Australia's China Policy

Hui Min Huang

A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy

School of International Studies

Faculty of Arts and Social Sciences

University of New South Wales

January, 2013 PLEASE TYPE THE UNIVERSITY OF NEW SOUTH WALES Thesis/Dissertation Sheet

Surname or Family name: Huang

First name: Hui Min Other name/s:

Abbreviation for degree as given in the University calendar: PhD

School: International Studies Faculty: Arts and Social Sciences

Title: Australia's China Policy

Abstract 350 words maximum: (PLEASE TYPE)

Primarily driven by the rise of China and the relative decline of the US, the basic pattern of geo-politics is undergoing substantial changes in the Asia-Pacific region . The emerging multipolarity not only will not remove the sources of the existing security challenges in the region but may arouse new uncertainties. This is one of the departure points for Australia-China interaction in the years ahead. My dissertation comprehensively examines the Australia-China relations from the angles of politics, security and economics in the fast changing world.

The theoretical approach involves international relations theories such as realism, liberalism, middle power and China's new security concept which are used to analyze the political and security relations. International trade theories such as absolute advantages and comparative advantages, strategic trade policies, and national competitive advantages are used to analyze the bilateral economic relations.

Bilateral political relations are not free of challenges due to differences of the two countries in many areas. Security relations have not been developed systematically and are still heavily affected by the US influence. Although the uncomplementary factors do exist and from time to time causes trade disputes, but overall, the complementary nature of the bilateral economic relations has benefited both countries. The study of the bilateral relations shows the two countries have a solid foundation for a friendly and cooperative partnership and a good relationship with China serves Australia's vital interests.

My findings in my four years of research reveal that although the Australia-China relations have not been problem-free, they present a classic case for two vastly different states to interact and cooperate in the various fields in international politics. One of the key reasons is that both countries behave based on their national interests and these interests do converge more than diverge. Conflicts that exist in the bilateral relations are unavoidable but manageable.

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Act 1968. I retain all proprietary rights, such as patent rights. I also retain the right to

use in future works (such as articles or books) all or part of this thesis or dissertation.

I also authorise University Microfilms to use the 350 word abstract of my thesis in

Dissertation Abstract International (th is is applicable to doctoral theses only).

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any minor variations in for atting, they are the result of the conversion to digital

format.' Acknowledgements

I would like to thank my supervisor, You Ji, Associate Professor of the School of International Studies, who suggested that I should conduct a study of Australia-China relations at the University of New South Wales where I was able to carry out research. Professor You Ji was very helpful with my research and the drafting of my dissertation. I am especially grateful for You Ji’s constant support, input and feedback. He has been my mentor and teacher and that is something I value highly.

I am also thankful to staff members of the School of Social Sciences and International Studies who gave me valuable comments during my seminar presentation, annual review and on other occasions.

Abstract

Primarily driven by the rise of China and the relative decline of the US, the basic pattern of

geo-politics is undergoing substantial changes in the Asia-Pacific region. The emerging

multipolarity not only will not remove the sources of the existing security challenges in the

region but may arouse new uncertainties. This is one of the departure points for Australia-

China interaction in the years ahead. My dissertation comprehensively examines the

Australia-China relations from the angles of politics, security and economics in the fast

changing world.

The broad and central question this dissertation tries to answer is how Australia should

respond sensitively and sensibly to a rising China: how Australia adjusts its China policy to

maximize its national interests, especially economic and security interests; and to deal with

the inevitable negative consequences either through its own hedging strategies or through

strengthening ties with its allies, especially the US.

The theoretical approach involves international relations theories such as realism, liberalism,

middle power and China’s new security concept which are used to analyze the political and security relations. International trade theories such as absolute advantages and comparative advantages, strategic trade policies, and national competitive advantages are used to analyze the bilateral economic relations.

Bilateral political relations are not free of challenges due to differences of the two countries

in many areas. Security relations have not been developed systematically and are still heavily

affected by the US influence. Although uncomplementary factors do exist and from time to

time causes trade disputes, overall, the complementary nature of the bilateral economic

relations has benefited both countries. The study of the bilateral relations shows that the two

countries have a solid foundation for a friendly and cooperative partnership and a good

relationship with China serves Australia’s vital interests.

My findings in my four years of research reveal that although Australia-China relations have

not been problem-free, they present a classic case for two vastly different states to interact

and cooperate in the various fields in international politics. One of the key reasons is that

both countries behave based on their national interests and these interests do converge more

than diverge. Conflicts that exist in the bilateral relations are unavoidable but manageable.

iii

Table of Contents

Acknowledgments ………………………………………………………………………. i Abstract …………………………………………………………………………………. ii Table of Contents ……………………………………………………………………...... iv Abbreviations ………………………………………………………………………….... ix Chapter 1 Introduction ………………………………………………………………….. 1 1. Rationale …………………………………………………………………….... 1 1.1 The impact of China’s rise in the region and the world……………… 2 1.2 Reasons for choosing this topic ……………………………………... 7 2. Significant issues ……………………………………..……………………….. 9 3. Research questions ………………………………………….……………….... 11 3.1 Diplomatic and security ……………………………………………… 12 3.2 Economic cooperation and trade …………………………………….. 13 3.3 The human rights related questions ………………………………..... 14 4. Central argument ……………………………………………………………… 15 5. Theory framework ……………………………………………………………. 15 6. Methodology ………………………………………………………………….. 16 7. Chapter structure ……………………………………………………………… 16 8. Summary ……………………………………………………………………… 19 Chapter 2 Literature review ……………………………………………………………… 21 1. Introduction …………………………………………………………………… 21 2. Literature review on political relations ……………………………...... 24 2.1 No unavoidable conflicts of interest ………………………………….. 25 2.2 There is almost no direct conflict historically ………………………... 26 2.3 Increasing exchanges …………………………………………………. 27 2.4 Human rights as a point of conflict …………………………………… 29 2.5 Cold War mentality …………………………………………………… 30 3. Literature review on security relations ………………………………………… 31 3.1 Power shift: security uncertainty ……………………………………... 34 3.2 The asymmetry of the USA-China-Australia trilateral relations and its effect on Australia ………………………………………………………… 41 4. Literature review on economic relations ………………………………………. 43 4.1 Increasing common interests …………………………………………. 45

4.2. China’s economic leverage ……………………………………….….. 47 4.3 Australia’s national interests and Australia-China relations: merits and benefits …………………………………………………………………… 48 4.4 Assessing China objectively: cooperation areas and depth ……..……. 50 5. Summary ………………………..……………………………………………… 54 Chapter 3 Theories framework ………..………………………………………………..... 57 1. Introduction ………..………………………………………………………….. 57 2. Theory framework for politics and security ……………………..…………..... 58 2.1 Realism …………………..…………………………………………… 58 2.1.1 Structural realism ……………………..……………………. 60 2.1.1.1 Offensive realism ……………………..………..... 60 2.1.1.2 Defensive realism ………………………..……..... 61 2.1.2 China’s New Security Concept …………..………………… 63 2.2 Liberalism ………………..…………………………………………… 65 3. Theory framework for international trade ……………………..………………. 68 3.1 Comparative advantages …………………..…………………………. 69 3.2 National competitive advantages ………..…………………………… 73 3.3 Factor Endowments (The Heckscher-Ohlin Theory) …..……………. 74 3.4 Limitations of the classical trade theory ……………..……………… 75 3.5 Strategic trade policies …………..…..………………………………. 76 4. Summary ……………..……………………………………………………….. 78 Chapter 4 History of the bilateral relations ………....…..……………………………….. 80 1. Introduction ……………………..……………………………………………. 80 2. From fear to normal relationship (prehistory to 1972) …………………..…… 82 2.1 The early years ……………………………………………………… 83 2.2 Prost-1949 to 1972 ……………..………………………………….... 84 2.3 The beginning of the normalization of relationship ……………..….. 87 3. From friendship to constructive partnership (1972-1989) ……………..…….. 90 3.1 Economics in command …………..……………………………….... 90 3.2 Summit diplomacy …………………..…………………………….... 92 4. From reluctant engagement to comprehensive cooperation (1989-1996) ….... 93 5. The swings of the Howard government (1996-2007) ………………..………. 97 5.1 A turning point ……………..…………………………………………. 98

5.2 Managing thorny issues ……………………..………………………... 99 5.3 Positive side …………………..………………………………………. 100 6. Summary ………………………..……………………………………………… 102 Chapter 5 Political challenge to bilateral relations ……………………………..……….... 105 1. Introduction: deepening bilateral exchanges at all levels …………………...... 105 2. Australian middle power diplomacy toward China……..………..…………..... 107 3. Political / ideological thorny issues ...... ………………………………………... 114 3.1 Political anchorage to withstand challenges ………………………….. 116 3.2 Human rights issue ………………………………………………..….. 118 3.3 Dalai Lama problem …………………………………..……………… 123 4. Diplomatic challenges: Rudd’s interaction with China (In office: 3rd December 2007 – 24th June 2010) ……………………………………………………………. 128 4.1 Pressure from the US ……………………………..…………………... 129 4.2 Rudd’s real perception and attitude toward China ………………….... 131 4.3 Cases: Rudd’s speech at Beijing University, Australia 2009 White Pager, Rabiye Qadir issue ………………………………………………... 132 4.3.1 Rudd’s speech at Beijing University ……………………….. 133

4.3.2 Australian 2009 White Paper ……………………………….. 134

4.3.3 Rabiye Qadir issue ………………………………………….. 134

4.4 Post Rudd time ………………………………………………………... 135 5. The politics of ambiguity as the way of diplomacy ……………………………. 139 6. Summary ……………………………………………………………………...... 140 Chapter 6 Australia-China security relations …...………………………………………... 142 1. Introduction …………………………………………………………………..... 142 2. Coping with an era of uncertainties ………….………………………………… 144 2.1 Security dimension of China’s rise …………………….……………... 146 2.1.1 Strategic objectives ……………….………………………… 147 2.1.2 Capability analysis …………………….…………………… 150 3. Australian strategic culture (ASC) and alliance enhancing ...………………..... 153 3.1 “Tyranny of Distance”: an obsolete concept? …………….………….. 154 3.2 The different perception on the 2009 Australian Defence White Paper 156 3.3 Perception of security uncertainty: intent + capabilities ………….…. 158

3.4 The operational environment and capability additions ……….……… 161 4. Australia-USA-China triangle in flux ………………………….……………… 164 4.1 Australian-US alliance in a broader context …………………………. 171 4.2 Taiwan issue …………………………………………………………. 176 4.3 Addressing Australia-the USA-China triangular carefully ………….. 180 5. Summary …………………………………………………………………….... 184 Chapter 7 Economic relations: Australia and China in a relationship of interdependence 186 1. Introduction ……………………………………………………………………. 186 1.1 Relationship of deepening economic interdependence …………..…… 190 1.2 Complimentarity: the core of Australia-China trade theory ………...... 206 2. Differential development stages ………………………..…..………………….. 207 2.1 Interdependence as the key …………………………………………… 207 2.2 Uncomplimentary factors as the source of trade rift ………………….. 213 2.2.1 Uncomplimentary factors and clash of interests ……………. 214 2.2.2 Technical or structural problems? …………………………... 216 2.3 Politics, diplomacy and strategic factors behind trade rifts ………...… 217 3. Australia-China Free Trade Agreement (ACFTA) ………………………..…… 218 3.1 Why is there a need for a FTA? ………………………………………. 218 3.2 Barriers to an ACFTA ………………………………………………… 222 3.2.1 The causes of difference ……………………………………. 222 3.2.1.1 Different approaches …………………………...…. 222 3.2.1.2 Selective vs. comprehensive ……………………… 223 3.2.1.3 Clashes in bottom lines …………………………… 225 3.2.1.4 Flexible vs. rigid ………………………………….. 227 3.2.2 External and internal pressures ………………..……………. 229 3.2.2.1 Agriculture ………………………………………... 229 3.2.2.2 Services and investment …………………………... 230 4. The outlook for Australia’s economic policy towards China …………………. 233 Chapter 8 Resources diplomacy: iron ore trade …………………………….…………….. 235 1. Resources trade: deepening interdependent relationship ………………………. 235 1.1 The Australia-China resources trade ………………………………….. 237 1.2 The effect of the resources trade with China on Australia …….……... 239 2. Resources as source of bilateral cooperation and rift ………………………….. 241

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2.1 The nature of the ownership debate …………………………………... 241 2.2 China’s direct investments in Australia: state-owned and private enterprises ………………………………………………………………… 245 2.3 Comparison of Chinese and other states direct investments in Australia …………………………………………………………………... 247 3. The effect of benefit and rift co-existing ………………………………………. 250 3.1 Political interest ………………………………..……………………... 250 3.1.1 Domestic politics ………………………………………….... 250 3.1.2 Resources nationalism ……………………………………… 254 3.1.3 Control of resources ………………………………………… 257 3.1.4 Ideological factors: the source of conflicts …………………. 260 3.2 Economic interest: Rio Tinto, FMG ………………………………….. 261 3.3 Competition between nations and companies ………………………… 271 3.4 Security issue: OZ case ……………………………………………….. 277 4. The effect of constraints on Chinese direct investments ………………………. 284 5. Summary ……………………………………………………………………….. 291 Chapter 9 Conclusion …………………………………………………………………….. 293 References ………………………………………………………………………………… 307

viii

Abbreviations

AAP Australian Associated Press

ABARE Australian Bureau of Agricultural and Resource Economic

ABC American Broadcasting Company

ABS Australian Bureau of Statistics

ACC Australia China Council

ACCC Australian Competition and Consumer Commission

ADFTA Australia-China Free Trade Agreement

ADC Australian Defence College

ADF Australian Defence Force

ADWP Australia Defence White Paper

AFIC Australian Foundation Investment Company

AFR Australian Financial Review

AFS Australia Food News

AFTS Australia’s Future Tax System

AGM Annual General Meeting

AIG Australian Industry Group

ALP Australian Labour Party

AMP AMP Limited

ANZUS Australia, New Zealand, United States Security Treaty

APEC Asia-Pacific Economic Cooperation

APSI Australian Strategic Policy Institute

ASIC Australian Securities and Investment Commission

ASC Australian Strategic Culture

ASEAN Association of Southeast Asian Nations

ASX Australian Securities Exchange

ASW Anti-submarine warfare

AWD Air Warfare Destroyers

BBC British Broadcasting Corporation

BHP BHP Billiton Limited

BLS Bureau of Labour Statistics

BMA BHP Billiton Mitsubishi Alliance

BWK Elders BWK Elders Australia Pty. Ltd.

CAFTA China-Australia Free Trade Agreement

CCP Chinese Communist Party

CCTV China’s Central Television

CEC Cooperative Engagement Capability

CEDA Committee for Economic Development of Australia

CEO Chief Executive Officer

CIA Central Intelligent Agency

CNN Cable News Network

CNSC China’s New Security Concept

DFAT Department of Foreign Affairs and Trade

DIMA Department of Immigration & Citizenship Australia

DMP Department of Mining and Petroleum

DOIR Department of Industry and Resources

EAS East Asia Summit

e.g. exempli gratia For Example

EU European Union

FDI Foreign Direct Investment

FIRB Foreign Investment Review Board

FMG Fortescue Metals Group Ltd

FT Financial Times

FTA Free Trade Agreement

G-2 Group of two

GDP Gross Domestic Product

GPA Government Procurement Agreement

HSBC The HongKong and Shanghai Banking Corporation

ICBM Intercontinental Ballistic Missile

ICCPR International Covenant on Civil and Political Rights

i.e. id est That is

ILO International Labour Organisation

IMX IMX Resources Limited

IPR Intelligent Property Rights

IMF International Monetary Fund

IP Intellectual Property

IR International Relations

LNG Liquefied Nature Gas

MRRT Minerals Resource Rent Tax

NAA National Archives of Australia NAFTA North American Free Trade Agreement

NATO North Atlantic Treaty Organization

NDRC National Development and Reform Commission

NSC New Security Concept

NZCFTA New Zealand China Free Trade Agreement

OECD Organisation for Economic Co-operation and Development

OZ OZ Minerals

PAAI Pennsylvania Association of Arson Investigators

PATA Pacific Asia Travel Association

PhD Doctor of Philosophy

PLA People’s Liberation Army

PPP Purchasing Power Parity

PRC People’s Republic of China

PSI Proliferation Security Initiative

RAN Royal Australian Navy

RAND Research and Development

RAU Republic Gold Ltd.

RBC Royal Bank of Canada

RFC RFC Corporate Finance Ltd

RIO Rio Tinto

ROK Republic of Korea

RSPT Resources Super Profits Tax

xii

SGX Sino Gold Ming Limited

SMH Sydney Morning Herald

SPS Sanitary and Phytosanitary

TBT Technical Barriers to Trade

TEF The Trade and Economic Framework

TV Television

UAVs Unmanned Aerial Vehicles

UK United Kingdom

UN United Nations

UNSW The University of New South Wales

WMD Weapon of Mass Destruction

WTO World Trade Organization

WWII The Second World War

xiii

Chapter 1 Introduction

1. Rationale

Australia regards the relationship with China as one of its most important and the relationship is based on shared interests and mutual respect to maximise shared economic interests, advance Australia’s political and strategic interests, and manage differences in a sensible and practical way (Australian-Embassy-China 2010 p.21).

Australia’s productive relationship with China is one of the assets in its Asia-Pacific diplomacy (Garnaut 1996 p.69; Kent 1997a p.171). However, the Lowy Institute’s poll in 2011 showed that Australian attitudes towards China remained somewhat split.

Three-quarters of Australians (75%) (Hanson 2011 p.11) agreed China’s growth has been good for Australia, stable with the 2010 finding of 73% (Hanson 2010 p.1) and up

12 points since 2008. At the same time, 55% of Australians agreed that Australia should join with other countries to limit China’s influence and 49% of Australians disagreed that the USA should give China a larger say in regional affairs (Hanson 2011 p.11).

The remarkable performance of the Chinese economy is not only driving regional economies, but is also shaping the region’s political and security environment (ASPI

June 2004). China now is not just Australia’s biggest trading partner. China has also overtaken Japan as the world’s 2nd biggest economy by the last quarter of 2010

(Barboza 2010; Phang and Thomas 2010; CNN-News 2011). Moreover, China has become the world’s top manufacturing country by output, according to a study released by IHS Global Insight, accounting for 19.8% of the world’s manufacturing output and was fractionally ahead of the USA with 19.4% in 2010 (Marsh 2011). According to the

World Bank’s estimate, China and the USA will each make close to 20% of the global

GDP by 2025 (Hawksworth and Cookson 2008 p.2). A report released by Price and

Waterhouse on the 21st January 2010, states that by 2030, China’s share in the global

GDP structure would be as large as 19%, vis-à-vis America’s 16% and the EU’s 15%.

In contrast, Japan, which has been the second largest global economy for a long time, had never had a global GDP share of more than 12%. China has achieved a successful transformation in its internal economy that has generated huge increases in wealth and power (Buzan 2010 p.8).

1.1 The impact of China’s rise in the region and the world

China’s rise inevitably operates with the USA at two levels: regional (East Asia), where the USA is an intervening power; and global, where the question is about the overall structure of power and institutions. China’s influence, regionally or globally, is mainly economic. If the US presence in East Asia contributes to regional stability, then it adds to China’s dependence on the USA-led international order. If the US presence weakens the regional order, then its main purpose is to constrain the rise of China by constructing a kind of containment of it at the regional level (Buzan 2010 p.15). It is very likely that is what the USA is doing in the Asia-Pacific region. China has successfully cultivated good relations with ASEAN and the two Koreas, and has begun to improve its relationship with Taiwan. It is absolutely imperative that China does its utmost to keep

Taiwan within its policy of peaceful rise and to avoid a military clash over it.

Otherwise, Australia might get involved in the conflict due to its military alliance with the USA.

The impact of rising China in the global arena was reflected in the Secretary of State,

Hillary Clinton’s speech, who on the 2nd March 2011 warned Congress in cutting

America’s foreign budget that “the USA is in direct competition for global influence with China and risks losing out” (CNN-IBN-Live 2011; Pennington 2011). This is probably the first time that a top US official has used such strong language of competition with China in diplomatic terms. Some Chinese overseas scholars analyzed

Clinton’s attitude towards China as a master of variable faces and full of “elimination, jealousy and hatred” (Chinese-Daily 2011b).

All these indicated that China’s rise is increasing its influence in the region and the whole world. Nevertheless, in the timeframes considered by the 2009 Defence White

Paper, no matter how the world changes, “China will have neither the intention nor the power to mount a direct attack against Australia” and “Australian strategic planning needs to recognize that China continues to be very much a status quo power” (Behm

2009 p.15). The question remains whether Australia’s China policy makers will consider more carefully about the development of the regional and international situation.

Nevertheless, tensions between Australia’s strategic alignment and its economic alignment heighten Canberra’s anxieties about having to choose between security and prosperity in the event of a confrontation between the USA and China (Wesley 2010b p.227). Foreign policy is a dimension of public policy that deals with the outside world

(Lewis 2002; Gyngell and Wesley 2007 p.9). Its job is to create an international environment conducive to the nation’s interest (Lewis 2002; Gyngell and Wesley 2007

3 p.8). Australian foreign policy is pragmatic (Downer 2002; Gyngell and Wesley 2007 p.9). Australia’s China policy is based on pragmatism that trade with China can ensure

Australia’s continuing prosperity. China’s shaping of the world is uncontainable (FT-

Series 2011). Thus, Australia’s China relations are pragmatic as are Australia’s relations with the USA. The USA is Australia’s shield, protecting Australia from any attacks.

