of the market and, on the aid front, recipient countries above all others. Yet they are also at odds with Canberra’s apparent willingness to contribute to rising geo-economic contestation through the likes of the Pacific step-up and the trilateral infrastructure partnership with Washington and Tokyo.

Though never officially stated as such, these new Australian geo-economic actions reflect a growing desire to directly compete with China over regional development finance and economic interconnectivity. What explains the apparent willingness by Canberra to act against its best instincts in this manner? And might alternative courses of action better guard against the overpoliticisation of Indo-Pacific economic relations?

The simple answer to the first key question, and a pointer to the second, is that Australia’s existing geo-economic platform—which has largely revolved around regional institution-building and influencing—has faced diminishing returns. This follows the more unilateral, major power-driven economic statecraft of the Indo-Pacific of recent years. Canberra’s greatest successes in this space have included the key roles it played in creating the Asia Pacific Economic Cooperation (APEC) group and the Cairns trade group in the 1980s and the Group of 20 (G20) and East Asia Summit (EAS) in more recent years. Such efforts have helped advance the country’s considerable, and considerably beneficial, commitments to open and liberal regional engagement. They have also magnified Australia’s middle power diplomatic capacity and helped manage dependencies on larger and sometimes conflict-prone international partners.

The primary catalyst for the changing nature of Indo-Pacific geo-economic engagement has been China, which at the same time is a major international partner of Australia and a source of increasingly muscular regional economic statecraft. Its assertive actions have transformed the debate around liberal institution building and even tended to make some institutional imperatives impotent at best and liabilities at worst. This is best reflected in Australia’s evolving engagement with Chinese foreign investment, both at home and abroad, in the first two decades of the 21st century.

The domestic side of the investment relationship reflected a natural alignment of Australian expertise with China’s pursuit of mineral and energy security under its Going Out policy of the early 2000s. There was, however, a near immediate need for Canberra to adapt to the frequent strategic motivations behind this. This was reflected in the Foreign Investment Review Board requiring state-owned enterprises to demonstrate strictly commercial behaviour and operational independence from their home governments. It followed controversies such as what appeared to be a Beijing-backed A$15.5 billion ‘dawn raid’ on Rio Tinto’s shares by Chinalco in 2008, to frustrate a rival takeover bid by BHP Billiton.

The 2013 launch of China’s Belt and Road Initiative (BRI) again tested Australia’s defences. An even more strategically delineated Chinese investment platform—coupled with China’s less heavily industrialised economic evolution—appears to have reduced the rationale for its direct investment in Australia, whose flows dropped from A$10 billion to below $1 billion from 2014 to 2017. Compounding matters has been Canberra’s—and the Australian public’s—growing concern around the national security implications of even that level of Chinese investment which remains.

This growing level of wariness was evident in Canberra’s dramatic, legislation-altering response to the Northern Territory’s 2016 lease of the Port of Darwin to China’s Landbridge—a private entity, but with identified links to the Chinese Communist Party and the People’s Liberation Army. It could also be seen in the May 2018  exclusion of China’s Huawei and ZTE from providing Australia’s 5G infrastructure.

China’s interactions with other Indo-Pacific countries have produced a similar dichotomy of results from Canberra’s perspective. They have on the one hand extended economic opportunity in a more expedited fashion than might have otherwise occurred. They have on the other attracted frequent reports of debt, corruption, environmental mismanagement and other undesirable outcomes. The fact that many signs point to the BRI’s strategic capacity extending not only to expansion of Chinese economic and diplomatic but—owing largely to the potential dual use of newly acquired ports—military clout further explains Canberra’s even fuller-throated push back against China’s geo-economics on a regional level.

Geo-economic risks

Owing to its liberal middle power status and complicated external partnerships, Australia nonetheless faces considerable liabilities in seeking to adapt, rather than adapt to, Chinese geo-economic strategies. The attendant risks extend to the replication of some of the failings of Beijing’s efforts to realisation of the Foreign Policy White Paper’s warnings around the compounding of strategic rivalries. Canberra has sought to at least overcome the first of these concerns through new capacity. This includes increased funding and responsibilities for the Export Finance and Insurance Corporation (now known as Export Finance Australia) and creation of a new A$2 billion Australian Infrastructure Financing Facility for the Pacific.

It also appears from, albeit officially unconfirmed, media reports of the first project of the trilateral infrastructure partnership that an exceeding degree of time and care will be paid to negotiating with partnering governments. There are, nonetheless, warning signs suggested by the purported subject of this first allocation, which is a US$1 billion loan to a liquefied natural gas (LNG) project in Papua New Guinea. This is a country with a rich experience of the resource curse, which indeed extends to outcomes from the already partly Canberra-funded PNG LNG development. This US$19 billion project received the largest ever loan from Australia’s Efic, at A$500 million, in 2009. According to 2018 reporting by the NGO Jubilee Australia, it also fell well short of a promised doubling of PNG’s GDP. Contributing factors were said to be governmental mismanagement and tax avoidance by the project operators. Both also contributed to exacerbating PNG’s social problems, including sparking landowner violence over the non-payment of promised royalties.

Heightened political tensions with China could, meanwhile, stem from any number of new Australian geo-economic actions. This includes the financing of subsea internet cables to PNG  and the Solomon Islands, which appear explicitly designed to deny opportunities for Chinese interests. It is also not encouraging in light of alignment of Australian efforts with those of the US and Japan, that there is a previously noted connection between the formation of the BRI itself and state actions which Beijing has previously viewed as designed to contain it. The BRI was, after all, at least partly developed in response to encouragement by Chinese strategists for Beijing to ‘march west’, seeking new sources of power and influence. This invocation had in turn acknowledged what was already a strong presence of the US and its allies in East Asia and potentially set to become greater under the pivot to Asia of the Barrack Obama Administration.