Thus, Australia’s China policy affects the bilateral relations and is an indication of its leaders’ wisdom and how it plays the triangular game.

In studying relations between Australia and China one immediately confronts an

Australian dilemma: Australia disapproves of China’s political system but it has a strong need to deepen bilateral relations for their mutual economic benefits. In the long run the rise of China will result in the alteration of the regional and global order in which Australia, as a middle power, has a crucial role to play.

The overall aim of this thesis is to assess how Australia’s China policy should be shaped to maximize its national interests against the uncertainties of a rising China. China’s rise has yet to be accommodated in the current Asia-Pacific power structure (Kelton 2006 p.229) but the situation might change in the near future. Australia’s alliance activities and regional engagement have facilitated its growing influence, regionally and globally in recent years (White 2005a p.13). The rise of China poses both challenges and opportunities for Australia to deepen this influence. Beijing has repeatedly promised not to turn itself into a Revisionist (Baldick 2008) power and declares it will operate within the existing international order (贾庆国 Jia 2007 p.22). The common wisdom is, however, that rising powers may become assertive and often attempt to alter the existing

4 global order to their advantage (Mearsheimer 2001 p.168). If China follows suit, the

Australia-US alliance may bear the first brunt under the circumstances.

When interacting with China, all nations, especially in the West, have to cope with complex issues. This thesis argues that China’s challenges and opportunities to

Australia are not irreconcilable. A positive Australia-China relationship will enhance

Australia’s profile and status in this Asia-Pacific power structure; and this can be achieved without alienating its traditional ally i.e. the USA. On the contrary, Howard has testified that when Australia upheld its best national interests and won political trust from the USA and China, it could have its cake and eat it too. He incorporated into the

USA alliance framework greater discretion for Australia’s China policy (Kelly 2005 p.8). A cooperative Australia-China relationship has actually helped Australia to strengthen its alliance relations with the United States, the cornerstone of the successive governments’ overall foreign policy. The crux is that Australia remains sensitive to the core national interests of the two big powers. Howard supported Bush’s key global initiatives, especially the Iraq War; and it was positive towards Beijing’s concern over

Taiwan. Consequently, Australia has gained greater room to manoeuvre not only between the big powers but also regionally.

This thesis will explore the factors behind Australia’s effort to construct a smooth relationship with China against the background of it being a Western country with close ties to Washington. It will analyse how this will help the current Australian foreign policy centred on a desire to take on a leadership role in restructuring a regional order that is capable of regulating major powers’ interaction and especially the behaviour of 5 the rising powers. This “middle power” approach forges a distinctive identity for

Australia that affirmed not only a regional power but a power with its own global vision, interests and responsibilities – trends started by the Labor Party (notably Gareth

Evans) in the 1980s but continued throughout Howard’s administration. On the other hand, although Howard simultaneously promoted strategic relations with the USA and

Asia, he seemed to have favoured the former. The Rudd Government had an incentive to redress this imbalance at the beginning. Immediately after assuming office he took a number of initiatives to project Australia’s image as a regional leader, from proposing the establishment of an EU-type Asia-Pacific Community to seeking a seat in the UN

Security Council, sharply in contrast with most Asian leaders, who are either reserved or elusive in making firm commitments for such an endeavour (Sutter 2008 p.2).

More importantly, Australia likes to construct a balanced triangular relationship with the USA and China by maintaining a military alliance with the USA which is primary, while enhancing its economic partnership with China (Rudd 2006b; Rudd 2008).

Australia has much to contribute to such a relatively smooth relationship. This study will analyse how Australia and China have tried to strike a balance between challenges and opportunities when they both pursue their own diplomatic initiatives.

However, to most Australians, China is uncharted territory. Although China has become economically very important to Australia, how much Australians know about China can be tested by its China policy. “Getting China right means Australia must make the effort to better understand China” (Wesley 2009). Most Australians have mixed sentiments

6 about China i.e. admiration and criticism. How many Australians have similar opinions as Wesley’s perception about China such as “China has long been an advocate for the

‘democratization’ of international affairs – a world controlled not by one or a few great powers, but in which most states have a say” (Wesley 2009)?

1.2 Reasons for choosing this topic

The topic of Australia’s China policy has been chosen for this PhD study due to several reasons. Firstly, China’s rise and the global response to it, raise new challenges to the theoretical significance of the existing IR theory on the rise of nations. The realist school of thought in particular is the dominant framework through which this rise and its diplomatic consequences have been analysed. Spontaneously we see China using its newly-obtained international influence for strategic gains and its great willingness to join globalization and an interdependent world order that mitigates against its drive for greater influence. This generates considerable debate among world policy makers and scholars over whether China will rise as a revisionist power like Japan in the 1930s and poses a major security threat to the region and the world; challenges the USA’s lead in the world order; or as a status quo power willing to accept the existing global and regional order, thus representing a new opportunity for peace-making. The study of

Australia-China relations during this fast-changing and unpredictable time can shed valuable light on this important evolution. This debate will be addressed in the theory chapter guided mainly by International Relations theories, such as realism, liberalism, middle power.

Secondly, in studying relations between Australia and China one immediately confronts an Australian dilemma: Canberra disapproves of Beijing’s political system but it has a strong need to deepen bilateral relations for their economic benefits. With its rising economic power, China is playing a key role in combating the global financial crisis and may save the world from sliding into a great depression (SMH 10th October 2008; The

Australian 13th October 2008; Bloomberg 15th October 2008).

On the other hand, there have been suspicions raised concerning China’s capability and willingness to fulfil international expectations. Nevertheless, opportunities to Australia offered by China’s rise are abundant. China is still in the process of industrialization which is based on the plentiful supply of Australian commodities; a significant component to their bilateral economic relations. The rapid growth of China contributes to Australia’s economic restructuring (from a lucky country to a clever country) and served as a valuable source for Australia’s “quiet boom” (Edwards 2006 p.Viii). At the same time that Australia is benefiting from China’s resources demands, there is this ongoing intensive ownership debate against China’s investment in Australia, which not only tests Australia’s China policy but also challenges Australians’ sentiment and wisdom.

Thirdly, in the long run, how would Australia’s China policy be shaped to maximize its national interests against the uncertainties of a rising China? China would like to change from a population of which almost half lived in near poverty undertaking agricultural work with the majority employed in state-owned enterprises, to a bourgeoning middle- class and a higher echelon whose personal wealth and purchasing capacity rivals that of 8 the most well-to-do in New York, Paris and London (Hutchings 2007 p.37).

Furthermore, there are more voices in the media saying that “it is the end of US era – now China calls the tune”, “the world order is changing because China is propping up the USA” (Garnaut 2008b). One of the reasons people think so is that since WWII,

Britain’s influence had declined because the USA had become its largest creditor, now the cycle is being repeated in the case of the USA and China.

The global financial crisis (GFC) 2008 had accelerated the power shift from North

America and Europe to East Asia and reinforced China’s rise in all dimensions of national power (Thayer 2010). Australia will face a more complex strategic environment in Southeast Asia over the next decade. Issues such as China’s economic growth, the recent China-Japan Diaoyudao / Senkaku Island dispute, the USA stepping into Southeast Asia and the East Asia Summit expansion by including the USA and

Russia as new members will affect the regional security. Australia will need to reassess its future role within this shifting strategic environment and devise a set of strategies in order to promote its national interests there. Australia’s China policy is a key issue to indicate whether Australia has the ability to adapt to these changes.

2. Significant issues

Whether power politics can adequately explain China’s foreign policy strategy in the post-Cold War era (realism predicts a predetermined path of confrontation between the major powers, especially between major powers of different civilizations and between rising powers).

The constraining impact of globalization and China’s economic integration with the international system on its foreign policy options, e.g. searching for an answer to the question of whether China has become more nationalistic (influenced by power-centric realism that is traditionally the foundation of China’s foreign policy making process) or more interdependent (embracing the theory of liberalism in order to further benefit from world trade, as an effective way of power accumulation and thus being propelled to follow the rules set by the Western powers) or both existed as mentioned above.

In analysing China’s behaviour, one can raise the question of whether it is simplistic to think that China plays a status quo power game in the process of its rise because this serves its vital security and commercial interests. In fact, China has been attempting to change the international and regional order because it does not leave a leadership position and space for development for Beijing due to Western domination

(Mearsheimer 2007 p.71,83,84; 贾庆国 Jia 2007 p.21). But China wants to do it at minimum cost (倪世雄 Ni 2007 p.123; 由冀 You 2007 p.95). The way to do this is to change the order from within rather than from without. One example to testify to this is

Chinese entry into the WTO in 2001 through accepting preconditions set by the developed countries (丁伟 Ding 2007 p.177). Chinese rationality is clear. If it is cost- effective to abide by the Western rules of the game, why oppose it head-on (由冀 You

2007 p.101)? This underlines its new security concept that emphasizes a win-win policy formula: relative gains for all players pave the way for peaceful co-existence (倪世雄

Ni 2007 p.120). Even if the international order is unjust and unfair, the most economical way for China to change it is to change it from within, and most naturally through power accumulation that will automatically add China’s say in the power game. Yet, the 10 theoretical significance is Beijing’s realization that seeking power does not guarantee security in the current world order of unipolarity (Mearsheimer 2007 p.75; 由冀 You

2007 p.105). Therefore seeking security is more important than seeking power and this highlights the importance of international cooperation and multilateralism (贾庆国 Jia

2007 p.21). The changing mentality of the Chinese leaders and their realistic assessment of the balance of power force them to play a new set of power games that are not truly realist, nor entirely liberalist (朱云汉 Zhu and 黄旻华 Huang 2007 p.23-24).

3. Research questions

The broad and central question this dissertation tries to answer is how Australia should respond sensitively and sensibly to a rising China: how Australia adjusts its China policy to maximize its national interests, especially those economic and security ones; and to deal with the inevitable negative consequences either through its own hedging strategies or through strengthening ties with its allies, especially the USA. This will be a huge task as the two countries differ in political systems, development stages, ideological values, and strategic visions on global and regional orders. A sensitive response also means balancing Australia’s pressing economic needs for a cordial relationship with China and its political obligation to promote China’s political transformation along the lines of human rights and democracy from without.

On the other hand, the relatively undisrupted deepening of the bilateral relations since

1972 have shown that there is considerable common ground for Australia and China to further friendly ties and even to institutionalize them in a partnership. Therefore, this 11 dissertation will raise specific questions on what shared interests the two countries have in the important areas of cooperation: diplomatic and security, economy and trade, social and cultural; and of course, also those questions regarding where they differ in strategic interests. Through findings to these questions this dissertation will evaluate the impact of China’s rise on Australia’s pursuits in the domestic and international arenas.

One particular emphasis will be on the questions concerning the potential conflicts that both countries will face, currently and in the near future.

More specifically, this dissertation will raise three sets of concrete questions regarding key bilateral concerns:

3.1 Diplomatic and security

Are there any converging interests between Australia and China in the regional restructuring process (由冀 You 2007 p.111-114), e.g. China actively restructuring relations with the East Asian Community ( 李励图 Li 2007 p.262) (with the participation of Australia) and Australia’s Asia-Pacific Community (O'Malley 2009;

Woolcott 2011)? Relevantly, the regional integration process as part of globalization is bound to raise the question of leadership, for China as a major power and Australia as a crucial middle power. Therefore, there are inevitable conflicts in the pursuits of the two countries. This dissertation will ask what they are and how they are dealt with.

One key challenge in Australia-China relations is Taiwan. Although the National Party

(KMT) government in Taipei since May 2008 has reduced the level of concern for the foreseeable future, the potential for war remains. This is a fundamental question to both countries and has particularly aroused debate in Australia about what kind of alliance

12 commitment Canberra should give to Washington in case of any armed conflicts there.

Associated questions of a strategic nature to Australian leaders and the public alike are: should the ANZUS Treaty be invoked (McDonald and Allard 2004; McDonald and

Forbes 2004; Gill 2007 p.152)? Does a shift to well explained clarity (non-committal) better serve Australia’s vital national interests or is continued ambiguity in this regard preferable? How should Australia balance the conflicting interests between maintaining a good relationship with Australia’s largest trading partner that ensures a good growth rate and jobs and maintaining a good relationship with its key ally that provides security insurance and guarantee?

3.2 Economic cooperation and trade

Complementary factors have been the key driver for the rapid or dramatic increase in

Australia-China trade. This dissertation will provide a fact-sheet to show that these concrete items such as resources trades e.g. iron ore and natural gas trading are what made the bilateral trade complementary. In doing so, a few case studies will be pursued, such as the Australian export of iron ore to China and cheap “Made in China” consumer goods to Australia. For instance, a question on the iron ore pricing will be raised to evaluate the nature of the bilateral trade dispute and the resolution mechanism.

Complementary factors do not guarantee smooth sailing in Australia-China trade relations. China has become Australia’s first trading partner since the last quarter of

2007, and trade with China has continued to grow. Australia’s trade in goods and services with China increased 23.6% to $105.3 billion (DFAT 2011a p.7) and

Australian products exported to China grew by 34.3% to $64.4 billion in 2010 (DFAT 13

2011a p.6). Since 2005, two-way trade has risen 20.2% per annum, compared with

10.2% for East Asia overall (DFAT 2011a p.7). However, one important emphasis of the dissertation will address the question of how non-complementary factors can pose constant challenges in the Australia-China economic cooperation. I will use the difficult negotiation processes of the Australian-Chinese Free Trade Agreement as a case study to analyse how these non-complementary factors (i.e. Australian attitude to Chinese direct investments and obstacles for Australian entry into the Chinese financial market) have hampered increases in the bilateral trade.

3.3 The human rights related questions

Given the focus on the political-strategic and economic dimensions in the development of the Australian relationship with China, human rights issues were generally not a major consideration (McDougall 2009 p.141). However, diplomatically and in terms of domestic politics, the question of balancing Washington and Beijing in the security area is also of particular relevance to the question of dealing with Chinese human rights issues that have long troubled various Australian political institutions (Firth 2005 p.261): how to balance the conflicting interests between maintaining a good relationship with Australia’s biggest business partner that ensures the continuing growth rate and jobs and fulfilling its international commitment to campaign for realization of the universal value of human rights among mankind?

4. Central argument

The central argument of this dissertation is whether Australia can maximise its national interests through its China policy in terms of politics, security and economics in the

Asian century. Australia and China are very different in many areas such as the political system, the strategic and economic structure. The author deems that these two countries can have a peaceful relationship and overcome disputes in areas of politics, security and economics.

5. Theory framework

So many contemporary international relations scholars agreed that none of the international relations theories can singularly explain the complicated international relations nowadays and especially in the case of China rising (Friedberg Fall 2005;

Johnston Spring 2003; Shambaugh Winter 2004/2005). There are many valuable reference books on IR theories including Baylis and Smith eds (2007) The

Globalization of World Politics: An introduction to international relations (3rd Ed.);

Burchill, Linklater, Devetak, Donnelly, Paterson, Reus-Smit, and True eds. (2005)

Theories of International Relations (3rd Ed.); Carlsnaes, Risse, and Simmons eds.

(2003) Handbook of International Relations; Devetak, Burke, and George eds. (2007)

An Introduction to International Relations: Australian perspectives; and Hanson and

Tow eds. (2001) International Relations in the new century: an Australian perspective; which could be referenced for assessing Australia-China relations. Jia’s, Zhu’s,

Huang’s, Zheng’s, Xiu’s, You’s are valuable international Chinese versions of applying the international relations theories to assess the rising China (朱云汉 Zhu and 贾庆国

Jia 2007). International theories such as realism, liberalism, middle power and China’s new security concept will be discussed in the theory chapter.

6. Methodology

The methodology is textual analysis. The theoretical analysis and literature review include authors from the West and Asia in both English and Chinese. References are made to various publications and reports by private and public institutions, including the governments of Australia, China, the USA and Japan. Company profiles and data from appropriate companies including private Australian research companies are also used.

The Australian government includes the Department of Foreign Affairs and Trade

(DFAT), the Australian Bureau of Statistics (ABS) and Hansard. Newspapers, journals and periodicals from both Chinese and English sources were examined for empirical data. Internet research was frequently used to gather data and information, mainly through the websites of the government agencies and relevant private firms.

7. Chapter structure

There will be nine chapters in this dissertation. The first chapter will be the introduction chapter outlining the significant issues, the theory framework and methodology used in this dissertation.

The second chapter will have literature reviews on relevant topics. Although there are many articles written about the Australia-China relations, academic research on

Australia’s China policy still need to be conducted especially now that China is vitally

16 important to Australia for diplomatic, security and economic reasons. Thus a PhD dissertation in these areas should be done.

The third chapter will discuss the International Relations theories and apply them to assess the specific case of the Australia-China diplomacy. Many experts agreed that no single international relations theory can explain nowadays the complicated international relations. Realism and liberalism can be applied to assess Australia-China relations.

Using different theories to assess Australia’s China policy will have different results for the relationship. Thus, which theory is more suitable and better for Australia’s national interests need to be studied.

The fourth chapter will present a historical review on Australia-China relations, concentrating on the diplomatic dynamics since 1972. The history of Australia-China relations have evolved from fear to normal relations, and finally to constructive partnership, then to comprehensive cooperation.

The fifth chapter will discuss the Australia-China political challenges. Although the bilateral political relations have not been a smooth one, yet the deepening bilateral exchanges at all levels and understanding, free of border conflicts, Australia’s middle power character and its national interests will direct the relationship.

The sixth chapter will deal with the security challenges to the two countries. Australia’s geographic location determines its strategic culture. Its innate factors determine its alliance with the USA. The Australia-China security relations have not yet developed to the level of the US. How to balance the tri-relations of security with the USA and economic relations with China is a challenge for Australian governments. Yet, it is not an unreachable goal.

The seventh chapter will illustrate Australia-China economic ties. Although China has become Australia’s biggest trading partner for a few years, there are still many challenges affecting the bilateral economic relationship. The process of negotiating the

Australia-China Free Trade Agreement reflects these challenges.

The eighth chapter will concentrate on the Australian resources diplomacy and the ownership debate. China has become Australia’s major resources export destination consuming 70% of Australia’s iron ore exports, yet, Australia’s policy for foreign investments especially those targeting Chinese policies might slow down Australia’s economic development thus affecting its economic interests.

The ninth and final chapter will conclude the dissertation. The central argument of this dissertation is that Australia’s China policy reflects whether Australia can manage its relationship with China in order to benefit its national interests. Although Australia has to face many challenges including political, security and economic when dealing with

China, none of these conflicts in the relations are definitely unavoidable. Since

18 economic is one of the most important national interests, due to the deepening of economic interdependence, the ideal result is achievable.

8. Summary

Australia is one of the six cases in Pacific Currents: The responses of U.S. Allies and

Security Partners in East Asia to China’s Rise, which was published by RAND

(Medeiros, Crane et al. 2008), a non-profit research and objective analysis organization.

The chapter on Australia’s responses to China’s rise was analysed from the angles of the Australian national condition, domestic politics and public opinion, economic responses, diplomatic and foreign policy responses; and provided future trends and indicators of the relations. The report states “Australia has pursued a complex and nuanced approach toward China” (Medeiros, Crane et al. 2008 p.28), yet, the relationship has been “built on mutual interest and mutual respect” (Medeiros, Crane et al. 2008 p.22).

Hence, through comprehensively assessing the bilateral relations of Australia and China in the areas of history, politics, security, and economics, this thesis concludes that the

Australia-China policy is based on Australia’s national interests including political and economic interests. This policy orientation has proved to be successful in the past and will also guide its policy towards China in the foreseeable future. The central theme of this policy is cooperation yet successive Australian governments have constantly raised its opposition to China’s human rights practices. This policy orientation has played a key role in maintaining common interests and accommodating differences. The

Australia-China policy has set a good example for countries with different political systems but which still cooperated well.

Chapter 2 Literature review

1. Introduction

The subject of Australia-China relations or Australia’s China policy has attracted significant public media attention in recent years in Australia. However, there have been no book-length treatments of Australia-China relations since the days of Albinski

(1965) and Clark (1967) until Fung and Mackerras (1985) brought out their book in

1985 (Andrews 1985 p,xii). In the past, it was because “China is only one of the centre of world politics, Australia is relatively-isolated geographically, and is a middle power at best” (Fung and Mackerras 1985 p.8). Yet, there are many articles from the mass media such as newspaper articles, journals - both Australian and international, electronic books, edited books, book chapters, and book sections written in both English and Chinese about Australia-China relations. These literatures provide solid and concrete support for Australian governments to formulate better China policies to better serve its national interests.

Nation-wide, according to the UNSW’s database—Trove1, there are 550 books; 17383 journals, articles and datasets; 105208 digitized articles and 1314 websites on China; there were 310 books and 11 journal articles on Australia-China relations as of the 23rd

May 2011.

1 Trove provides access to content previously available via the Australasian Digital Theses Program database, including links to Australian digital theses. Trove includes theses at all levels, including Honours. Trove also includes theses held in other Australian institutions and those awarded elsewhere but housed in Australian libraries. 21

The academic exploration of Australia-China relations is still developing. According to the database of the University of New South Wales, up to May 2011, there were only two PhD dissertations titled “The formation of Australian attitudes towards China,

1918-1941” (Willis 1974) and “Crimson threads and golden strands: Weaving the pattern of Australia’s trade with Asia, 1932-1957” (Tweedie 1989) and five other types of theses on the relevant topic awarded by the UNSW.

According to the UNSW’s library search engine “union list of higher degree theses in

Australian university library2” on the 23rd May 2011, there are 203 theses written on the subjects of China and Australia-China relations including Masters and PhD theses from all Australian universities, books and journal articles.

Globally, according to the UNSW’s database—proQuest 3 , dissertations and theses

(including dissertations and theses published by universities in the UK and Ireland), there are 18110 PhD and Master theses about China. However, there is only one Master thesis relevant to Australia-China relations, which was titled “the geographical impact of Australian immigration policy on the composition, distribution and settlement of

Chinese in Australia” (Adams 1989) 2 PhD theses indirectly related to the topic such as

“Britain, the United States, Australia, New Zealand and the Malaysia-Indonesian

2 Union list of higher degree theses in Australian university libraries. Masters and doctoral theses, 1959-1989.

3 With more than 2 million entries, PQD&T is the single, central, authoritative resource for information about doctoral dissertations and masters theses. Dissertations published from 1980 onward include abstracts written by the author. Includes a comprehensive bibliographic listing of dissertations and theses, most with abstracts, accepted for higher degrees by universities in the United Kingdom and Ireland. 1716+ 22

Confrontation, 1961-1965” (Subritzky 1997) and “Australia, South East Asia and the

Cold War, 1948-1954” (Lowe 1990), which was published outside Australia.

Research on directly synthesizing the political, security and economic issues of

Australia-China relations is still developing. In the process of literature review this author is increasingly convinced that as Australia-China relations are undergoing subtle changes as time passes, it is no longer sufficient to view the rise of China through the mirror of the traditional IR theory, especially the Realist school of thought that is often applied to the study of rising major powers (Buzan 2003). More research effort should also be conducted to update the information on Australia-China relations.

There are several reasons why Australia-China relations are still developing. Before the new century, the subject, except for the economic component of it, attracted little academic attention because China was not seen to be particularly important as it is now in Australia. The attacks on the USA of 11th September 2001, however, changed this perception because the USA needed to gain the co-operation of China in the “war on terror” (Soon 2004; Zhang 2007 p.91) and while “avoiding any serious differences between Canberra and Washington over its China policy” (Sutter 2002 p.349).

Australia, traditionally, has been a close ally of the USA. The Howard Coalition government further enhanced the ties. China’s cooperative approach to the war on terror has reduced the West’s security concerns on China as a non-western power and this has, in a way, broadened the base upon which Australia-China relations are facilitated.

Coupled with the phenomenon of China’s rapid rise, China is becoming increasingly

23 more important in Australia’s future. Hence, Australia-China relations have become an academically hot topic.

Furthermore, the bilateral economic relationship is getting more and more interdependent. The management of this important relationship directly affects

Australia’s long term prosperity and economic interests. Australia’s growing economic ties with China have been another key factor which elevated official and scholarly interest in China-related subjects. When Australia signed its historically largest trade contract to supply gas to China worth A$25 billion in August 2002, many people were convinced about the importance of China to Australia’s economic development (Wilson

2004; DFAT 2007a). The subsequent “resources boom” (i.e., large quantities of iron ore sales to China) since 2003 has further sustained this trend (Zhang 2007 p.93). Thus, in the last decade, the number of publications on Australia-China relations has greatly increased.

2. Literature review on political relations

Australia has established an official relationship with China for 40 years (1972-2012).

Politically, this 40 years of relationship has progressed from fear to friendship (Albinski

1965; Andrews 1985; Mackerras 1992 p.211; Harris 1995; Mackerras 1997). Although there are almost no conflicts of interest nor problems left over from history (Shi 2002 p.341), but it is not yet, a strategic partnership. In 2008, a public survey conducted by the Lowy Institute for International Policy showed that 52% of Australians agreed with the improved Australia-China relations and only 9% disagreed with it (Hanson 2008

24 p.10). 46% of Australians said it was likely China would become a military threat to

Australia in the next twenty years, up five points since 2009, and there were 52% that disagreed with this proposition (Hanson 2010 p.2).

Notwithstanding that the Cold War era is already history, “the Cold War mindset nevertheless dies hard” (Shi 2002 p.338). To some people, anything that smacks of socialism or communism is evil, and anything that China does must have a sinister motive (Shi 2002 p.338). The so-called ‘China threat’ has been created and can still be found in Australia and substantial bias exists at least in certain circles (Shi 2002 p.338).

Thus, there are always different opinions on Australia-China political relations.

2.1 No unavoidable conflicts of interest

There are no border conflicts between Australia and China in their history. Border disputes are unavoidable conflicts. For example, border conflicts have occurred between

China and Japan, China and India, China and Vietnam as well as disputes in the South

China Sea between China and Vietnam, the Philippines, etc. and some ASEAN countries are still having border conflicts with China lingering from the past. Thus, conflicts of interest between China and these countries are hard to avoid forever. This is why China’s rise has been perceived as a potential threat by these countries. However, there is no such unavoidable conflict of interest or any border dispute between Australia and China. Thus, Australia-China relations should very likely be better than China’s relations with these neighbouring countries.

As Mackerras has pointed out that “China has never ever wanted to threaten Australia”

(Mackerras 1992 p.218). Although from the mid-19th century to the mid-20th century,

Chinese migrants had been seen as a threat to Australia’s security and society and the

‘White Australia’ policy implied a fear of China, it was mainly in tones of racism

(Mackerras 1992 p.209). Australia and China were once allies against the Japanese during the Pacific War (Mackerras 1992 p.209). Mackerras pointed out that China’s status has shifted from being a threat to a friend due to no unavoidable conflict of interest but economic opportunities (Mackerras 1996b p.211-215).

2.2 There is almost no direct conflict historically

There are many differences between Australia and China such as ideologies, cultures, and especially the political systems, yet there are only minor direct conflicts due to these differences, and there have been almost no direct major conflicts in their history.

During the Korean and Vietnam Wars, Australia’s army had joined the Americans against Korea-China and Vietnam-China because of their similar ideology and military alliance. In fact, if one transcended ideological differences, there were no actual direct conflicts between Australia and China.

As Shi pointed out that “China and Australia have neither conflicts of interest nor problems left over from history” and “China seeks to develop friendly and cooperative relationships with all countries” because China needs a peaceful external environment for its own development (Shi 2002 p.340-341). Shi concluded it as looking forward to the future, if the two sides can work bilaterally to reduce or eliminate barriers, set up the

26 right environment to expand the range and scope of contacts and exchanges, and realize the full potential of cooperation, both “ought to be able to make an historic achievement resulting in a more peaceful, stable and prosperous future for both Australia and China”

(Shi 2002 p.345).

2.3 Increasing exchanges

There are increasing exchanges between Australia and China at the official level, academics and ordinary people. These can help develop understanding of each other’s culture, ideologies, values and thoughts. Especially the academics’ objective and critical discussions between the two countries could possibly avoid unnecessary misunderstanding and reduce mistrust. For example, the 2011 conference of “China-

Australia relations at forty: learning from the past, facing the future”, where academics from both sides actively discussed the forty years relationship in the areas of history, economics and security. Objective discussions such as these help to improve understanding of each other and reduce mistrust.

Shi has analysed that high level visits between the two countries were so frequent that they have become regular events (Shi 2002 p.337). These regular visits and direct talks can improve understanding of each other’s circumstances to transcend ideological differences and not try to impose their own will on others (Shi 2002 p.337-338). During the Cold War era relations between countries were based upon ideology and the social system rather than on the principles of peaceful coexistence and the convergence of national interests (Shi 2002 p.338).

Harris deemed that isolating China was not sensible (Harris 1995 p.240) and the five objectives of the Australia-China policy were “to shift Australia’s approach from fear to one of friendly relations; to deal with China on its own merits; to see China as an opportunity rather than a threat; to recognize China as a potential great power; and to bring China into the world on an equitable basis” (Harris 1995 p.244). Harris also deems China’s peaceful evolution from a communist regime to reforming itself politically, as Australia’s interpretation of this which was not the same as some academics, historians and China-watchers in the USA interpreted the term. “Such differences will be more important in the future if Australia is to pursue a nuanced, thoughtful, informed relationship rather than an ideologically-based approach” (Harris

1995 p.240). Harris saw “China’s economic reforms ….were seen as opening up opportunities for Australia” (Harris 1995 p.238). Concentrating on an ideologically- based approach would create problems and conflicts between Australia and China and made the relationship revert back to Cold War status. The Cold War model of relationship is rivalry and not conducive to regional and world peace. Exchanges at all levels can maximize understanding of each other and minimize mistrust in order to minimize conflicts.

Liou (2007) mentioned that “Australian perceptions of rising China are largely positive” and “Australia tends to perceive China as both an emerging market economy and a responsible player in Asia-Pacific” (Liou 2007 p.201). He also quoted a nationwide poll in 2006 that “most Australians believe rising China poses no threat to Australia” (Liou

2007 p.201).

These scholars’ positive views on the rise of China and Australia-China political relations are based on their research on Chinese characteristics, Chinese culture and its long history and come mainly from the perspective of liberalism. Border conflicts might pose a threat. Direct conflict in history might pose a threat e.g. the conflict between the

Islamic world and the West. Common interests generate opportunities. Exchanges improve understanding of each other. On the positive side, there are more common interests such as the increasing interdependence and exchange at all levels and these factors made these scholars perceive that China’s rise is mainly positive for Australia. If there are more opportunities, there might be fewer threats. Thus, Australia-China relations have a bright future although there might be some attrition simultaneously.

2.4 Human rights as a point of conflict

China’s human rights concept is different to Australia’s due to the differences of ideologies and cultures. In fact, these differences do not just exist between Australia and

China, but they also exist between the West and the East. This school usually ignores these differences and expects the same standards from China as would be expected from

Australia’s and the West’s perspective.

Nevertheless, human rights, as a point of conflict in the bilateral political relations, as

Kent pointed out that “due to cultural and historical backgrounds, countries like China and Australia could have different views on some issues, human rights for example”

(Kent 1997a p.183). Although Australia’s relationship with China is productive and

“one of the assets in its Asia-Pacific diplomacy” (Kent 1997a p.171), yet it also “is one

29 of its most difficult and challenging” (Kent 1997a p.170). However, at the same time

Kent worried that China’s rise as a great power highlighted the increasing asymmetry in power. It is a conundrum that reconciles Australian interests and identity with the region due to “China’s political culture and its rapid and often volatile economic, political and strategic changes” (Kent 1997a p.190). Her perspective of China was mainly from the human rights angle and she concluded that the bilateral relationship has grown

“commercialization” (Kent 1997a p.185). Kent assessed the bilateral relations from the period of 1966-96 from the political, commercial and strategic angles although more from a Chinese human rights specialist perspective, yet, Kent also said that “human rights, as part of Australia’s political relationship with China, have, at least since 1993, been marginalized rather than being seen as having important political and strategic, as well as humanitarian, dimensions” in ‘the era of economic’ (Kent 1996a p.379). Kent thus concluded that despite the occasional robustness, the bilateral relations have been

“pragmatic and self-awareness” and should continue along those angles (Kent 1996a p.380).

2.5 Cold War mentality

Kent admitted that problems, which existed in the Australia-China relationship, “have been based not so much on anything China has done, but on the nature of our cultural and ideological perceptions of what China might do” (Kent 1996a p.366). This is indicative of how some academics and politicians perceived China. This perception is a

Cold War model mentality. According to this mentality, China would be perceived as an imaginary enemy instead of an economic engine. Is this the main reason Australia does

30 not have confidence in China? This kind of perception was based on imagination and has been modified, yet still exists.

Mediansky proposed his suspicion of China by saying “the future of the relationship is difficult to gauge” (Mediansky 1997a p.308) and “cooperation with China will become more complex as the alignments of the Cold War are crosscut by considerations of political culture and ideology” (Mediansky 1997a p.308). He worried that “the capabilities of China’s South China Fleet were improving as China assumes a more active role in Australia’s traditional security environment” (Mediansky 1997a p.308).

Mediansky deemed “Australia will need to balance its substantial economic investment in China against its own domestic values, reinforced by domestic lobbies pressing for its democratisation” (Mediansky 1997a p.208). Obviously, Mediansky worried that

Australia’s economic development relied too much on China. His view on China is from the need of the Australian domestic political competition focussing on the differences of these two countries’ political systems.

Due to the ever increasing common interests between Australia and China, the Howard

Government had changed its attitude and policy toward China by “upgrading China’s priority in Australian foreign policy to the highest level no less than that of the USA”

(Liou 2007 p.202). This upgrading includes all levels of official exchanges, education i.e. academic exchanges and tourism i.e. people visiting each other’s countries.

3. Literature review on security relations

Moreover, the security relationship too, is becoming more important due to the increasing influence of China and consequently, the relative declining influence of the

USA in the region. Thus, Australia’s China policy would also affect its security interests in the region. A huge amount of academic research can provide theories to support a sensible foreign policy. Hence, more research on the topic is necessary.

Some scholars deem Australia is facing more difficult choices as the USA-China-

Australia trilateral relations develop. The trilateral relations will change from asymmetry to symmetry then to asymmetry eventually. In other words, Australia might have to face the world politics changing from the USA-dominated unipolar to the USA and China concert of power, then possibly to the China-dominated unipolar or multipolar. Obviously, Australia does not know what to do if China’s power is equal to or overtakes the USA because Australia is used to being under the USA’s protection and

China is a country very much different in many ways. Hugh White deems Australia faces security uncertainty due to power shifting between the USA and China, although

Mediansky deems Australia has not been treated as a friend economically, by the USA even though Australia is America’s loyal military ally. White and Dobell deemed that the rising China is threatening the USA’s interests in the Asia-Pacific region thus threatening Australia’s too, hence challenging Australia’s strategic and security policies from their defence and strategic background and classical realist lens. Yet, White,

Wesley, Kent, Mediansky and Malik are concerned that Australia would have to face difficult choices due to the asymmetric trilateral relations of the USA, China and

Australia. Human rights, once, were a point of conflict between Australia and China in

32 the late 1980s and early 90s. However, human rights have been a less important point in the bilateral relations due to China’s increasing importance economically. Kent has a pessimistic view on China due to her human rights specialist background. Wesley is concerned that Australia’s foreign policy might be affected by China’s economic leverage because the bilateral economic relations are getting more and more interdependent. Wesley is concerned that the rising China would threaten the USA’s interests in Asia thus challenging Australian foreign policy. The Cold War mentality still influences Australia’s domestic politics, thus the rising China often appears in the public media as a debatable topic. Mediansky is concerned about issues created by the rising China and the need of the Australian domestic political competition. Apparently, those that have pessimistic views on China and the bilateral relations are more concerned with issues from the defence aspect and the need of the domestic political competition. Those are mainly the views of classical realism and offensive realism.

Moreover, they consider the USA factor more important than Australia’s national interests. In regard to the bilateral relations, these commentators place less importance on other Australian national interests such as the economic interest, which is also one of

Australia’s most important factors and directly related to Australia’s long term prosperity.

Some pessimists see China as an inevitable world power in the making. Those having pessimistic views on China usually focus on security issues, the divergences of ideological values, the political and legal systems, different cultures, and especially on the perspective of offensive realism. The pessimistic perception includes the security aspect e.g. the China threat perception and Australia’s overt economic reliance on

China. The perception of the China threat includes a potential direct security threat from

China e.g. the potential of China invading Australia (no one would say it openly but implied it e.g. debate on the relevant issue initiated by Ross Babbage since May 2011

(McDowall 2009 p.86; Dobell 2011; Yoshihara 2011 p.3)) and indirect threats e.g. the conflict between the USA and China. If China threatened the USA’s interests especially in the Asia-Pacific region, Australia would feel threatened due to their alliance relationship.

3.1 Power shift: security uncertainty

The future of Australia’s relationship with China had emerged as a point of contention, sparking heated debates. Debates regarding the international power shift, Australia’s position on the international stage, or what kind of attitude that Australia will have to face in the power shift between the USA and China that is in Australia’s best interests have attracted public attention in Australia.

White pointed out the power of world politics is shifting in his article “power shift:

Australia’s future between Washington and Beijing” (White 2010d) and “power shift: rethinking Australia’s place in the Asian century” (White 2011). This power shift is happening in Asia thus generating security uncertainty for Australia. Hugh White’s main point is that a rising China would inevitably challenge the USA’s dominant position in world politics thus challenging the USA’s interests in Asia (Twining 2007 p.79) and the intensified relationship of China and the USA would force Australia to face security uncertainty and difficult choices. Both security and economic relations are

34 national interests. Thus, Australia should try everything to avoid facing this difficult choice although it is very hard to do so according to history.

White has foreseen that the second big trend which would change Australia’s long term security environment was the rise of China (White 2004 p.46). White’s paper on “The

Australian dimension” (White 2004) deemed that the USA-China relationship is the riskiest relationship in the world today” (White 2004 p.46). This “makes the long-term balance of power in Asia deeply uncertain” and “systemic enmity between the USA and

China would be a disaster for Australia” (White 2004 p.46). Hence, White deemed it is imperative for Australian policy to maximize its capacity and efforts to influence the

USA and especially the development of the USA-China relationship (White 2004 p.49).

He emphasized that Australia “should not wait until the crisis erupts, and call for military support comes through, before we let the White House know that going to war with China over Taiwan is not an attractive idea to us” (White 2004 p.49).

White, in his paper, “The limits to optimism: Australia and the rise of China” (2005) has a more conservative view by saying that “the best we can hope for instead is that China and the USA will cooperate in a concert of power, but the USA will be very reluctant to make the necessary concessions to China for that to happen. So there is a real risk of even worse outcomes: Chinese primacy, sustained US-China hostility. Or war (White

2005b p.469).” This is why White try to persuade other academics that the “Concert of

Asia” will be the best solution to settle down the uncertainties (White 2005b p.469).

White deemed in his “negotiating China’s challenge” (2010) that the USA-led order has been wonderful for Asia these past forty years, and China’s new assertiveness raises fears about how China would use any additional power, and how greedy for power it has become (White 2010c). Surely preserving the old order is safer than giving in to

Chinese pressure to build a new one (White 2010c). White concluded in the article that

“no one wins if we all conclude that China’s growing power is something that we must inevitably fear” (White 2010c).

White, in his paper, “The end of American supremacy” pointed out that “a peaceful new order in Asia to accommodate China’s growing power can only be built if America is willing to allow China some political and strategic space” (White 2010a). Such concessions do not often happen. History offers very few examples of a rising power finding its place in the international order without a war with the dominant power, who will not willingly make space for the challenger, as Britain made way for America in the late nineteen century. White asked “will America do the same to China? Should it

(White 2010c)?”

Nevertheless, White’s paper on “Power Shift: Australia's Future between Washington and Beijing” considers Australia’s future between the USA and China. “A Chinese challenge to American power in Asia is no longer a future possibility but a current reality” (White 2010d p.2). Furthermore, due to Australia’s location, the following situation worried White that “the USA can retain its military power in Asia or it can have order, but it can’t have both: China’s rise means that the region might be more peaceful if America settles for a more modest role (White 2010d p.25).” However, if 36 instead “America tries to retain primacy in the face of China’s power, it will provoke a struggle that upsets the region, it would be sacrificing Asia’s peace to preserve its own primacy (White 2010d p.25).”

As the power balance shifts and China’s influence grows, what might this mean for

Australia? Throughout Australian history, Australia counted first on British then on

American primacy in Asia. Now the rise of China as an economic powerhouse challenges American dominance and raises questions for Australia that go well beyond diplomacy and trade - the place of Australia in the world, Australian loyalties and long- term security (White 2010d p.107). White believes that faced with China’s growing power, America can either withdraw from Asia, or share power with China or compete for primacy (White 2010d p.36). Although the 2009 Rudd’s government’s Defence

White Paper defined China as a threat to Australia and the region thus needing to deploy military forces to counteract it, yet, there are also different opinions from academics and professionals. There is an underlying assumption emerging that balancing Australia’s allegiance between the USA and China is “no longer possible” (Harris 2005 p.227;

Garrett 2010a). Hugh White stated that Australia must tell the USA to rescind its role as uncontested leader and allow for “collective leadership” with China (White 2010d p.23,56).

White repeatedly mentioned that keeping the USA primacy in Asia would be the best option for Australia. Australia wants the strongest possible economic relationship with

China and the strongest possible strategic relationship with the USA (White 2011 p.90).

China’s rise would be the most consequential change in Australia’s strategic circumstances in its history. There were three times in Australian history that Australian 37 foreign and strategic policies had been reoriented, yet, this time, it would be probably tougher in the future than it has been in the past. According to White’s presumption if

America stays in Asia, and a powerful China is inevitable, then the best outcome for

Australia would be a Concert of Asia i.e. maintaining peaceful US-China relations / co- leadership (White 2011 p.90; White 2012a); if America left Asia, “a better option for

Australia might be to adopt armed neutrality on the Swiss or Swedish model”, or to form an alliance with Indonesia (White 2011 p.92). White’s opinion is clear that

Australia wants to maximize its benefit from the rise of China but does not trust China to contribute to the peace of the world and region and thus be the status quo power. As

Nick Bisley commented on White’s assessment of Asia’s current and future international order: military power is the key to maintaining regional order, it matters more than economic relations, states are the key actors, also trumping the forces of markets and institutions, and nationalism, alliances and force of the USA are key determinants of international life, which is a classical realism-oriented (Bisley 2011a p.105).

The debate on the topic of “power shift” was conducted at the Lowy Institute in 2010.

The relevant point of view of the debate participants were published in the Lowy’s periodical entitled “the Interpreter” including Graeme Dobell, Hugh White, Malcolm

Cook, Andrew Phillips, Geoff Miller and Raoul Heinrichs etc.