The potential of more assertive and China-focused Australian actions to attract blowback is already more than a hypothetical concern. Though difficult to definitively prove, it appears realised in the wielding of another of China’s formidable geo-economic tools: trade-based coercion. This, motivated by activities such as the Huawei ban and the first steps of the Pacific step-up, was suspected to be at play in Chinese authorities’ blocking of Australian coal shipments at the port of Dalian in early 2019 and the late 2018 WTO dispute China launched in response to purported Australian barley dumping.

Institutional incentives

The fact that Australian policymakers appear to have reached the limits of adaptation to Chinese geo-economics yet face considerable risks in adapting them, lends great importance to the second question raised above, around the potential for alternative courses of action.

One avenue that is certainly worth investigating is some form of revitalising of the national institution-building prowess. This could occur in tandem with, or as an alternative to, Canberra’s new geo-economic initiatives, but with a shared intention of managing risks. Despite the growing challenges facing this process in recent years, Australian policymakers have shown at least some capacity to forge ahead. This includes Canberra’s stewardship, alongside Tokyo, of the process of reviving the Trans-Pacific Partnership (TPP) trade deal following US withdrawal.

Australia has, moreover, used its institution-building approach to manage past ties with China and Beijing’s desires for greater economic integration. This includes participation in the negotiations for the Regional Comprehensive Economic Partnership proposed trade deal. The intention is to unite the six ASEAN Plus One FTAs under a single set of coherent rules. Progress nonetheless remains subject to the political whims of more major governments, principally India and China, even as Canberra has made a concerted diplomatic effort to conclude the agreement.

More promising, and more instructive in the context of Australia’s increasingly infrastructure-focused geo-economic concerns, was the manner in which Canberra leveraged its membership of Beijing’s Asian Infrastructure Investment Bank (AIIB) for strategic gain. This membership, obtained over the objections of Washington, led to improvements to the bank’s governance which ultimately satisfied Australia’s liberal preferences. Canberra’s policymakers worked with their counterparts in other advanced economies to help draft the AIIB’s Articles of Agreement, resulting in new commitments such as best practice principles for development finance, a commercial orientation to loan activities and the removal of individual member veto over project funding decisions.

Looking to the future, increased harmonisation of Canberra’s regional initiatives with the frameworks of multilateral development banks would provide some degree of quality assurance. There are also opportunities, some of which have already been pursued, for greater alignment of efforts with non-Chinese connectivity efforts, such as the Master Plan on ASEAN Connectivity 2025 and Japan’s Partnership for Quality Infrastructure. Given the explicit motivations of Canberra’s geo-economic step-up and risks outlined above, the larger prize would be to build on its AIIB legacy to have more direct engagement with China on mitigating some of the ill-effects of the BRI and the potential political tensions arising from rivalry in this space.

Australian officials could again work alongside Chinese and other AIIB-participating officials to channel more prospective Indo-Pacific infrastructure spending through its Canberra-facilitated and amenable governance framework. They could seek more direct improvements to the design of the BRI itself, with targets including the introduction of new safeguards around debt sustainability, project transparency and partnering country participation. These have been the recommendations of a number of prominent reviews of the BRI in the past two years. Encouragingly, the authors of one of these, from the Asia Society Policy Institute, reported that many of their ideas were well-received by Chinese officials consulted during the course of its preparation.

The March 2019 Multilateral Cooperation Center for Development Finance may provide new opportunities for Australian engagement in such processes. This brings together Chinese and non-Chinese financial institutions, ostensibly seeking to ‘foster high-quality infrastructure and connectivity investments for developing countries’ across the BRI and non-BRI networks alike. A number of existing multilateral institutions, including the World Bank and United Nations, are also intimately engaged with the BRI and provide further space for guiding desired progress. Doing so would entail avoiding a US temptation to view such developments as solely the product of Chinese co-option of international cooperation for unilateral benefit. It would instead acknowledge that Beijing’s opportunity to do so also results from US neglect of its traditional leadership role in such institutions, particularly under the presidency of Donald Trump. Such neglect is a mistake that Australia, as a successful past proponent of, albeit middle power, institutional diplomacy should not repeat.

As well as its own past victories, Australia could take inspiration from the more expansive geo-economic efforts of Japan currently in train. Like Canberra, Tokyo has considerable concerns around the strategic rationale of the BRI. It also already rivals, and sometimes surpasses, Chinese development spending in some parts of Asia. Despite its seeming transactional victories, Japan has simultaneously pushed for improved institutionalisation and interconnectivity in this space. This includes brokering a set of G20 ‘principles for quality infrastructure investment’ at the G20 meeting it hosted this year. Tokyo has also worked with European Union counterparts to align their respective development and interconnectivity efforts. Perhaps most importantly of all, these have also not come at the expense of some degree of willingness on Japan’s part to explore future cooperation with Beijing on infrastructure projects. Taken in its entirety, the approach appears well-suited to realising Canberra’s desires for the dilution of strategic rivalries as well as protection of domestic economic preferences and advancement of regional development and connectivity.

 

James Bowen is a Research Fellow at the Perth USAsia Centre and currently a Visiting Fellow at the Mercator Institute for China Studies in Berlin.


Disruptive Asia is a thought-leadership project by Asia Society Australia launched in 2017. It presents – through long-form essays – new perspectives and policy recommendations on how Asia’s rise is impacting Australia’s foreign policy, economy and society and how Australia should respond. Disruptive Asia deliberately looks at both external aspects of Australia’s relationship with Asia (foreign policy, business connectivity, international education) and their domestic implications and manifestations (community relations, leadership diversity, education settings and capabilities).

 

More Disruptive Asia