Graeme Dobell agreed with White that “it was the excruciating choice foretold by

Samuel Huntington: the idea of Australia as a torn country” (Dobell 2010). Dobell deemed it is a very difficult problem now for Australia to face by saying that

“Australians still harbour a sense that we and our allies can set the terms of our relationship with China, as we have for two centuries past. As an outpost of the West, we see that as our birthright. But in future this will not be true. We will have to negotiate our relationship with China and we have not quite got used to that idea”

(Dobell 2010).

Malcolm Cook also agreed with White’s Australian identity. Cook deemed that although White’s contention is that “China’s growing power does not threaten

Australia” (Cook 2010; White 2010d p.55), White also called on Australia to approach other middle and lesser powers in Asia to create a regional coalition to convince

Washington that the US should join / establish a collective leadership concert in Asia with China that recognises China’s legitimate international and regional interests, including its increases in defence spending (Cook 2010; White 2010d p.38). Cook deemed White’s most ambitious contention was calling the East Asia – Australia coalition to push Washington to intervene more directly in cross – Strait relations in favour of reunification, to recognise China as a nuclear ‘peer’ and forego any ambitions to use nuclear threats to intimidate it (Cook 2010; White 2010d p.46,60).

Andrew Phillips argued White’s analysis was overly pessimistic. The past four decades of American hegemony partially militates against occasional frictions due to the rising

China and the relative decline of the USA; and it is very unlikely that these frictions will resolve themselves in a sustained great-power confrontation. Phillips named the period of 1870 to 1970 as the ‘benchmark era’. Phillips deemed China was so weak that it faced the risk of imminent dismemberment on several occasions for most of the 39 benchmark era. Since 1970, China’s economic revival has favoured enduring advances in ‘self-strengthening’ and state building (Phillips 2010),

Geoff Miller agreed with White that the topic ‘power shift’ was worth debating and believed as White that Australia could do something to prevent serious tensions between the rising China and the pushing back of the US. Miller deemed White misdescribed the situation and underestimated the extent that the regional countries had already adjusted to the situation and the possible role of multinational diplomacy and institutions in promoting the equilibrium (Miller 2010).

Raoul Heinrichs agreed that it was good to bring down the debate from the ivory tower into Australia’s public consciousness. Yet, Heinrichs had doubts over the practicability of White’s ‘concert’ model. He doubted that White’s assumption of hoping for a concert did not constitute a prudent basis for Australia’s strategic policy because the US might fight for primacy. He deemed that Australia should hedge its bets strategically foremost to secure its own security (Heinrichs 2010a).

White admitted that he was a professional pessimist (White 2010f). White deemed

Australia had hardly begun to adapt to the political and strategic implications of China’s rise and had been in denial about the scale and significance of those implications. White deemed Australia and Asia needed a new order in Asia to keep the peace under the new circumstances. Australia should be active in trying to bring a concert of Asia under which order must be the accommodation of China’s power in ways consistent with the

40 most important interests of others (White 2010f). White’s ‘concert’ was not an alternative to strategic competition, but a way of managing it. White explained that every member of the concert accepted that the costs of attempting to dominate the system outweigh the benefits, so each accepts the best outcome they can sensibly hope for, which is for an equal share of regional power with the others and as long as the others accepted that too. However, if there was not enough trust between concert powers, the system would slide directly into a competition over primacy. The reason why White thought a concert in Asia might be possible was that the huge stake of economic interdependence could avoid competition. White further explained that his

‘concert’ would be quite unlikely to emerge in Asia, but it was one of prescription.

White emphasized that a ‘concert of powers’ would be the best credible outcome for

Australia and the rest of the region (White 2010g).

3.2 The asymmetry of the USA-China-Australia trilateral relations and its effect on Australia

Hugh White has pointed out that in the USA-China-Australia trilateral relations,

Australia might have to face a difficult choice due to the power shift. Malik showed his position and attitude to China clearly by saying that “China is non-status quo, dissatisfied with the current distribution of power in the region” (Malik 2003 p.109).

Malik deemed that “Australia’s relationship with China is shaping up as the toughest foreign policy task in the 21st century” (Malik 2003 p.109). Moreover, “the wide divergence in the two countries’ philosophical approaches to governance, political culture, and values introduces an element of uncertainty and unpredictability in the bilateral relationship” (Malik 2003 p.109).

Michael Wesley deemed “tensions between Australia’s strategic alignment and its economic alignment, along with growing public ambivalence about China’s rise, heighten Canberra’s anxieties about having to choose between security and prosperity in the event of a confrontation between the United States and China” (Wesley 2010a p.230). Wesley deemed the USA security guarantee has kept Australia and the region stable and safe for the last six decades. He emphasized Australia and Asia felt safe and comfortable under the USA’s protection. He deemed that the rising China is challenging the USA primacy in Asia, thus challenging Australia’s foreign policy. Hence, he concluded in the article that the “sudden rise” (Wesley 2010a p.231) of China is challenging three mechanisms—the alliance, trade with US allies, and the multilateral institutions of Australian foreign policy (Wesley 2010a p.231).

Ann Kent worried that “the growing tensions between China and the USA, and China and Taiwan, created shock waves to Australia” “although Australian analysts and media had become increasingly independent of United States views” (Kent 1997a p.173). This reflected some Australian academics’ perceptions on the trilateral relations. Malik pointed out the trilateral relations as that “militarily and politically, Australia follows the USA; economically, Australia has close ties to Japan and wants to extend its economic influence in Asia; culturally, Australia wants to keep her links to Europe”

(Malik 2003 p.129). Does not this explain Australia’s sentiment in the trilateral relations?

Nonetheless, Mediansky pointed out that “prolonged conflict between Australia’s major ally and its major trading partner could create difficult choices in Canberra” (Mediansky 42

1997a p.313). He further explained that “Australia’s continuing trade problems with the

USA illustrate the compartmentalized nature of the alliance” and “policy managers of

Canberra have discovered that being a good ally is no guarantee of friendly treatment in trade issues “(Mediansky 1997a p.313). Mediansky had said that along with the increased capability of China’s South China Fleet, China had assumed a more active role in Australia’s traditional security environment in Southeast Asia and the Southwest

Pacific (Mediansky 1997a p.307). More correctly, Australia’s traditional security environment in Southeast Asia and Southwest Pacific are actually based more on its alliance, the USA’s interests. This is in fact not directly related to Australia’s national interests although this is possibly one of the reasons Australia treats China as a potential threat in the 2009 Defence White Paper, a most serious term for Australia-China relations in Australia’s Defence White Paper. Does this not explain what Australia can expect to get from its most important military ally and how the alliance relations would affect its other national interests?

4. Literature review on economic relations

There are more and more Australian scholars questioning what the real Australian national interests are and how to balance Australia’s political, security and economic interests? Domestically, the Australian Prime Minister, Edward Gough Whitlam, was in power for two years, eleven months and seven days only (5th December 1972- 11th

November 1975). Whitlam’s commission was terminated by the Governor-General, Sir

John Kerr, by regal intervention. He achieved a lot of good things for Australia including the elimination of military conscription and capital punishment, institution of universal health care and fee-free tertiary schooling (university), and the

43 implementation of legal aid programs. However, all these needed economic support!

Subsequently, Whitlam’s commission was terminated due to a flagging economy.

Whitlam remains the only Prime Minister to have his commission terminated in that manner because of the economic factor. Hence, economic interests can affect the survival of a nation or a government. In other words, the relationship with China may affect the survival of Australia governments in some ways.

Most optimistic analysts think China will stay preoccupied with economic developments at home for at least the next two or three decades (The-Economist 2011).

The school of optimistic perception on the bilateral relations mainly perceives China as a pragmatic long term cooperative partner especially in terms of economics. Their optimistic perceptions on China usually views the bilateral relationship from a

Liberalism (Calhoun 2002) angle. Liberalism deems economic interdependence and influential international institutions can help to solve or reduce conflicts between nations.

Scholars who have neutral perceptions on Australia-China relations tend to be neither optimistic nor pessimistic on the issues. They perceive China as a normal and useful country. They advocate treating China according to its merits and its usefulness to

Australia’s national interests. Their perspectives of China are more from the liberal standpoint e.g. Australian economic interests. Scholars of this school base their neutral position on Australia’s national interests, mainly Australia’s economic interests.

Australia wants to be friends with the two big powers (The-Economist 2011).

John Larum sees China as a “tremendous opportunity for Australia” (Larum 2010 p.13).

Stuart Harris, a former Secretary of the Australian Department of Foreign Affairs and

Trade, also deems that “China’s economic reforms …… were seen as opening up opportunities for Australia” (Harris 1995 p.238). Liou also deems “Australian perceptions of rising China are largely positive” (Liou 2007 p.201).

4.1 Increasing common interests

Because of the increasing common interests between Australia and China especially the economic interests, thus there are more opportunities than threat. The improving interdependent economic relations help to improve the Australia-China relationship and avoid conflicts according to liberalism. China is Australia’s biggest trading partner in two ways. China is changing from a developing country to a developed country. China’s industrialization and urbanization need not just huge amounts of resources but also require assistance in many other areas i.e. services to fulfil its development of railways, construction of public facilities and infrastructure, etc. Australia is not just rich in resources but is also advanced in architecture, legal and financial services. Thus

Australia and China have highly complementary economic structures. These complementary structures are common interests between the two countries which create tremendous opportunities for both countries. This is why China is very likely an opportunity rather than a threat to Australia.

Mackerras has even pointed out that “during the 1980s, Australia became closely involved in China’s modernization and developed extensive financial interests in its

45 success” (Mackerras 1997 p.215) by narrating most major events happened in the relations during the period from the 1850s to the mid 1990s and concluded that

“successive Australian Governments for their own reasons promoted China’s importance both in political and economic terms” and China’s status has shifted from being a threat to a friend (Mackerras 1997 p.218).

Larum used a lot of economic data to demonstrate his opinions in his “Into the dragon’s den: Australian investment into China” (Larum 2010) and analysed Australia’s treatment of foreign investments in general and of Chinese investments in particular, and Australian foreign direct investments into China. Larum’s paper was written at the time when Chinalco’s bid for Rio Tinto sparked a heated debate regarding Australia’s treatment of Chinese investments in the Australian resources sector. Larum deemed that

Australia should neither overestimate nor underestimate its strategic importance to

China. Larum also pointed out that although there are still significant regulatory and cultural barriers to investing in China, yet the “impact of the formal barriers should not be overemphasized” (Larum 2010 p.33). Larum concluded that although the ongoing growth of China presents tremendous economic opportunities for Australia, how

Australia treats China would produce the same result in China’s treatment of Australia.

Larum’s “tremendous economic opportunities for Australia” means what Australia has in exclusive mining skills, an advanced service sector and its richness in natural resources are what China needs for its development; what China has is more exclusive cheap labour for manufacturing daily life products compared to Australia and mostly those products are the ones Australia does not make. All these complementary factors are common interests for both countries.

However, some academics e.g. Michael Wesley worries that if China’s economic growth slows down one day, Australia’s economy would also collapse because it relies too much on China (Wesley 2011). Trade with China accounted for 19.7% (=$113.3 billion) of the total Australian trade in 2010-2011 (DFAT 2011e p.5) and contributes

10% of Australia’s GDP (DFAT 2011c; DFAT 2011e). If the bilateral economic relations worsen, what would happen to Australia’s prosperity?

Public polls and academics who has pessimistic perceptions about China showed that some Australians including academics and politicians have no confidence in China.

They would not feel comfortable if China’s power overtook that of the USA. What is the real reason for their anxiety about the rise of China? Is it because the USA will not make the necessary compromises to China to cooperate in a concert of power

(Roggeveen 2010; Heinrichs 2010a) or even less possible, hopes to undermine China’s lead? The resulting deteriorating of the USA-China relations would make Australia face harder and harder choices.

4.2. China’s economic leverage

Michael Wesley worried China might use its economic leverage against the behaviour of other countries in his “Australia faces a changing Asia” (Wesley 2010a p.229) and

“Australia and the China Boom” (Wesley 2011 p.4). This is one of the reasons why some politicians and academics worried that Australia’s economy relied too much on

China. Wesley cited cases of China’s economic relations with Taiwan, South Korea,

Vietnam and Japan to prove his opinion. What Wesley worried is that if Australia’s

47 economy relied too much on China, then Australia’s foreign policy would be affected by China. However, Australia’s situation is very different to these countries. All these countries have border conflicts with China in their history but Australia never has. Thus the comparison between these countries and Australia is not logical.

4.3 Australia’s national interests and Australia-China relations: merits and benefits

Due to the value of the bilateral trade exceeding $100 billion and China taking 25% of

Australia’s exports (Callick 2011), there are more and more Australians treating China as a normal and useful country. Geoffrey Miller in his “convergence and integration in

East Asia-the Australia-Japan security Declaration” argued “why would we further restrict our freedom of action by concluding a security treaty with Japan” because “it is surely not in our interest to even appear to be encouraging actions directed against a country which is of enormous economic importance to us” (Miller 2007 p.6). Miller also reminded the government it should assess Australia-China relations more objectively and avoid mistakes which could destroy this important relationship.

Eric M. Andrews has foresaw in 1995 that “with the economic progress of China and the gradual growth of the Chinese community in Australia, China and Chinese is of immense interest” (Andrews 1985 p.xii). He also pointed out that “the security preoccupations of the Liberals have made more fervent supporters of China on the international scene than Labor, which had originally recognized the People’s Republic

48 of China” (Andrews 1985 p.247). He concluded that “the historian can look forward to more interesting changes in the years to come” (Andrews 1985 p.247).

John Edwards pointed out that Australia’s circumstances had changed because of the relative economic decline of the USA and the increasing significance of China in the region. “China is growing much faster than the USA, and has advantages in population, natural resources, land mass and so forth which Japan, for example, does not have”

(Edwards 2004 p.53). Edwards argued that “whatever may be true of the defence and security realms, the global economic context for the Australian economy is clearly not based on a unipolar global economy or a hegemonic US – indeed, Australia’s economy is not based on the USA at all” (Edwards 2004 p.55). “A new East Asian economy is emerging; one focused on dramatically increased trade within the region and based on

China rather than Japan. It accounts for most of the world’s growth, commands most of the world’s foreign exchange reserves and finances most of the USA current account deficit” (Edwards 2004 p.56). Furthermore, Edwards pointed out that “unlike the Soviet

Union, China is completely immersed in the global economy, and its continuing success depends on the success of the global economy, its rules and institutions” (Edwards 2004 p.59). Moreover, “China is not bothered by Australia’s generally European culture and ethnicity, as some other Asian nations are” (Edwards 2004 p.58). He emphasized clearly that “Australia’s foreign economic policy cannot be based on the USA. The USA is not hegemonic in the global economy, cannot now set the rules, and will be less rather than more able to do so in the future” (Edwards 2004 p.61-62). Edwards had practical experience on global economics and thus, his view on the issue was very pragmatic and based on China’s merits.

Findlay pointed out the economic importance of China to Australia. He deemed

Australia “has benefited substantially from the growth of the Chinese economy at this stage of China’s development” (Findlay 2011). Yet, there are also some challenges for the Australian government.

Indeed, from the above mentioned academics’ articles, both countries have their own merits and these merits can benefit both of them. Australia can supply China’s demand and China can provide a huge market for Australia’s commodities. Thus, trade or the healthy economic relations between Australia and China can benefit both countries.

4.4 Assessing China objectively: cooperation areas and depth

When China’s direct investments in the Australian resources and energy sector increased significantly and the ownership debate intensified in 2008, Drysdale and

Findlay pointed out that this is just another round of history repeating itself. The pattern of this round is similar to that of Japan’s direct investments in the resources sector in the

1970s and in the early days by the North Americans and Europeans (Drysdale and

Findlay 2008 p.1). The only difference in the present round is that the money is from red China. Nevertheless, as they described in their article, “Chinese investment in

Australian minerals is a consequence of the growth in demand in China. That growth in demand has contributed to rising prices in the same way that, in the 1960s and 1970s, the growth of Japanese demand saw a similar rise in Australian and global commodity prices” (Drysdale and Findlay 2008 p.20). Drydale and Findlay also pointed out that the government’s new restrictions on Chinese direct investments has introduced

50 confusion and “much of the confusion seems to relate to uncertainty about how to respond to the growth of Chinese investment interest in the Australian resources and energy sector” (Drysdale and Findlay 2008 p.33). Drysdale and Findlay pointed out the government’s new restrictions on Chinese direct investments are inappropriate. “The issues of Chinese state-ownership of investment, competitiveness in markets and political or security matters are issues that are not appropriately dealt with through additional restrictions and tests on Chinese or other foreign investment proposals”

(Drysdale and Findlay 2008 p.34). They concluded that “uncertainty around these issues already runs the risk of hindering exploration or the industry’s potential and damaging

Australia’s longer term political and security interests” (Drysdale and Findlay 2008 p.34). The mining industry is an area in which Australia and China can widen and deepen their cooperation due to the complementary nature of both countries’ development. China needs raw mining materials for its development. Australia is rich in many kinds of minerals. Cooperation benefits both sides.

Peter Drysdale argued that “China’s economic growth brings with it fundamental change to the global economic and political system and Australia and many other countries enjoy the economic benefit of China’s integration into the world economy”

(Drysdale 2011). This indicated how these academics with an economic background perceived China’s rising. China is not just a huge market for Australian commodities, it also provides enough financial support for the development of Australia’s economy.

Hence, there are many areas where both countries can cooperate.

Ashton Calvert in his paper “The evolving international environment and Australia’s national interest” stated that China’s growing economic, political and strategic weight have been rightly described as the single most important strategic trend in the Asia-

Pacific region. Australia’s bilateral relationship with China shows this. Calvert said

“this is clearly a positive development for Australia” (Calvert 2004 p.73).

John Ravenhill analysed that “the significance of China’s contribution came not just from its own demand for Australia exports, especially of raw materials, but also indirectly through China providing the motor for the regional economy” (Ravenhill

2007 p.194). He said that “China’s rapid economic growth and the more general recovery from the economic crises in the region had two significant effects on

Australia’s trade” (Ravenhill 2007 p.194). One is that China “drove a further redirection of Australian trade towards East Asia, which in 2004-2005 accounted for 56% of all

Australian merchandise” (Ravenhill 2007 p.194); “the second major effect of China’s rapid economic growth was felt in the substantial improvement that occurred in

Australia’s terms of trade” (Ravenhill 2007 p.195). He concluded that “Australia also benefited from the capacity of the Chinese economy to sustain expansion at historically unprecedented rates” (Ravenhill 2007 p.211).

The Committee for Economic Development of Australia (CEDA) is the unique

Australian institution that brings business, university, government and community leaders together in pursuit of Australia’s national development. CEDA published nine research papers under the title “China in Australia’s future” including the Lowy

Institute’s Mark Thirlwell’s “China and the international economy” (Thirlwell 2007), 52

HSBC Bank Australia Limited’s John Edwards’ “the development and significance of the Australia-China economic relationship” (Edwards 2007), Department of Foreign

Affairs and Trade’s Nicholas Coppel’s “China’s economic development and outlook”

(Coppel 2007), Beijing University’s Jia Qingguo and Zhong Tingting’s “towards a mature relationship: China and Australia” (Jia and Zhong 2007), Rio Tinto Limited’s

Charlie Lenegan, Tony Beck, and Malcolm Gray’s “the economic significance of resources and energy trade” (Lenegan, Beck et al. 2007), the Boston Consulting

Group’s John Nicholson and Ben Thompson’s “the services opportunities in China for

Australian business” (Nicholson and Thompson 2007), IMA Asia’s Richard Martin’s

“opportunities in higher value manufacturing and other collaborations” (Martin 2007),

Australian Strategic Policy Institute’s Peter Jennings’s “emerging political and security relationships” (Jennings 2007), and IP Australia’s Ian Heath’s “a perspective on intellectual property protection in China” (Heath 2007). All these research papers analysed China in Australia’s future from different aspects. These researchers are from different backgrounds. They all have different opinions from different angles to observe the same question. The one common view among them is that China is very important to Australia’s future and long term prosperity.

Apparently, scholars who have a neutral perspective on rising China and Australia-

China relations are judging it according to the recent past few decades’ economic figures, in other words, the Australian economic interests. Australian economic interests directly affect Australian prosperity. This is also the purpose of this dissertation which is to advocate that both countries should assess the Australia-China bilateral relations objectively and act accordingly. Better understanding of each other could widen and

53 deepen both sides cooperation in many areas and benefit both sides economic developments and Australia’s long term prosperity.

5. Summary

Concluding the literature review on China and Australia-China relations in the areas of political, security and economic relations, it is obvious that understanding each other’s history, culture, and ideologies are important to the relationship. A relationship has many parts. Any of them can affect the relationship. If authors concentrated on some contents but ignored others, there would be different perceptions and conclusions on the same issues. This is why there are optimistic perceptions, pessimistic perceptions and neutral perceptions on Australia-China relations.

Literatures concentrating on the bilateral political relations deemed that there were no unavoidable conflicts of interest between Australia and China. There is almost no direct conflict historically. Increasing exchanges at all levels can improve understanding and cooperation between the two countries. Although human rights is a point of conflict due to cultural and ideological differences, both countries have tried to improve this issue by diplomatic means. Nevertheless, the Cold War mentality is still a barrier in the bilateral political relations.

Literatures concentrating on the security relations usually had pessimistic perceptions on China and Australia-China relations. They deemed that power shifting generated

54 security uncertainty. The changing asymmetry of the USA-China-Australia trilateral relations is affecting Australia’s foreign policy.

Literatures concentrating on economic relations usually have neutral perceptions on

China and Australia-China relations. Their views are mostly based on Australia’s national interests and the merits and benefits of both countries. There would be wider and deeper cooperation between the two countries if both countries assess the Australia-

China relationship more objectively and act accordingly. Hence, literatures concentrated on different angles of the bilateral relationship have different views and conclusions on

China and Australia-China relations.

Reviewing the existing literatures, the finding is that the international political and security scholars usually ignore economic factors and the economic scholars usually ignore international politics and security factors. This is the weak point of the existing literature and international relations theory. This is also the purpose of this dissertation which is to combine the different aspects to examine Australia-China relations and

Australia’s China policy.

China takes 25% of Australian exports (Callick 2011). Such an important bilateral relationship, in fact, lacks sufficient academic research for the government and

Australians to understand it. Certainly, there is a need of a new thinking to observe the bilateral relationship in the new era. China’s rise is different to any of the previous great powers’ rise. The present international environment is different to the past too. It is a

55 challenge for the Australian government to adjust its China policy to adapt to the new developing environment. If Australia still looks at China through the old lenses of realism, which is usually used to observe a rising power, Australia would be limiting itself to develop the bilateral relationship and thus limiting its own development. Hence, more research on Australia-China relations is necessary. It can help Australia to adapt in the ever changing world of politics, global and regional order. In practical terms, adapting wisely could help Australia’s long term prosperity.

Chapter 3 Theories framework

1. Introduction

Theories studies and applied in Australia-China relations can help Australian governments to understand more about China and better formulate their China policies for Australia’s national interests. Different international relations theories viewed the international relations from different standing points and assessed them from different angles. Using different theories to access the same phenomenon might have different results. Many contemporary international relations academics agreed that not a single one of them can explain the complicated international relations, especially nowadays, in the case of China’s rising (Friedberg Fall 2005; Johnston Spring 2003; Shambaugh

Winter 2004/2005). In the international relations realm, realism, the tradition of power politics or high politics theory, views the international system as a continuous struggle among sovereign countries and dominates the academic study and practice of foreign policy (Calhoun 2002); liberalism, the low politics theory which concerns political economy, environmental issues, international institutions and human rights (Dunne

2005 p.183) are the two main theories applied to assess the political and security relations in this dissertation. Classical international trade theories such as comparative advantages and factor endowments; contemporary international trade theories such as strategic trade policies and national competitive advantages are also applied to assess the economic relations in this dissertation.

2. Theory framework for politics and security

As China grows economically, it will raise the prosperity of the global economy and increase the sum of human knowledge and technology (Yan 2008 p.159). Anti-Chinese sentiments account for only a relatively small portion of the concerns about China’s rise

(Buzan 2010 p.21). Realists are obliged to be concerned about the rise of any power.

Liberals are not worried about the rise of China in itself, but about the political nature of the China that arises (Buzan 2010 p.21).

2.1 Realism:

Realism has been the dominant theory of world politics since the beginning of academic international relations (Dunne and Schmidt 2005 p.165). Unitary, sovereign, self- interested states are the key factors and power and war are its basic currencies. With no international sovereign power, states must help themselves in the struggle for survival.

Peace therefore depends on the balance of power, while foreign policy should be based on the prudent calculation of national interest (Calhoun 2002). Realists are often portrayed as being advocates of an aggressive foreign policy (Dunne and Schmidt 2008 p.178). Australian foreign policy has historically been guided largely by realist tenets, regardless of political parties (Griffiths and O'Callaghan 2007 p.61). For instance, the coalition government’s two white papers, In the national interest (1997) and Advancing the national interest (2003), interpreted international relations through realism’s lens

(Griffiths and O'Callaghan 2007). Of most importance was the predominance of ‘realist’ assumptions in the thinking of key policy-makers and the central theme in foreign policy was an accentuation of bilateralism throughout the Howard-Downer period

(Cotton and Ravenhill 2007 p.7). 58

According to Jackson and Sorensen, basic realist ideas and assumptions are a pessimistic view of human nature; a conviction that international relations are necessarily conflictual and that international conflicts are ultimately resolved by war; a high regard for the values of national security and state survival and a basic scepticism that there can be progress in international politics that is comparable to that in domestic political life (Jackson and Sorensen 2007 p.60). National security and state survival are the values that drive realist doctrine and realist foreign policy. This is why people, who have realist defence backgrounds, usually have pessimistic views on the rise of China.

This is why Australia’s relationship with the USA is Australia’s core interest because the alliance relationship can calm the nerves of these realist defence people. Although

Australia is not threatened by any invaders or by distant regimes that the Americans want to depose, the threats come instead from terrorists in the region and, less directly, from the poverty of neighbouring countries (Firth 2005 p.177). Those are the threats that should be at the core of rethinking how best to keep Australians secure (Firth 2005 p.177). However, due to the military and political alliance relationship with the USA, if

China’s rise weakens the USA domination in the international stage, Australia feels unsafe. Thus, Australian realists are anxious due to the rise of China and the USA’s relative decline. This is why a realist deems that enhancing the military and political relationship with the USA and following the USA to hedge against China is necessary and even these actions might affect Australia’s economic interests. This can explain why Australia followed the USA to enhance its military ally relationships with Japan and India in recent years regardless of angering China.

2.1.1 Structure Realism

There are many different schools of thought in realism including classical and neo- realism. The more applicable type of realism is one of the neo-realisms i.e. in the form of structural realism. This is because the structure of the international system leaves limited choice for states to survive (Mearsheimer 2007 p.71), thus states care deeply about the balance of power and compete among themselves either to gain power at the expense of others or at least to make sure they do not lose power (Mearsheimer 2007 p.71). This more suitably explains today’s international relations especially in the case of China’s rise and Australia-USA-China trilateral relations. It is because that for classical realism, power is an end in itself, yet for structural realism, power is a means to an end and the ultimate end is survival (Mearsheimer 2007 p.72). Therefore, there is a need to balance offence and defence and “this balance is a force for peace”

(Mearsheimer 2007 p.72).

2.1.1.1 Offensive realism

In offensive realism, the ultimate goal of the great powers is to gain hegemony because it is the best guarantor of survival (Mearsheimer 2007 p.83). Hence, offensive realists assume that a rising China will imitate the USA and is likely to try to push US military forces out of Asia in order to become a regional hegemony in Asia, just like the way the

USA pushed the European great powers out of the Western Hemisphere in the 19th century (Mearsheimer 2007 p.83). Therefore, “the USA will work hard to contain China and ultimately to weaken it to the point where it is no longer a threat to control the commanding heights in Asia” (Mearsheimer 2007 p.84). This can explain the USA’s perspective of China, its attitude toward China, its China policy and its recent actions in 60

Asia. Its actions reflect its policy. Its policy reflects its perspective and attitude. From the offensive realist’s perspective, the USA wants to keep its world dominant power and assumes China may become hegemonic for its survival. The term of authoritarian regime has been used by the USA to crucify China. The USA’s behaviour of returning to Asia reflects its constraining China policy (Twining 2007 p.79). The reason why the

USA returns to Asia is for its interests in the region as the USA admits. Yet, the USA has not clearly declared what kind of interests the USA has in Asia. However, from what the USA has done recently, e.g. the USA military exercises with Japan, South

Korea, and India; re-enhancement of its military alliance with Japan, South Korea, and

Australia; agitation of ASEAN especially the Philippines and Vietnam to provoke China in the South China Sea, strengthening of military cooperation with Australia under the pretext of Australian security; one can conclude from these actions that they are for the purpose of constraining China’s rise in order to keep the USA in the dominant position internationally (Twining 2007 p.79). But the result might not be the same as what the

USA wants.

2.1.1.2 Defensive realism

Defensive realism recognizes that an international system creates strong incentives to gain additional increments of power and emphasizes that if any state becomes too powerful, balancing will occur so that it is strategically foolish to pursue hegemony, while offensive realists argue that states should always be looking for opportunities to gain more power and should do so whenever it seems feasible (Mearsheimer 2007 p.75). In contrast to offensive realism, defensive realism offers a more optimistic story about China’s rise (Mearsheimer 2007 p.84). According to defensive realism, although

61 it does not deny that China will attempt to gain more power in Asia, yet, it is hard to see what China gains by conquering other Asian countries (Mearsheimer 2007 p.84). The difference between the rise of China and the other Western states, the USA or Japan is that China’s economy has been growing at an impressive pace without foreign adventures, proving that conquest is unnecessary for accumulating great wealth.

Referring to Chinese history, even when China was the world’s biggest economy before

1880, what China had done was different to these superpowers in the world’s history e.g. Spain, Portugal, Holland, Britain, Germany, Russia, Japan, and the USA. All these superpowers gained their powers through invading other states in order to plunder their wealth. What China had done historically or what China is doing currently is to develop itself and defend its survival. As both David Shambaugh in his “China engages Asia”

(Shambaugh Winter 2004/2005) and Alastair Iain Johnston in his “culture realism strategic: culture and China’s grand strategy in Chinese history” (Johnston 1998) described is that “China does not have a significant history of coercive statecraft”.

Shambaught depicted that “China’s ‘tribute system’, which constituted the regional system in Asia for more than 2,500 years, was characterized by a combination of patron-client ties, economic interdependence, security protection for those closest to

China, cultural assimilation into Confucian customs, political ritual, and benevolent governance” (Shambaugh Winter 2004/2005 p.95). China believes that wars do not secure development and survival. Wars would only deplete a nation’s power. The Iraq war and the war in Afghanistan consumed a lot of the USA’s national power. The

USA’s decline can be attributed directly or indirectly to these wars. Hence, only a stable and peaceful environment could secure space for development and survival.

Many argued that the recent militarisation of China, particularly its Navy, is a reaction to the growing dependence on maritime security e.g. sea lanes through which a great majority of its energy resources, particularly oil, are passing through. According to realism, the supply security that China seeks can only be attained with corresponding political and military power. Chinese leaders fear that as the country changes from relative dependence to one of absolute dependence upon imported oil, national security will be increasingly threatened. Defensive realism predicts that when nations feel their security being threatened, they will pursue ambitious economic, diplomatic and military strategies (Blazevic 2009 p.62). This explained why China advocates a powerful navy to uphold their maritime rights and interests because sea lane control could become a necessity for current and future Chinese oil interests, as well as national development and modernization (Blazevic 2009 p.63). Therefore, if Australia sees China’s development of its navy and its recent activities in South China Sea from the defensive realism perspective and not actively challenge or threaten China’s interests in the region, then Australia does not need to be anxious about whether China will threaten

Australia’s interests.

2.1.2 China’s New Security Concept

China has repeatedly emphasized its development of military force is for its survival and not for seeking power to rule the world e.g. the USA. This can be referred to

China’s New Security Concept (NSC). Thayer’s “China’s ‘New Security Concept’ and

Southeast Asia” (Thayer 2003) and Shambaugh’s “China engages Asia” (Shambaugh

Winter 2004/2005) have annotated that the core purpose of China’s NSC is to conduct dialogue, consultation and negotiation on an equal footing to solve disputes and

63 safeguard peace. The five main points of China’s NSC are: mutual respect for territorial integrity and sovereignty, nonaggression, non-interference in each other’s internal affairs, equality and mutual benefit, and peaceful coexistence. These clearly show that

China is seeking security and peace for its development. China is willing to cooperate with other countries and respect others.

Therefore, structural realism is more suitably applied to explain the current international relations especially USA-Australia-China relations. The USA’s behaviour has been more like offensive realism in the international stage in the recent decades. This explains the USA’s attitude towards China and its deployment of a return to Asia.

Certainly, China would develop its defensive power for security under such circumstances. Australia might have a different China policy if it understands and treats

China through the offensive realist or defensive realist lens and perspectives. Australia as a middle power has to choose carefully for its security in the shadow of the two superpowers. If Australia perceives China from an offensive realism’s perspective, then it would very possibly follow the USA’s path to constrain China, therefore possibly constraining itself in terms of economic development. If Australia treats China’s development through the defensive realism’s lens, it is more likely to be the truth.

According to Chinese history, it might be more pragmatic and better for its economic interests.

2.2 Liberalism:

Liberalism developed in opposition to realism (Richardson 2007 p.52). Its central principles—freedom, (human) rights, reason, progress, toleration—and the norms of constitutionalism and democracy, are deeply embedded in Western political culture

(Richardson 2007 p.43). Liberalism also is concerned about maximizing the total gain for all parties involved and promoting international institutes for world order (Dunne

2005 p.194). These are what China advocates when it cooperates with other countries and Australia advocates by bringing China into international institutes in order to standardize its behaviour.

Although realism in the past has been the dominant influence when writing about

Australian foreign policy, the changes occurring in international politics more broadly have led to liberalism becoming a more important influence (McDougall 2009 p.25).

Liberalism focuses more on economics. The liberal tradition is the free market model in which the role of voluntary exchange and markets is emphasized both as efficient and as morally desirable (Woods 2007 p.332).

Australia has benefited from the general principles of the liberal trading regime.

Australian commentary—of both a pragmatic and a regionalist provenance—has treated the rise of China as an economic and political force since 2001 as largely benign, something that is contributing positively to Australia’s trade and economic integration into the region (Jones and Ungerer 2008 p.190). The Howard government’s second

65 white paper on foreign and trade policy, Advancing the national interest (2003), begins by identifying Australian values with liberalism (Richardson 2007 p.50):

Australia is a liberal democracy with a proud commitment to the core values of political

and economic freedom which underpin our society and our philosophy of liberalism.

The political and economic values that have shaped our institutions and outlook guide

our approach to international affairs.

This indicates that liberalism has an influence on Australian foreign policy. The two prominent issues, human rights and humanitarian intervention, indicated liberalism in

Australia’s foreign policy (Richardson 2007 p.50).

Most realists are pessimistic yet most liberalists are optimistic (Friedberg Fall 2005 p.12). Optimist liberalists deemed that more economic interdependence between two countries means that the groups on both sides will have a strong interest in avoiding conflict and preserving peace (Friedberg Fall 2005 p.12). Australia and China are getting more and more interdependent economically. Six out of the top ten richest

Australians in 2008 were from the mining sector. These groups of vested interests profit hugely from the China trade. They certainly do not want to see conflict between the two countries so as not to affect their vested interests. Thus, those interest groups might have some influence on Australia’s China policy.

Liberalism also believes that international institutions help to improve communication between states, reducing uncertainty about intentions and increasing the capacity of governments to make credible, binding commitments to one another and help to ease or

66 counteract some of the pernicious effects of international anarchy, clearing the way for higher levels of cooperation and trust than would otherwise be attainable (Friedberg Fall

2005 p.13). Australia had a positive influence when China joined the WTO in 2001.

Kevin Rudd wanted to tie China into as many institutions as possible because he believed this would help socialize China into rules based on behaviour (Sheridan 2011).

Australia particularly wants China engaged in big Asian institutions that also include the USA. Australia achieved this strategic goal by getting the USA to join the East Asia

Summit, and getting China to agree to US membership. This was a big institutional play by Australia. Australia believes that if China is constructive, it helps China. Otherwise, it helps the region manage China (Sheridan 2011).

According to Friedberg’s view on liberalism, democratization is a force for peace, and the process of democratization is already well under way in China and economic development creates an objective, functional need for political liberalization (Friedberg

Fall 2005 p.15). Although China is not yet a democratic nation, both politics and economics are becoming more and more liberal in China especially in terms of economics. New Zealand became the first country to recognize China’s market economy status in 2004. Since then, more than 70 countries and organizations have recognized China as a market economy, including Russia, Australia, South Africa, the

Republic of Korea and ASEAN (Xinhua 2009).

Liberalism also has its pessimistic side. Pessimist liberalism, according to the American scholar Friedberg, deems that even if China is an authoritarian regime in transition, it might be better to keep it as it is now; even though the USA is not really a crusading 67 liberal democracy; and ideological differences undermined the factors for better, more stable and harmonious relations (Friedberg Fall 2005 p.33). In other words, even though

Australia, the USA or China has different ideologies and political systems, yet, the differences might not be the barrier in the relationship. Indeed, compare the current ideology in China now and 30 years ago. It is more westernized and open now.

Australia and China are becoming more and more economically interdependent since

China became Australia’s No.1 trading partner in 2008. China’s rising economic power inevitably affects its international relations including Australia-China relations. The highly complementary and interdependent economic relationship between Australia and

China benefits Australia in high economic growth but low inflation (Truss 2006b).

Hence, according to liberalism, interdependence and cooperation could make Australia and China more likely to be friends and partners than competitors and rivals.

3. Theory framework for international trade

International trade theories provide guidance for analysis of Australia-China economic relations. Classical trade theories such as comparative advantage and factor endowments (the Heckscher-Ohlin theory) are closely helpful for this purpose. More contemporary theories such as the theory of strategic trade policies in the 1980s and the national competitive advantage theory of the 1990s will also serve as a theoretical basis for developing the central argument of this dissertation that stresses the combination of state and corporate roles in promoting bilateral trade.

3.1 Comparative advantage

The most important part of the bilateral economic relationship between Australia and

China is the character of complementarity. Both countries’ economic structure indicates that both Australia and China have comparative advantages with each other. Adam

Smith and David Ricardo, who were the most influential of the classical economists in the 18th century, deemed that the wealth of a nation depends on the incomes of the people in the country and what they are able to consume (Harrington 2009). China now is the world’s No. 2 economy and the No. 1 buyer of iron ore. Four of the world’s top

10 companies by market capitalization are from China, including PetroChina Co.,

Industrial & Commercial Bank of China Ltd., China Mobile Ltd. and China

Construction Bank Corp (Hamlin 2010). China’s foreign-exchange reserves exceeded

$3 trillion in April 2011 (Zheng 2011). “IMF says China will overtake U.S. economy in

2016” (Filipiak 2011) if the calculation is based on purchasing power parity (PPP) although its GDP per capita was only the No. 125 in 2010 (CIA 2011).

According to Gionea, the four specific reasons why a country could gain from trade are:

“1). mutual gains from voluntary exchange of goods; 2). increased competition; 3). the division of labour (which reduces costs and increases specialization) and 4). better use of skills and resources in different countries” (Gionea 2003 p.49). All these can explain why Australia and China become more and more economically interdependent. Trade between Australia and China is a voluntary exchange of goods. The Australia-China trade increases competition in both countries. For instance, increasing the Australian service sector in China is intensifying the competition with the local service sector. Yet, it also helps to improve the service industry in China so that it benefits the local

69 consumers. On the Australian side, importing more manufactured products from China, which Australia would not or could not make or which cost more to make in Australia, can benefit Australian consumers too due to their competitive price. In regard to the division of labour, China has relatively cheaper labour for manufacturing daily life products compared to Australia. Comparatively, Australia has more exclusive mining skills, an advanced service sector and is rich in natural resources. Thus, both countries can benefit from trading by using their different advantages in their countries.

Furthermore, every country has a basis for trade and that specialization and trade are more efficient than policies of national self-sufficiency (autarky) (Findlay 1987; Gionea

2003 p.50). According to these terms, both Australia and China have relative comparative advantages with each other. The principle of comparative advantage refers to the ability of a party (or an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product most efficiently given all the other products that could be produced

(O'Sullivan and Sheffrin 2003 p.444; BLS-information 2008). Comparative advantage demonstrates that if a country specializes in products in which it has the greatest comparative advantage relative to other nations and trades those products for goods in which it has the greatest comparative disadvantage, the country’s total availability of goods will be enlarged (Hardwick and Langmead 1990; Gionea 2003 p.50). Adam

Smith wrote in his The Wealth of Nations (Smith 1776-1981), “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage” (Suranovic 2007 Book IV, Section ii, p.12). Comparative

70 advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade (Ricardo 1817). If Australia can produce some set of goods at a lower cost than China, and if China can produce some other set of goods at a lower cost than Australia can produce them, then clearly it would be best for Australia and China to trade their relatively cheaper goods for their relatively cheaper products.

For example, China can produce cheaper electronic goods, toys, clothes, shoes, handbags, etc. due to its cheaper labour. Australia is richer in natural resources and the technique to produce them and has an advanced service sector. In this way both countries may gain from the bilateral trade due to their comparative advantages.

The opportunity cost of any product is what has to be sacrificed in order to obtain it

(Gionea 2003 p.50). It is a calculating factor used in mixed markets which favours social change in favour of purely individualistic economics (Stigler 1955). It has been described as expressing “the basic relationship between scarcity and choice” (Buchanan

1987). The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, swag, pleasure or any other benefit that provides utility should also be considered opportunity costs. A typical example is the Australian iron ore trade with China. Despite the fact that China possesses the largest quantity of iron ore reserves globally (its production in 2010 was

900 mt), the average grade of Chinese iron ore is very low, at around 30% ferric content

(Drysdale and Hurst 2012 p.6), compared with Australia’s iron ore content which is more than 63% on average (Christie, Mitchell et al. 2011 p.3; Mineral-Resources-

Mines-and-Processing-Centre 2012). China’s domestic reserves are largely in the country’s north and west, making transportation to its steel mills, which are mainly in industrialised coastal provinces of the south, very costly at an estimated US$120 to almost US$140 per tonne and even higher at the margin (MacDonald 2011; Mackenzie

2011; Drysdale and Hurst 2012 p.6), but the production costs in Australia including shipping costs to China is only US$28 to US$30 per tonne (Garnaut 2010c). The production costs for Chinese iron ore producers are the highest globally (Drysdale and

Hurst 2012 p.6), imports have thus become a more reliable and cost-effective solution for inputs into China’s steel industry. Therefore, although China does have a big iron ore industry however, none of this is capable of satisfying the rising domestic demand (

王潔 Wang 2010) according to opportunity cost. And while there is a desire for China to develop its own iron ore production industry to avoid heavy reliance on imports

(Garnaut 2009a; 劉曉忠 Liu 2010), the costs of developing a new and big enough commercial iron ore industry in China is astronomical and the effort will take a long time to produce results. This means that China still has to import large quantities of iron ore (王潔 Wang 2010). China’s demand for iron ore is huge for its industrialization and urbanization. Hence, importing iron ore from overseas at the moment for China is more efficient because the relative opportunity costs are cheaper.

Trade with monetary costs is more realistic and simple if production is measured in monetary terms and exchange rates are introduced (Gionea 2003 p.50). Trade with opportunity costs and monetary costs are the two major measurements for international trade. These two kinds of trade measurements clarify the views on Australia and China economic relations, the complementary character of their economic structure, and both

72 countries’ comparative advantages. Australia is best placed to provide primary products while China is best placed to supply cheap manufactured goods according to their comparative advantages.

3.2 National competitive advantage

National competitive advantage was formulated by theorists like Michael Porter and seeks to explain why some nations succeed and others fail in international competition

(Porter 1986 p.11; Gionea 2003 p.58). Competitive advantage refers to any characteristics (skills or capability) held by a company that enables it to achieve lower costs, higher revenues, or lower risk than its competitors. It is a concept used to compare two companies’ abilities to compete in the same business (Gionea 2003 p.58;

Kirchbach 2003). National competitive advantage suggests that the pattern of trade is influenced by six attributes of a nation: 1). factor endowments, 2). domestic demand condition, 3). relating and supporting industries, 4). firm strategy, structure, and rivalry,

5). chance , and 6). government (Porter 1986 p.39; Gionea 2003 p.58). Because of the involvement of governments, politics and policies are instruments for solving national competitive problems.

Nowadays, many countries have their own competition laws and agencies to combat anti-competitive behaviour and protect their interests. In Australia there is the

Australian Competition and Consumer Commission (ACCC), the EU has the European

Commission, China has its own antimonopoly law and the USA has the Federal Trade

Commission. For example, both Chinalco’s US$19.6 billion bid for Rio Tinto and the

BHP - Rio Tinto joint venture in the Pilbara region of Western Australia announced in

June 2009, needed government approval.

3.3 Factor endowments (The Hecksher-Ohlin theory)

Australia-China trade relations can also be explained in terms of the “factor endowments” theory. This theory constitutes a general equilibrium mathematical model of international trade (Suranovic 2006). Relative endowments determine a country’s comparative advantage (Trefler and Zhu 2000). The Hecksher-Ohlin (HO) theory postulates that countries export the products based on their abundant factors intensively

(and import the products using their scarce factors intensively) (Blaug 1992). It is generally agreed that variations in absolute and comparative costs exist because there are uneven distributions in both quality and quantity of factors of production e.g. land, labour, capital between countries (Gionea 2003 p.54). A country’s share of factors of production is referred to as its factor endowment (Bernstein and Weinstein 2002). The opportunity cost of foregoing production in other goods will be lower than the opportunity cost of foregoing production of goods, which make intensive use of the abundant factors (Davis , Weintein et al. 1997). Both Australia and China possess some factors in greater abundance than others.

Australia has traditionally been a major exporter of agricultural products and minerals, reflecting in part its unusual abundance of cropland and mineral deposits. China needs these for its development. Land rents are cheaper in Australia than elsewhere (Gionea

2003 p.55) and labour commands a higher wage rate in Australia than elsewhere; thus

74 the theory postulates that it is the difference in relative factor endowments and the pattern of factor intensities that make Australia export resources instead of cloth. This concept could explain the pattern of Australia-China trade. Australia specializes in producing and exporting primary products e.g. grain, beef, minerals, which make greater use of Australian abundance factors such as land and natural resources. China specializes in producing and exporting manufactured goods, which intensively exploit their abundance factors, particularly capital and labour.

3.4 Limitations of classical trade theories

Although classical international trade theories are useful in analyzing bilateral trade, they have limitations. These concepts are highly theoretical and merely indicate some reasons why certain countries have specialized in the production of certain goods

(Gionea 2003 p.55; Tarmidi 2005). For instance, the theory of comparative advantage in international trade does not take into account a number of considerations such as the difficulty in moving resources, especially the labour force, into the desired industries

(Ho 1996; Gionea 2003 p.55):

 fluctuations in demand, or the collapse of a market in a country’s product, in a situation

of international recession or of unfair (i.e. subsidized) competition;

 artificial limitations (e.g. import restrictions) placed on a product by overseas countries;

 other political restraints. (Gionea 2003 p.55)

Limitations such as these make it difficult to apply comparative advantage theories. For example, while Australia has a comparative advantage in providing iron ore to China,

Australian companies need financial investments to enable them to develop their iron

75 ore industries. However, the Australian government’s attitude to Chinese direct investment in Australian iron ore production is ambiguous. This might mitigate

Australia’s comparative advantage. Peter Drysdale and Christopher Findlay noticed this in 2008 (Drysdale and Findlay 2008) and raised the question that if Australia continues this policy, Australia’s negative image would deter Chinese investors and buyers away to other destinations e.g. Middle Asian countries such as Mongolia, Kazakhstan,

Uzbekistan, Kyrgyzstan, Turkmenistan; South East Asian countries such as Indonesia and Papua New Guinea; some South American and African countries. As a result, more and more Chinese investments have redirected their destinations to the above mentioned regions (Tasker 2011a).

3.5 Strategic trade policy theory

Strategic trade policy theory is relative modern international trade theory and it refers to trade policy that affects the outcome of strategic interactions between firms in an actual or potential international oligopoly (Spencer and Brander 2008). The theory suggests that governments should nurture and protect firms and industries where first mover advantages and economies of scale are likely to be important, as doing so can make it more likely that a firm will build economies of scale and eventually end up a winner in the global competitive race (Gionea 2003 p.57). While selective protectionism had always had support among politicians and their constituents, it is only recently that it has become a legitimate source of debate among economists (Gionea 2003 p.57).

Since this theory emerged in the 1980s, many governments have become interested in supporting particular industries. The strategic trade policy amounts to a re-interpretation of mercantilism and in terms of this new mercantilism, governments play a greater role in trade issues; in other words this brings political factors into play. The classical mercantilism, which emerged in England in the mid-16th century, viewed the economic system in the same way that those who subscribed to the idea of “realism” viewed international relations as a zero-sum game, in which any gain by one party inflicts a loss in another (Ekelund and Tollison 1981). Thus, tariffs, quotas, and export subsidies were emphasized by mercantilism (Smith 1776-1981). In the face of strengthening competition on international markets, the most profitable support is connected with the oligopolistic markets (Chilimoniuk 2003). Most developed countries use strategic trade policies such as export subsidies or taxes on imports and investments, or adjustment assistance subsidies (Hufbauer and Erb 1984 p.1; Carlton and Perloff. 2000). Cases of this occurring include the USA placing penalty tariffs of 35% on China-made tyres

(Kellerhals 2009), 99% on steel oil pipes (SMH 6th November 2009), and 231.4% on gift boxes and ribbons in February 2010 (China Daily 5th February 2010). These can be seen as the Obama government’s strategic trade policies aimed at gaining political support from some benefited domestic industries. At the same time, the European Union began levying anti-dumping duties on Chinese leather shoes on the 5th October 2006 (up to 16.5%). At the end of 2009, the EU governments approved the 15-month extension of this tariff (China Daily 27th December 2009). Australia’s Foreign Direct Investment

Review Board represents its strategic trade policy aimed at protecting ownership of its strategic assets e.g. its resources industries.

All the above-mentioned international trade theories do not exist or are applied in isolation from each other and in fact there is much interconnection and interaction between them. For instance, strategic trade policy and mercantilism sometimes converges in practice. The new wave of protectionism emerging in the USA and EU as a result of the global financial crisis can be seen as a strategic trade policy. Australia has comparative advantages in iron ore production at the moment. However, if the demand from China shrinks, or if China redirects its iron ore import source, or if China’s iron ore industry develops to a greater level, the relevant comparative advantages might be reduced or no longer be an advantage. National competitive advantage also takes factor endowments, strategic trade policy and so on, into account. All these theories have influenced Australia-China economic relations.

4. Summary

There are many existing theories for international relations and international trades.

However, each of them has their advantages and disadvantages. Thus, when applied to the present international relations or trades, it is not hard to find that none of them can easily explain the current international situation, especially Australia-China relations.

Structural realism is more relevant to be applied to explain the bilateral political and security relations. The attitude towards China from lenses of defensive or offensive realist will result in different China policies thus resulting in different Australia-China relations. Accordingly, defensive realism and liberalism are most relevant in guiding the

Australian government to formulate its China policy while the offensive realism is more relevant in viewing the US. However, the “China threat” thinking and Rudd’s White

Paper indicated how Australia treats China through the offensive realist’s lenses.

Liberalism concerns more about economics and thus can explain how economic factors can affect politics and security. Accordingly, the more interdependent is the economic relationship of Australia and China, the more it could improve the bilateral political and security relations. The two countries, which are very different in terms of values, ideologies, political systems, and cultures, might eventually are more inclusive to each other.

In bilateral economic relations, comparative advantages or in other words, factor endowments are the main cause of the increasing interdependency. However, many factors such as the political issues, competitive issues, and protectionism might affect and reduce comparative advantages. The contemporary strategic trade policy and national competitive advantages is how politics can influence economic developments and international trades. Applying these international trade theories to Australia-China economic relations, it is easy to find many uncertain factors which could affect the bilateral economic relationship. In other words, a different China policy would result in a different Australia-China relationship.

Chapter 4 History of the bilateral relations

“We cannot understand the contemporary world unless we understand China, and we

cannot understand contemporary China unless we understand its past” Said Professor

Robert Bickers from the University of Bristol (Bickers 2007).

This statement tells us how important knowing history is to the present.

1. Introduction

History is facts of the past. Studying history can help to foresee the future. China was the oldest continuous civilization in the world and has been a major power for most of its history. Although China suffered a period of decline in the late 19th and early 20th centuries, recent decades have seen a remarkable resurgence of Chinese prosperity and power (Pumphrey 2002). Reviewing history, we can gain some insight into how two culturally and ideologically distant countries have been able to move towards a more pragmatic basis for their relationship (McDougall 1998 p.179). Successive Australian governments have nurtured relations with China despite the divergent ideological principles and the sharply divergent political values that govern each society: Australia is a liberal democracy, and China is ruled by the Communist Party, under a one-party system. In this historical relations review chapter, some references of existing literature will be applied to illustrate the relationship from the beginning up to today’s period to prove that although Australia and China have differences in many areas, interests are always the common factor in the relationship. This historical review argues once again that there is no eternal enemy or friend, only eternal benefits or interests. This chapter also argues that if there were national interests involved, Australia would overcome any barrier to normalize the relations. History is the record of the past. Different scholars 80 viewed history from different angles according to their background. Thus, the history of

Australia-China relations has been classified into different phases by different scholars.

Furthermore, different periods of the relationship have been written by different scholars. Using history chronicles to analyze Australia-China relations, most scholars e.g. (Albinski 1965; Andrews 1985; Harris 1995; Kent 1996a; Mackerras 1996b; Sutter

2002; Chey 2004; Thomas 2004; MacKerras 2004a; Kendall 2005) commonly agreed for the period of prehistory to 1972 to classify it as from fear to a normal relationship.

During this period, Australia’s attitude to China was almost the same or similar to

Britain and USA. This has been narrated by the Australian historian Humphrey

McQueen (McQueen 2008). Australia’s attitude to China was heavily influenced by the

USA not only in diplomatic and security areas, but also on commodities trade

(McQueen 2008). In other words, according to McQueen, Australia must think of the

USA’s complexion to cultivate its diplomatic policy.

From 1972-1989, scholars such as Yahuda (Yahuda 1982), Dunn and Edmund Fung

(Dunn and Fung 1985), Fung (Fung 1986), Hawke (Hawke 1986), Hayden (Hayden

1987), Kent (Kent 1996a), Mackerras (Mackerras 1996b; MacKerras 2004), Garnaut

(Garnaut 1997), Robert Sutter (Sutter 2002), Nicolas Thomas (Thomas 2004), had seen

Australia-China relations move from friendship to constructive partnership although

China was hardly mentioned in Australia’s 1987 Defence White Paper (Kent 1996a p.368).

The arguable and critical period was 1989-1996. This period was seen as one of pragmatism and uncertainties and China had been perceived as a friend by Mackerras and Liou (Mackerras 1997; Liou 2007); as a threat by Kent, Malik and Mediansky

(Kent 1997a; Mediansky 1997b; Malik 2003); and as a normal and useful country by

Harris and Zhang (Harris 1995; Zhang 2007). The bilateral relationship had developed from reluctant engagement to comprehensive cooperation.

From 1996-2007, Hou (Hou 2005) treated this period as the swings of the Howard government. Scholars such as MacKerras (Mackerras 2000; MacKerras 2004), Hanson and Tow (Hanson and Tow 2001), Malik (Malik 2003), Kent (Kent 2004), Hou (Hou

2005), Lee (Lee 2006), Jia and Zhong (Jia and Zhong 2007) saw it as from a balance-of- power approach to one based on comprehensive engagement.

2. From fear to normal relationship (prehistory to 1972)

Australia has a long history of contact with China, but formal relations between the two countries only consolidated more recently. The first Chinese Consul-General to

Australia arrived in Melbourne in 1909, but it wasn’t until 1921 that Australia established representation in China through a trade commissioner. Australia’s first diplomatic mission in China opened in 1941, but closed when the Chinese Communists established the People’s Republic of China (PRC) in 1949. Then Cold War fears of

Communism characterised, and may still characterise, Australia’s relations with China over the next two decades until 1972 (NAA 2010).

2.1 The early years

The history of Australia-China relations can be traced back to 1426, the prehistory of

Australia (Andrews 1985 p.1). The subject of who got to Australia first has been debated by historians since Gavin Menzies published his book 1421: the year Chinese discovered the world in 2002 and this news was featured on an Australian television program in July 2006 (Gateways 2006). In his book, Menzies wrote that Admiral Zheng

He (1371-1435), the famous Chinese navigator, and his fleet circumnavigated the world in the 15th century and visited Australia long before any European explorers. Indeed,

Menzies claims that new evidence and reinterpretation of existing evidence has expanded the areas Zheng He’s fleet travelled to and the great European explorers such as Columbus, Magellan and Cook used maps that were based on those drawn by Zheng

He’s crew in their own exploration of the world (Menzies 2002; Gateways 2006). A well-known archaeologist, Professor Wei Juxian, published a book titled Zhongguo Ren

Fa Xian Aozhou (The Chinese discovery of Australia) in 1960. Wei re-interpreted ancient Chinese classics and mythological texts, and proposed that “the Chinese people went back and forth to Australia from time to time from 592 BC to 1432 AD” (Wei

1960; Gateways 2006). Nevertheless, “Zheng He was concerned with trade and tribute rather than conquest and occupation” (Behm 2009 p.15).

After the European settlement of Australia in 1788, cheap labour was required especially from the 1850s; major sources were several counties in central coastal

Guangdong province in China’s far South-east. These Chinese immigrants often encountered hostility and sometimes anti-Chinese riots in 1860-1861 (McDougall 1998 p.180). Especially, the ‘White Australia’ policy implied a fear of China from the 1880s 83 to the early 20th century although China was a power experiencing a long period of decline in this period (McDougall 2009 p.180). The Chinese were one of the main groups of people against whom the White Australia policy was directed (McDougall

1998 p.180). After Japan defeated Russia in the Russo-Japanese War of 1904-1905, the

Japanese replaced the Chinese as the number one ‘yellow peril’ in Australian eyes and retained this status until the Chinese Communist Party (CCP) came to power in China in

1949 (Mackerras 1992 p.209). However, even up to this day, the China threat or the yellow peril is still mentioned whenever there are relevant issues.

After the Federation of Australia, while for much of the first part of the 20th century

Australia’s relationship with China was characterized by the negative aim of restricting

Chinese immigration (McDougall 1998 p.180), yet, the positive side of the first relationship between Australia and China was low level trading. The main product exported to China was wheat in the 1920s and 1930s. When Australia sent Trade

Commissioners to China in 1935, Australia’s foreign relations were almost exclusively conducted by, through, and for the British Empire (Wesley 2007 p.5). There was also a

Chinese Consul General in Australia as early as 1909 but full diplomatic relations were not established until the Australian Prime Minister, Robert Menzies sent Sir Frederic

Eggleston as Australia’s first Minister to China in May 1941.

2.2 Post-1949 to 1972

At that time, China, Australia and the USA were considerably very uneven in power and influence than they are now. In 1949, Australia and China stood divided by 84 suspicions and objectives defined by the Cold War (Downer 2010). Australia and China were once allies during the Pacific War against the Japanese. However, their relations were not particularly cordial and remained lukewarm at best after the war. When the

Chinese Communist Party (CCP) took over China’s government from Jiang Jieshi on the 1st of October 1949, the Australian government refused to recognize it. Chifley did so because there were pressure from Britain and its own Department of External Affairs and he was strongly influenced by the American policy of containing China

(McDougall 1998 p.181). Chifley was facing an election in a short time in December of the same year. Chifley dared not to be labelled as weak on communism thus, refused to recognise the new CCP government (Renouf 1979 p.314; Mackerras 1997 p.213). After him, Menzies’ government (1949-1966) at first considered recognising the People’s

Republic of China (PRC), largely due to Britain doing so in January 1950 (Mackerras

1997 p.213).

In the Korean War, Australia took part under the UN banner against the Chinese and in favour of seeing the PRC as a threat. In the 1950s, even though successive Australian governments supported the American policy of containing China, they were never as consistently hostile to China as was the USA (McDougall 2009 p.136). In fact,

Australia followed the British “China policy” more at that time. Australia was a country that had subordinated itself to Britain and then the USA in 1949. Britain was the

“mother country”, but the situation during World War II, and specifically the comparatively low priority Britain gave to the Pacific theatre during World War II, convinced Australia to revise its policy (Mackerras 2012 p.2). Britain did recognize the

People’s Republic of China (PRC) although the two governments did not exchange ambassadors until 1972.

When Casey was the Minister of External Affairs from 1951-60, he was known to have held misgivings over the extreme reactions of the American i.e. the USA’s strong opposition to Communist China, resulting in Australian hostilities to the PRC at that time. The dawn in the bilateral relationship was in 1957, at its Brisbane Federal

Conference, when the Australian Labor Party (ALP) first mentioned recognition of the

PRC as part of its explicit policy (Mackerras 1992 p.208). However, the Australian government was still politically and strategically hostile towards China in the 1960s and the beginning of the 1970s. This perception was strongly influenced by the American policy of containing China (McDougall 2009 p.135). Australian policy towards China was essentially in accord with that of the USA, even though Australia was less consistent in the way that the policy was carried out (McDougall 1998 p.186). In the

1960s, Australia became a major wheat exporter to China. However, when Canada recognized the People’s Republic of China ahead of Australia, the Chinese government switched wheat purchases from Australia to Canada (Cook 2007). Thus, non- recognition of the PRC was hampering Australia’s wheat trade with China and diplomatic recognition put Australia in a good position to develop its trade with China

(McDougall 2009 p.138,139). Internationally, Australia sided clearly with the Soviet

Union in its rift with China; and with India over its border war with China late in 1962.

Australia also sent its troops to Vietnam against China in the Vietnam War. The cultural and racial fears of China were exacerbated by the fact that China was a Communist power (McDougall 2009 p.135).

International influence on Australia was that in 1970, Canada and Italy had established diplomatic relations with China. At the same time when the US President, Richard

Nixon, sent his National Security Adviser, Henry Kissinger, to China secretly, the

Australian Labor Party’s leader, Gough Whitlam, visited China as well bypassing the

McMahon Government. It was one of the ironies of history that Whitlam and Kissinger were in Beijing at the same time (Mackerras 2012 p.11), but Australia didn’t know until the US President, Nixon, announced Kissinger’s successful visit and secured an invitation from China for him to visit China. Due to the changed US’s attitude to China,

McMahon’s attitude towards China also made a 180 degree turn and this showed how quickly Australian politicians could change their faces for their interests and powers

(Renouf 1979 p.332). McMahon’s attitude change also indicated that changes in

American policy towards China during the 1970s had an unavoidable influence on the

Australian attitude towards China at that time (McDougall 2009 p.137). However, the total secrecy of Kissinger’s visit meant that Whitlam knew nothing about it and the implication was that Whitlam’s actions were not directly influenced by the US

(Mackerras 2012 p.11). From America’s perspective, Whitlam’s interests were also geopolitical and his China policy reflected a greater degree of independence from US decision-making, and endeavoured to demonstrate that Australia no longer automatically endorsed the pronouncements of the USA (Sutter 2002 p.350).

2.3 The beginning of the normalization of relationship

After Whitlam was elected to lead Australia in 1972, one of the first actions of his government was to establish diplomatic relations with the PRC. Only three weeks to the day after the election, Australian and Chinese ambassadors in Paris issued a 87 communiqué in which Australia recognized the PRC Government as the sole legal government of China and ‘acknowledged’ its position that Taiwan was a province of

China. Soon afterwards Australia’s embassy in Taiwan was withdrawn although unofficial contacts of various kinds continued without objections from the PRC.

Whitlam made it clear from the beginning that though he hoped to build a substantial relationship with China, it would ‘not develop at the expense of Australian relations with other countries’ (Mackerras 1992 p.211). Whitlam’s trip to China as an Australian

Prime Minister in 1973 was the first time an Australian Prime Minister had visited

China. This trip indicated that Australia’s China threat theory had changed and since then, Australia-China relations have changed from fear to normal; and China, from a threat to a friend.

Although Australia’s attitude to China was based on fear and icy political relations before the 1972’s normalization, Australia did not prevent the growth of a very lucrative wheat trade with China. The wheat trade with China started in the early 1960s, but had collapsed in the 1971 - 1972 financial year. Nonetheless, China had provided a market for an increased wheat production, and, although the more anticommunist Democratic

Labor Party criticized the trade, even they could not stop it. Australia also exported other products such as wool to China, but maintained an embargo on certain types of

‘strategic’ goods (Mackerras 1992 p.210; Kent 1996a p.59). After the normalization of the relationship, the Whitlam Government revived the wheat trade and signed the first long-term wheat trade agreement with China in 1973. In the same year, the Australia-

China Business Co-operation Committee was established and this laid the basis for an enormous future expansion of trade. In July of the same year, representatives of the two

88 governments signed a trade agreement which stipulated ‘exploratory discussions for long-term commodity arrangements’. The range of goods exported to China expanded to include not only primary products such as sugar, but also iron ore. Since then, iron ore trade between the two countries has never stopped. According to Australian statistics, two-way merchandise trade has grown from A$113 million in 1973, just after the establishment of diplomatic relations, to A$78.2 billion in 2009 (Australian-

Embassy-China 2010), a 692% increase in 36 years. Thus, Australia has enjoyed a mutually satisfying trade relationship with China since the early 1970s (Ricci 2009).

However, the different value systems have caused hostility especially during the Cold

War period. Nevertheless, this hostility was due to ideological opposition i.e. capitalism vs. communism and the West vs. the East. This type of opposition does not just only exist between Australia and China but in many other countries as well. As Ann Kent had mentioned that Australia has had considerable problems with China in history, however, these problems have not been based upon anything that China has done, but on the nature of Australian ideological and cultural perceptions of what China might do

(Kent 1996a p.366). This is a typical Cold War mentality. The Cold War developed out of longstanding conflict between the Soviet Union and the USA i.e. the conflicts between communism and capitalism. It was problems between the political system, ideology and values. The Cold War, as it is known, became the preponderant influence on Australian foreign policy. Australia moved to strengthen its alliance with the USA.

Those were the problems that Australia and China have. The main difference in ideology between the two countries during the Cold War period was that China insisted on following Communism, yet the Australian governments were against it. However,

89 since the relationship was normalized in 1972, it was realized that the move towards a more open political and trading relationship with China was a priority.

3. From friendship to constructive partnership (1972-1989)

In the 1970s, Australia began to open up to Asian immigrants and government policies began removing official discrimination against non-British migrants, and prohibited all forms of discriminatory treatment on the basis of race and ethnicity. There were 17,601

China-born Chinese in Australia in 1971, accounting for 0.7% of the total population

(DIMA 2001). These figures had declined from 29,907 in 1901 (3.5% of total population) to 6,404 in 1961 ( 0.9% of total population) (DIMA 2001). During the

1970s, the government withdrew the last Australian troops from the Vietnam war, where they were allied with the USA to stop the spread of the “red” communism, and ended military conscription (Sutter 2002 p.348). Under this background, Australia had respectable policies toward China. As some scholars e.g. Mackerras and Pitty stated that the diplomatic convergence between the US and China in the late 1970s created a new geopolitical situation for Australia. It reversed many presumptions of the early time when Australia’s regional relations with Asia were largely shaped by a fear of China

(Pitty 2003 p.49; Mackerras 2012 p.13).

3.1 Economics in command

Since the Whitlam Labor government formally recognized China in December 1972 maintaining good relations with China has been Australia’s bipartisan policy

(Mackerras 2004b p.2). Australia-China relations shifted from fear to friendly

90 cooperation. Diplomatic ties, trade and people-to-people exchanges have since greatly expanded based on the principle of peaceful co-existence (Whitlam 2002 p.330).

Malcolm Fraser’s government continued to build a close relationship with China since it was elected in 1975. A sugar agreement was signed in July 1980, sales of iron ore and the range of commodities sold expanded (Mackerras 1992 p.212). While trade economics provided the cornerstone of the Australia-China relationship (Mackerras

2000 p.185), links have continued to grow in political, scientific, educational, cultural and other fields (Harris 1995 p.244). With China’s ‘open door policy’ allowing a much more multifaceted relationship (Sutter 2002 p.347) and China was, on average, the most rapidly growing among the world’s major economies in the following three decades.

In 1982, 53,000 Australians visited China. It was the third largest grouping behind the

Japanese and the Americans. Australian business people were among the first to seek opportunities as a result of China’s opened door to foreign enterprise (Strahan 1996 p.296). The Australia China Technical Co-operation Agreement signed in October 1981 was one of the first bilateral aid agreements which China signed with Australia

(Mackerras 1992 p.212). In the 1980s, trade partners mirrored Australia’s greater focus on Asia as the balance of world economic power shifted toward the Pacific. By 1984, the volume of trans-Pacific trade exceeded that of trans-Atlantic trade. While European economies stagnated in the 1980s, those of Japan and the newly industrialized economies of East Asia, including China, grew markedly (Sutter 2002 p.351). Although total trade was actually falling before the 4th June Tiananmen Square Incident in 1989, under the Hawke government, Australian exports to China passed the A$1 billion mark for the first time in the 1984 - 1985 financial year. The real economic cooperation

91 started deepening and taking off from the 1990s onwards. Details of the bilateral deepening and interdependent economic relations will be discussed in chapter 7.

3.2 Summit diplomacy

High-level visits between the leaders are so frequent they have now become regular events (Shi 2002 p.337). Up to 1989, three Australian Prime Ministers, including Gough

Whitlam in 1973, Malcolm Fraser in 1976 and 1982, and Bob Hawke in 1987, had visited China. The first Chinese Prime Minister to visit Australia was Zhao Ziyang in

1983, followed by Li Peng in 1988. Fraser’s first China trip unusually came before his first visit to Washington, and he also supported China in the 1979’s action of “teach a lesson” to Hanoi and encouraged a loose coalition of China and Japan with the

Association of Southeast Asian Nations (ASEAN) to oppose the Soviet threat. This approach in turn guided Australia’s closer relations with ASEAN as the principal regional forum for Australia’s interests (Sutter 2002 p.350). Bob Hawke worked hard to develop relations with China, without Fraser’s anti-Soviet passion. Ministerial visits expanded rapidly. Hawke reflected a widespread feeling in Australia, also prevalent in the USA at that time that China was rapidly moving closer to western-backed economic and political norms. These created greater opportunities for cross-cultural understanding

(Strahan 1996 p.299). Numerous Australian universities, colleges, museums, libraries and art galleries maintain links with their Chinese counterparts (Smyth 1995). The result is that China is now the main provider of foreign students studying in Australia

(Gyngell 2005).

In summing up this period, Australia became closely involved in China’s modernization and developed extensive financial interests in its success. Australia had benefited from

China’s policy of economic modernization and openness from the late 1970s. The public polls had been demonstrating a public perception of the lessening of the China

“threat” (Huck 1984 p.163). Australia’s 1987 Defence White Paper hardly mentioned

China, and it was believed that China had ceased to be regarded as a threat to Australia or its strategic interests (Australian-Department-of-Defence 1993 p.2). Australia-China relations in this period were seen as part of the normal relationship with a friendly country in the region (Argall 1989 p.10-11). The 4th June event placed no limits on economic exchanges. In fact, trade was actually falling before the event but picked up slightly after it. While the event had its impact on political relations, its economic impact was minimal or even negligible. Australia could work out what were its main national interests.

4 From reluctant engagement to comprehensive cooperation (1989-1996)

The 4th June 1989 Tiananmen Square tragedy was a test for the bilateral relationship.

Before that, the Australian Prime Minister, Bob Hawke, had built up warm personal relationships with both the Chinese Prime Minister, Zhao Ziyang, and the Chinese

Communist Party General Secretary, Hu Yaobang. Both these two leaders were to fall victims to power struggles in China at that time. Hu Yaobang fell early in 1987 and

Zhao Ziyang fell in May 1989 during major student demonstrations. The reactions of the Hawke government changed the political focus towards China from a close friendship to wariness and condemnation of China for the Tiananmen Square event. The

Hawke government issued a statement on the 13th July 1989 to promote the role of

93 human rights to centre stage for its new framework for Australia-China relations and placed a ban on ministerial visits until the end of 1989. However, some degree of recovery of relations was fairly quick in coming. On the 23rd January 1990, the Hawke government issued another statement about China, easing the blanket ban on ministerial visits to allow case by case consideration. As a result, the Chinese Minister for

Metallurgical Industry, Qi Yuanjing, visited and attended a commissioning ceremony for the Mt Channar iron ore joint project in May 1990. Further recovery of the relations was when Foreign Minister, Senator Gareth Evans, declared on the 26th February 1991 that restrictions on matters such as technical cooperation, agricultural research and exchanges of parliamentary delegations would be lifted due to ‘dissemble improvements in the human rights situation in China’ and because other countries such as Japan, USA, and those of the European Community, had already taken similar measures (Mackerras 1997 p.213).

During this period, China had become an incipient power with the fastest growing economy and the fastest growing military budget in the world (Kent 1997a p.171).

China established relations with all ASEAN states in this period and began negotiating settlements of border disputes with its immediate neighbours (Walters 1995; Kent

1997a p.174). Australia’s greater independence from both the USA and Britain in the post-Cold War world, and its political orientation towards the Asian region was understood as not only valuable to Australia (Cheng 1991; Kent 1997a p.181), but as beneficial to the Australia China relationship. Meanwhile, globally, there was a major shift in focus onto the booming economies of the Asia-Pacific region, which also

94 coincided with a period of downturn in most developed economies. Australia-China relations have become a growing commercialized bilateral relationship.

Economically, China’s growth rate was 9% per annum since 1978, and in 1992 and

1993, at nearly 13%, and these made China the world’s ninth largest economy.

However, in the 1990s, Australia’s trade with China, although registering a continuing increase, failed to achieve the share of the market it enjoyed in the mid-1980s (Kent

1997a p.182). Nevertheless, according to Australian figures, in 1992, two-way trade grew by over A$1 billion to reach $4.2 billion, while in 1993 - 1994 it increased to $5.7 billion (Kent 1997a p.182).

Politically, the Australia - China relationship has been affected by China - USA relations and China-Taiwan relations in this period. In Australia, a secret Foreign

Affairs Department report, circulated in late 1995 and published in the Sydney Morning

Herald, stated that the often tense relations between China and Taiwan constituted a potential security and economic threat to Australia (Editorial 1995; Jenkins 1995; Lane

1995; Kent 1997a p.188). Thus, the management of relations with ‘Greater China’, which included Taiwan and Hong Kong, while remaining within the ‘One China’ agreement, was the most challenging achievement of the political relationship.

High level visits continued in this period. The visit to Australia of Vice-Premier, Zhu

Rongji, in 1992 and Keating’s visit to China in June 1993 helped restored the cooperative relationship that existed before the 4th June 1989. The visit to Australia of

95 the Chairman of the National People Congress, Qiao Shi, in 1994 further enhanced the relations. Australia and China had common concerns on the Cambodian question, the situation in Myanmar, the nuclear problem on the Korean peninsula, and regional security (Kent 1997a p.179).

Although China was perceived in 1990 as having shrunk in world importance due to the

Tiananmen event, yet only four years later it had become the dominant economic and strategic power in the Asia-Pacific region (Kent 1997a p.178). What concerned

Australia was how China would use its increasing strategic influence and it estimated that ‘overall the evidence provides strong grounds for optimism, but with a few residual grounds for concern’ (Australian-Department-of-Defence 1993 p.2; Kent 1997a p.185).

In the 1994 Defence White Paper, Defending Australia, explicit references to China were limited to noting its economic and military power, calling for increased ‘strategic dialogue’ with China, and encouraging China’s participation in regional and other multilateral security discussions (Department-of-Defence 1994 p.91; Kent 1997a p.185). Although economic growth already allowed China to increase its military capabilities, especially of its maritime forces, yet, none would see China as a threat and the White Paper was careful to avoid any such impression (Dibb 1997 p.68). Australia’s role in the region as a middle power was an informal mediator between the USA and

China; and who has close political and military relations with the USA and economic relations with China.

5. The swings of the Howard government (1996 - 2007)

The Howard doctrine and its ‘swing period’ in 1996-2007, from a balance-of-power approach to one based on comprehensive engagement, dominated Australian foreign policy including the China policy (Hou 2005 p.113). During this period, Australia’s actions on the war against terror and the East Timor event have been seen as acting as

‘America’s deputy sheriff’, regional policeman, America’s willing ‘little mate’, a foot soldier tasked with protecting an army general (Hou 2005 p.114). Doubts were raised that the Howard Government had an independent foreign policy (Hou 2005 p.129). In the case of East Timor, the crisis itself did not directly border China. However,

Australia’s intervention implicated Australia’s future role in the Asia-Pacific region and

Howard’s American fellow foreign policy was named as the ‘Howard Doctrine’ by

Chinese analysts (Hou 2005 p.114).

The return of the Liberal-National Party coalition to office after 13 years in opposition brought a ‘confrontational’ foreign and defence policy towards China in its first eight months until the Asia-Pacific Economic Cooperation (APEC) meeting in Manila in

November 1996 (DFAT 1996b; Lee 1998 p.252). A series of incidents accumulated to persuade China to believe that Australia was becoming increasingly hostile to China.

These critical issues were a reduction in Australian aid to China e.g. abolition of Aid

Scheme and Anti-Asia Racism; strengthened ties with Taiwan and Tibet e.g. planned to sell uranium to Taiwan and sending a minister on a trade mission to Taiwan in

September 1996, and Howard meeting the Dalai Lama in September 1996; upgrading of the defence alliance with the USA with an alleged aim of containing China e.g. encouraging the USA to remain actively involved in East Asia (Lim 1996; DFAT

1996a; Lee 1998 p.256; Goh 2005 p.vii). Even the Australian media said that Paul

Keating brought Australia closer to Asia and John Howard took it away again (The-Age

1996).

5.1 A turning point

However, in the APEC forum held in the Philippines in 1996, after the Clinton-Howard meeting, Howard met the Chinese President Jiang Zemin. In the Howard-Jiang meeting,

Jiang invited Howard to visit China and Howard did not raise the issue of human rights

(Dagong-Bao 1996; Wenhui-Bao 1996; AFR 1997; TheAustralian 1997). Howard, after a searing first-year fiasco with China over these above mentioned events, recovered to conduct a strong relationship with China for the rest of his prime ministership after his first visit to China in March 1997 (Hartcher and Garnaut 2009). Howard’s formula was simple: concentrate on trade, everything else – the sensitive issues of Taiwan, Tibet, defence, human rights, democracy, Falun Gong – was shut out. The result was a less troubled relationship and economic benefits for Australia (Hartcher and Garnaut 2009).

The new importance accorded to China in Australia’s foreign policy was neatly symbolized in October 2003 when President George W. Bush and President Hu Jintao visited Australia at the same time, and both were invited to address the Australian parliament. Hu’s speech was the first time anyone other than a US president had been extended this honour (White 2005b p.469). In 2007, Hu Jintao visited Australia in

September for the APEC Economic Leaders Meeting; Chinese Vice-Premier Zeng

Peiyan visited Australia; and Australian Ministers for Foreign Affairs, Trade, Health and Defence visited China (DFAT 2008c).

During the last term of the Howard government, Australia and China maintained a number of bilateral dialogues to advance cooperation while managing the two countries’ differences. Dialogues covered trade and economic cooperation, resources, aid, defence, regional security and disarmament, human rights and consular matters (DFAT 2008c).

Trade ties are a key asset in the relationship. China overtook the USA as Australia’s second largest trading partner in late 2006, and overtook Japan in late 2007 (DFAT

2008c). The Trade and Economic Framework (TEF) signed in October 2003, agreed to commence a free trade agreement negotiation in April 2005, established the Australia

China Joint Coordination Group on Clean Coal Technologies in January 2007. Two- way merchandise trade with China reached $49.9 billion in 2006-07, a 21% increase on

2005-06. China accounted for 14% of Australian merchandise export trade, worth $22.8 billion and signed an historical record LNG (Liquefied Natural Gas) contract (worth $25 billion) in May 2006. China was Australia’s second largest export market for Australian agricultural products with exports worth over $3 billion in 2006 - 2007 (DFAT 2008c).

5.2 Managing thorny issues

Gregory Clark in his detailed examination of Australia’s political relations with China in the mid-1960s had concluded that “there is nothing inherent in the Chinese or their government to indicate aggressive tendencies” (Clark 1965 p.21). China’s history has a less aggressive component and a less militaristic tradition than Japan (Harris 1996 p.18). These quotations indicate that in the Australia-China bilateral relations, there is

99 no incentive of direct conflict so that the relationship is free from this major outstanding problem.

Sensitive political issues in the bilateral relationship include Taiwan and human rights.

The Howard government adhered to a one-China policy but maintained unofficial contacts with Taiwan primarily to promote Australian legitimate economic, trade and cultural interests there. Australia’s and China’s approach to managing differences on human rights in China is constructive and based on dialogue rather than public confrontation. Australia does not recognize the Dalai Lama as a political leader but a spiritual leader and a Nobel Peace Prize winner and invited him to visit Australia several times during Howard’s time in office. But Howard did not see him at his visit in

2007. Australia has no view on the Falun Gong’s beliefs or practices but disagrees with

China’s ban on Falun Gong and its treatment of practitioners.

5.3 Positive side

People-to-people links play a vital role in the Australia-China relationship. The

Australia-China Council (ACC) is the active agency in promoting such links and its current priorities are the Youth Exchange Programs, which encourage young

Australians to develop their interest in China and the Australian Studies Program, which provides funding to Australian Studies centres in Chinese universities. Parliamentary exchanges also provide a means to expand dialogue. Education and travel dominate

Australia’s service exports to China, accounting for around 80% of service exports and had an average annual growth of 23% over the last five years of the Howard government. In 2006, more than 90,287 Chinese enrolments were received at Australian education institutions, while Chinese visitor arrivals surpassed 308,500, thus making

100

China the fifth largest source of international visitors and the visitor figures has been predicted to reach one million by 2015 with an economic value for the Australian economy of $4.3 billion (DFAT 2008c).

China, with a strong economy during the international economic crisis, is very important to Australia’s real national interest as Australia can benefit economically from healthy trade relations with China in search of large quantities of resources to maintain a good level of economic growth (8%).

During Howard’s terms in office, Australia remained ambivalent about what the economic, military and diplomatic rise of China meant to the region and Australia, and

Australia had been hesitant to enrage China and eager to position itself to benefit from its rise (Lee 2007 p.612). In his last term in power, Howard had confidence in three key points in regard to relations with China: 1). China’s economic growth would be sustained and increasingly favourable towards open trade policies; 2). Tensions in the

Taiwan Strait could be managed effectively, thus avoiding conflict between Taiwan and

China and thus avoiding conflict between the USA and China, and ultimately Australia and China; 3). Australia had earned enough respect and influence in the region not to have to choose between closer relations with China and its on-going alignment with the

USA (Hanson 2005 p.571; Parkinson 2005). As Howard’s Foreign Affairs Minister,

Downer, had asserted Australia did not support a ‘containment policy’, which was led by the USA, and emphasized that Australia’s China policy “had its own dynamics” and this as Hugh White had stated was “the single largest divergence in perception

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Australian have had with the USA ever since they became allies” (Leaver and Sach

2006 p.628; Sheridan and Walters 2006; Walters 2006).

What had made Howard change his attitude towards China was Australia’s economic interests and prosperity. The Howard’s government stance in seeking strongly to be included in the inaugural East Asia Submit (EAS) process, from which the USA was excluded, was interpreted as that it was prepared to pursue a regional agenda independent of the USA (Kelton 2006 p.232). During this period, Australia’s attitude to

China and its China policy could be manifested in its White Paper: the 1997 White

Paper on foreign policy argued that China would “remain one of Australia’s key relationships” (DFAT 1997 p.63); the 2000 Defence White Paper described China as

“the country with the fastest growing security influence in the region and as an increasingly important strategic interlocutor for Australia” (Department-of-Defence

2000 p.37); and the 2003 White Paper on foreign policy with the argument that

“China’s rising economic, political and strategic weight is the most important factor shaping Asia’s future”…hence, “building a stronger partnership with a growing and more influential China is an important objective in Australian policy” (DFAT 2003 p.79).

6. Summary

The forty years of history are a brief flash in the course of history, yet, remarkable achievements in mutual understanding and cooperation in various fields have been made between the two countries. Relations between Australia and China are free from

102 major conflicts of strategic interests and direct confrontation during this time. From existing literature, it is not hard to find that Australia and China did not encounter historical hostility, although ideological opposition was immense during the Cold War period. They are relatively free from major outstanding problems, such as territorial disputes. This has greatly helped the consolidation of the bilateral relations at all levels.

For instance, institutionalized summit meetings and extensive people-to-people contacts are typical of friendly nations.

Although the bilateral political relations were not trouble-free yet, even in the historical low point of the bilateral political relations, e.g. before the normalization of diplomatic relations, right after the Tiananmen event and before the Howard government’s China policy swing, issues were not caused by any outstanding problems. Although Australia was in fear of China before the normalization of diplomatic relations, nevertheless,

Australia’s recognition of China was a win for national self-confidence because it was pursued in the face of American disapproval (Evans and Grant 1991; Harris 1996 p.19).

Before the Tiananmen event, bilateral political relations were “over exuberant” (Harris

1996 p.9), but the tragedy pushed the political relations down to the lowest point.

However, not long after the event, links with China continued to grow in the political, economic, scientific, educational, cultural and other fields (Harris 1996 p.10 ). At the beginning of the Howard government, his government’s China policy was to follow the

USA to contain China (Hou 2005 p.115). However, after a searing first-year fiasco with

China over Taiwan, soon after Howard’s first visit to China, he concentrated on economic interests and the result was a less troubled and strong bilateral relationship

(Garnaut 2009h).

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The image of China in Australia has improved markedly over the last four decades from one of an ideological competitor and threat to a strategic economic partner (Cook 2007).

Australia’s attitude to China has progressed from fear to friendship then towards strategic partners. Although there were different periods and characteristics of

Australia-China relations, yet, the thirty-eight years history of Australia-China relations shows Australia’s China policy was affected by Australia’s dual characteristics: as a

European country in culture and an Asian country geographically. Even Australia’s

China policy will inevitably be within the framework of the Australia-US security alliance (Harris 1998; Shi 2002 p.340), and many of the differences between China and the USA on a broad range of issues will persist, making ups and downs in the relationship unavoidable. Australia’s national interests, sometimes more on economics and sometimes more on politics, will be the main factors affecting the relationship.

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Chapter 5 Political challenge to bilateral relations

1. Introduction: deepening bilateral exchanges at all levels

The world’s politics are inevitably transforming from the USA-dominated unipolar to a multipolar order. What does this change mean to Australia? The USA has been

Australia’s most important political and security alliance since World War II. Australia feels safe and comfortable under the USA’s protective umbrella due to a similar political system, culture, ideology and values. Australia was willing to follow the USA.

On the other side, China’s importance to Australia’s economic interests is irreplaceable at present and the near future. China has overtaken Japan to become the world’s 2nd biggest economy in 2010. Safety and prosperity are the two most obvious objectives of its government’s foreign policy (Bell 1997 p.55). Political objectives have to be grounded in the competing political value systems of society and those value systems are usually grounded in ideology, history and sometimes religions (Bell 1997 p.55).

Australia and China have very different value systems, both in ideology and history.

Thus, Australia’s political relations with China are a big test for its government as to whether Australia has the ability to adapt to the transforming world pattern? Australia’s ability manifests in how it responds to China’s rise sensitively and sensibly. Whether

Australia can secure and maximize its national interests from this transformation manifest in whether Australia can act well in balancing its political, security and economic interests.

The political relations of Australia and China have not been defined by any major direct confrontation and have been relatively free from conflicts of strategic interests. The

105 foundation of their cooperation is their mutual benefits from a substantial trade relationship. Trading links benefitted Australia during the global financial crisis and saved Australia from following the economic misfortunes of the USA and Europe.

Moreover, there is no getting around the fact that the two countries are in the same region. Successive Australian governments have nurtured relations with China, despite the divergent ideological principles that govern each society. Although China will always matter to Australia more than the other way around, yet China has made it clear on many occasions that it cares what Australia and Australians say and do (Mackerras

2000 p.197). In other words each country is important to the other.

What is worth mentioning is the beneficial mixing of economic complementarity and improving diplomatic relations, which was captured by the Prime Minister, John

Howard’s invitation to China’s President, Hu Jintao, to address a special joint sitting of the Australian Parliament in October 2003 (Cook 2007). Certainly there are divergent issues due to ideological differences and human rights issues with the Dalai Lama problem being the most pronounced. Nevertheless, Australia’s China policy had not been excessively affected by these issues (even after the 1989 Tiananmen event) because a good relationship with China serves Australia’s vital interests (Firth 2005 p.261).

The large number of high-level visits underscores the strength and importance of the bilateral relationship. Since Gough Whitlam’s visit to China in 1973 as the first

Australian Prime Minister to do so, high level visits from both sides have been very

106 frequent and these visits have helped to bolster mutual understanding and cooperation.

For example, since the election of the Labor Government in November 2007, the former

Governor-General and current Governor-General, the Prime Minister (twice) and the

Treasurer (twice) have all visited China, as have the Ministers for Foreign Affairs

(twice); Trade (seven times); Infrastructure, Transport, Regional Development and

Local Government; Innovation, Industry, Science and Research; Climate Change and

Water (twice); Agriculture, Fisheries and Forestry (twice); Tourism, Resources and

Energy (four times); and Sport. The Speaker of the House of Representatives also led a

Parliamentary delegation to China in April 2010 (DFAT 2010c).

Furthermore, the increasing non-government exchanges i.e. Chinese tourists and students have become the main source of Australia’s tourism and education industries.

According to a survey that was commissioned by PATA (Pacific Asia Travel

Association) Travel Intention, Australia is officially on top of the travel charts in China and more than half of all travellers from China were intending to holiday in Australia

(Lane 2010). There are also an increasing numbers of Australians who have travelled or are working in China too. All these travels and visits have helped to increase the understanding and maintaining of the flourishing bilateral relations.

2. Australian middle power diplomacy toward China

Australia made quite a rapid progress from being a minor power to a middle power after

World War II but would be unlikely to become a great or superpower due to its population size (Bell 1997 p.58). In the decades of the Cold War, the archetypical middle power in international politics was seen as a country with a preference for 107 multilateral cooperation (Croucher 2009). The characteristic dilemma of middle powers is that they neither have the degree of economic and strategic clout that would enable them to safely walk an independent path in a world of more formidable powers, nor do they have so little clout that their presence or absence makes no substantial difference to strategic arrangements (Bell 1997 p.59). After the dissolution of the Soviet Union, the

USA has become the only superpower after the Cold War. Australia, as a middle power, has political and security protection from its ally, the USA, it thus felt safe and comfortable in the USA dominated unipolar world order until the rise of China.

Especially since China has become the biggest trading partner of Australia, how

Australia manages its political relations with China, whose value system and ideology are very different, manifests how Australia manages the triangular relations with the

USA and China.

Middle power is a term used in the field of international relations to describe states that are not superpowers or great powers, but still have a large or moderate influence and international recognition. All middle powers display foreign policy behaviour that stabilizes and legitimizes the global order, typically through multilateral and cooperative initiatives (Jordan 2003 p.165). Australia’s long flirtation with its ‘middle power’ status began with the election of John Curtin’s Labor Government in October

1941 (Ungerer 2008a p.26).

Middle powers pay special attention to trade in conducting foreign policy. Furthermore, analysing the changing attitude and policy of the Howard Government towards China since 1996, Hugh White indicates that “Now we are closer to Beijing than to 108

Washington, China is seen as the key to Australia’s economic future” (Liou 2007 p.201). At the same time, the Howard Government upgraded China’s priority in

Australian foreign policy to the highest level to no less than that of the United States

(Liou 2007 p.202).

The current Australian foreign policy is based on a desire to be a ‘middle power’, which balances a triangular relationship with the USA and China by maintaining a military alliance relationship with the USA, while at the same time enhancing its economic partnership with China. Although China has repeatedly emphasized that it does not want to challenge the current international order in which the USA is the dominant power, nevertheless a rising China will inevitably change the current international power structure to some degree, and this in turn challenges Australia’s role as a middle power.

From Australia’s point of view: how should a middle power interact with a major power from which it differs in almost every respect? From the Chinese point of view the question is: how can cooperation be maximized, while recognizing the differences contained in the bilateral interactions?

According to Ungerer, a comprehensive middle power strategy would contain five key elements (Ungerer 2008b p.266-269):

1) Australia would need to maintain a greater degree of independence within an

alliance framework (Ungerer 2008b p.266).

Australia has increased economic relations with China to an unprecedented level of interdependence but this interdependent economic relationship has not yet developed to

109 be strategic partners. The bilateral relationship is still far away from a military or political alliance relation. On the other side, Australia does successfully maintain a military alliance with the USA but Australia’s degree of independence within the alliance framework is limited. In most cases, Australia followed the USA and was used like its tool even though it might damage Australia’s national interests, e.g. Australia put itself in a dangerous environment by joining the War on Terror with the USA. As

Heinrichs said, the most shrewd option for Australia is to curb its involvement in the emerging rivalry between China and the USA in order to minimise its own exposure to the risks and costs of confrontation (Heinrichs 2010b p.3). Thus, it would be better for

Australia to adjust its foreign policy accordingly to comply with this condition to become a middle power.

Kelton deemed Australia should carefully manage its relations with its ally, the USA

(Kelton 2008 p.181). It is because Australia’s close relationship with the USA does not guarantee that Australia can also have good relations with other countries. In contrast,

Australia may get in trouble due to its close relationship with the USA. The Bali bombings, which occurred on the 12th October 2002, was a typical example of this.

Australia should avoid hurting its national interests by angering China due to too close a relationship with the USA. Kelton (2008) deemed that the pressure for Australia to manage its relations with the USA well will increase as questions arise over the USA’s economic ability to sustain its aggressive intervention and reconstruction posture. Thus, a greater degree of independence within the alliance framework would be better for

Australia’s national interests.

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2) Australia has demonstrated a strong preference for the collective security

principles embodied in the United Nations Charter (Ungerer 2008b p.267).

In the case of East Timor, Australia did show that it has fulfilled this requirement to be a middle power. But in other regions such as the Middle East and Middle Asia,

Australia’s influence is very limited. Thus, Australia still has a certain distance to cover to be a world-wide middle power. A collective power such as the UN Security Council is attractive to some Australian policy-makers because this can amplify Australia’s voice on the international stage. However, Australia’s bid for a non-permanent seat at the UN Security Council, as Heinrichs deemed, it would put Australia in the awkward position of having to choose between the USA and China on a range of contentious global issues and this does not cohere with Australia’s core strategic interests (Heinrichs

2010b p.2).

3) A middle power strategy suggests a strong regional focus (Ungerer 2008b

p.267).

It is true that Australia has shifted its strategic focus from the West to the Asia-Pacific region in recent decades. However, Australia’s domestic politics are an internal barrier for it to integrate into the region. One theme in the history of Australian foreign policy is about Australia’s identity as a nation, and its relationship with Asia (Firth 2005 p.44).

Before 1965, and even today, there are still some politicians defining Australia as a country for white people, with ties to another white country on the other side of the world, an island of Europeans from which Asians in particular were to be excluded

(Firth 2005 p.45). Australia began to lose its reputation in the Asian region as a bastion of white racism only in the 1970s and 1980s, with the abolition of the White Australia 111 policy and the influx of immigrants from Asia. In retrospect, Whitlam, can be seen as the prime minister (1972 - 1975) who broke the spell of fear which had inspired the policy of forward defence; and Fraser, as the prime minister (1975 - 1983) who did most to open Australia’s doors to refugees from the region, thus beginning the gradual transformation of Australia from a nation which thought of itself as an isolated

European outpost to one capable of assuming a partly Asian identity (Firth 2005 p.45).

A key relationship for Australia in the Asia-Pacific region is that with China. This relationship provides a specific example of what the “geography versus history” theme has meant for Australia (McDougall 1998 p.179). Developments in the Australian relationship with China during the previous three decades were in essence a continuation of the major themes established after 1972 (McDougall 1998 p.186). This applies to the political, security, and economic aspects of the relationship (McDougall

1998 p.186). Without a doubt, a positive and stable relationship with China can improve

Australia’s regional focus due to China’s position in the region.

4) The middle power tradition requires that states maintain a high degree of

defence self-reliance (Ungerer 2008b p.268).

However, Australia is heavily relying on the alliance with the USA in term of defence.

No Australian government, regardless of which Party, has ever seriously considered emerging completely from under the comforting wing of a Great Protector from abroad

(Firth 2005 p.43). Michael Wesley has told the public that “Australia cannot even protect itself in a war” at the workshop of “meeting the China challenge” at the

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University of Sydney in March 2010. If that is the case, how can Australia have a high degree of defence self-reliance? As Heinrichs said, the most appropriate response for

Australia was to maximise its own independent strategic weight as a hedge against the spectrum of unpalatable possibilities from the most serious risks arising from Asia’s power transition (Heinrichs 2010b p.3). If Australia could do so, it would improve

Australia’s capacity, give Australia more confidence and latitude to dissent from

American policies that do not coincide with Australian interests and better enable

Australia to defend itself from any hostile major power (Heinrichs 2010b p.3).

5) An effective middle power strategy for Australia will need to include a stronger

commitment to the construction of new partnerships (Ungerer 2008b p.268).

Australia seems lacking in its ability to construct new partnerships. In the case of China, the relationship still seems ambiguous (Andrews 1985 p.247) and can hardly be defined as a partnership although the economic relationship of Australia and China has developed to an unprecedented level. In other words, although China is the biggest trading partner of Australia, yet the general relationship with China can hardly be deemed as a partnership. This is because Australia only wants the Chinese market but finds it hard to be part of a political and military alliance with China.

Hence, according to Carl Ungerer (2008), Australia still has a lot of ground to cover to be a real middle power in the international arena. In other words, Australia “needs to be realistic about the limits of its influence” although it is a middle-sized country

(Heinrichs 2010b p.2). During Rudd’s time in office, Australian foreign policy was

113 dominated by Rudd’s Middle Power policy ambition. Rudd’s speeches on “Leading, not following” (Rudd 2006b) and “Middle power diplomacy: Advancing Australia’s interests” (Rudd 2008) clearly showed Australia’s ambitions and pursuits in the international stage. However, if Australia can be more independent in alliance relations with the USA, then Australia can get more freedom to construct an advisable relationship with China, and its ambition to be a middle power might be achieved easier. National security has always been the prime objective of Australia’s foreign policy (Horner 1997 p.73). The pursuit of national welfare is central to all countries’ foreign policies and economic well-being is essential for exerting national power

(Ravenhill 1997 p.92). One is the prime objective of Australia’s foreign policy; the other is central to Australia’s foreign policy. Which one of them is more important is hard to define absolutely. For middle powers, the search for national economic wellbeing and the maximization of economic sovereignty becomes as important as traditional concepts of security (Cooper, Higgott et al. 1993 p.171). Australia as a middle power, how to play the balancing game between the two superpowers, which one is its prime objective and which is central, is really a test of its wisdom. In pursuit of middle power diplomacy, the Rudd Government was refashioning Australia’s political culture and Australia has to realize it is a middle power and adjust its international role accordingly (Grant 2008).

3. Political / ideological thorny issues

Australia has a slightly different view on China than that taken by many western governments. This might be due to its geographical location and multicultural society character. The Australia’s China policy framework considers not only the direct 114 bilateral relationships but also the regional and global context of these relationships

(Harris 1996 p.8). China’s size, its permanent membership of the United Nations

Security Council, its nuclear capacity and its economic growth would make China the major power in the region and this is the basis of the Australia’s China policy (Harris

1996 p.8).

Australia believes that to bring China into the international society is a better way than hostility to regulate China’s behaviour. Hence, Australia has actively supported China’s participation in various international organizations such as the International Monetary

Fund, the World Bank and the WTO because Australia believed it would gain from

China’s economic reforms and from bringing China more fully into a rules-based global society (Harris 1996 p.8).

China has repeatedly emphasized its rise will be a peaceful rise. The words “peaceful rise”, a term coined by a senior party theoretician, Zheng Bijian, in 2003, reflected a

Chinese concern to be seen as a country open to the world as its economy rapidly expands and as it seeks to develop mutually beneficial relations with other states

(Osborne 2006). Without good relations with other countries, a peaceful rise would be hard to achieve.

China’s economic development, once seen as a threat by Southeast Asians is now generally regarded as an opportunity. The fact is reflected in what is already a substantial increase in trade between the region and China and has led to the conclusion

115 of a framework agreement on free trade between ASEAN and China in 2002, which came into effect in 2010 (Osborne 2006). Can this be an example to Australia that cooperation with China can turn the negatives into positives on concepts and for actual relations? Moreover, the British ambassador to China observed in 1986 that “the

Chinese leadership spends more time thinking about the Australian relationship than about any country other than the USA, the Soviet Union and Japan” (Garnaut 1996 p.71; McDougall 1998 p.187). This indicates that China takes the relationship with

Australia seriously. Nonetheless, the cultural and political differences present many diplomatic challenges to Australia.

3.1 Political anchorage to withstand challenges

Although Australia was ideologically opposite to China during the Cold War period, nonetheless, even during the Cold War years, China was a significant market for

Australian wheat, wool and coal (Ravenhill 1997 p.103). Stuart Harris (1996) in his

Australia-China political relations 1985-95: Fear, friendly relations or what concluded that “an aggressive approach based on fear of China” (Harris 1996 p.19), which meant to view China as a threat, would be a dangerous policy. It is more rational to seek friendly relations and to maintain a friendly attitude towards China, rather than one based on the fear of China. This is the most sensible framework for Australia’s political relations with China (Harris 1996 p.19).

However, some Australian politicians worry that Australia’s deepening economic relations with China might cause side effects to Australia’s national interest i.e. political

116 anchorage to withstand challenges in some way. The arrival of China on Australia’s economic horizons has been remarkably rapid. One obvious effect is that the gravitational pull of China’s economy is reshaping the Australian economy. Gravity models in international economics theorise that the volume of trade between the two countries is an increasing function of the size of their economies and a decreasing function of the distance between them (Head 2000; Wesley 2011). The side effect of the gravity model, as Albert Hirschman described, might be that where one country is able to change the economic structure of another to make it highly complementary to its own, a relationship of profound dependence and influence is created (Hirschman 1945 p.22; Wesley 2011). In other words, relationships of asymmetric specialization which have developed between China and its neighbours including Australia, might be dependent on their trade with China resulting in increasingly economic restructuring to maintain trade profile. Although this result of a conscious strategy is highly unlikely to be designed by China as some Australian politicians think, however, they worry that if

China had another political incident, e.g. the 1989 Tiananmen tragedy, what would happen to these highly economic dependent countries?

Another issue, which some Australian politicians also worry about is that China would use economic leverage to influence countries in the region. At the present stage, there is very little evidence that China has tried to use this leverage (Wesley 2011). But there are signs that more subtle forms of leverage may be at hand. For example, Australia and

New Zealand are basically direct competitors in exporting dairy products to China and

Australia is competitive with Brazil and some other resources-rich countries and regions in supplying raw materials to China. China will have the option of deciding to give any

117 country more favourable trading terms. This could have a major impact on other competitive countries. This is the so called side effect of the China boom, which could have significant regional effects with implications for Australia. In other words, these

Australian politicians are worried that China would possibly use economic leverage to affect Australia’s foreign policy. However, at the present stage and for the near future, it is not possible to say that Australia has moved into an asymmetric relationship with

China as it is still far below the level of trade dependence on one’s economy as compared with Japan in the 1970s and 1980s. Indeed, not just targeting China, Australia should also keep a watching brief on economic relationships with other countries e.g. the USA, the EU, Japan and India for signs that economic leverage is being used.

3.2 Human rights issue

Human rights has been the principal issue in the strategic and political arena (Mackerras

1996a p.1) and central to the conduct of Australia’s foreign policy in the post Cold War era (Kent 1996b p.57). Thus, human rights issues inevitably come to occupy a place in

Australia - China relations especially since the Tiananmen event. After the active monitoring period from July 1991 to December 1992, the human rights position in

Australia-China relations became the quiet diplomacy and constructive engagement phase from early 1993 to the present (Kent 1996b p.61).

The idea that individuals have rights as human beings which they ought to be able to claim against their own governments was established in the 1948 Universal Declaration on Human Rights, but little progress was made towards claiming these rights for all

118 people until relatively recently (Brown and Ainley 2005 p.208). During the Cold War, human rights were often treated as a strategic bargaining tool, to be used to gain concessions from or to embarrass the states of the East (Brown and Ainley 2005 p.208).

If taking the idea of human rights to its logical conclusion, e.g. the realists, the world would end up with endless wars of humanitarian intervention as states invaded each other on the grounds of human rights’ violations (Firth 2005 p.245). Furthermore, the realists think that when countries talk about human rights, they do so merely as a cover for other interests i.e. national power (Firth 2005 p.245). Thus, it is not surprising that the United States has been active in promoting human rights in China (Mansbach and

Rafferty 2008 p.206).

However, there are serious conceptual problems involved in widening the notion of

‘rights’ to incorporate economic and collective right. The Western origin of the doctrine of rights has also come to be seen as problematic in the post-colonial era, as the proponents of ‘Asian values’ have stressed (Brown 2005 p.689). Asian societies have different cultural backgrounds from those of the West (Langlois 2007 p.346). They refused to follow “the same standards of human rights and democracy as those asserted by the West” (Langlois 2007 p.346) and stress cultural relativism vis-à-vis the universal application of a Western philosophical concept (Langlois 2007 p.346). The former

Prime Minister of Malaysia, Mahathir Mohamad, argued that “the norms and precepts for the observance of human rights vary from society to society”. Lee Kuan Yew, the architect of modern Singapore, saw an excess of democracy leading to “undisciplined and disorderly conditions which are inimical to development” (Firth 2005 p.264). This

119 section will try to adopt a critical but balanced analysis on this important issue in

Australia-China relations.

Regarding the human rights issue, Australia and China seriously differ in their approaches to realizing human rights. At a general level the difference between

Australia and China over human rights’ issues relates to the fact that Australia follows a

Western liberal approach whereas China is influenced more by its Confucian and

Communist traditions (McDougall 1998 p.193). China is akin to some Asian societies and has its own definition of human rights. For the Chinese the notion of human rights includes, in addition to its political and civic rights components, economic and social rights that highlight the role of the state. More importantly, economic and social rights are necessary conditions for political and civic rights. China defines human rights in the

Chinese way that “for any country or nation, the right to subsistence is the most important of all human rights, without which the other rights are out of the question”, and that “human rights are essentially matters within the domestic jurisdiction of a country” (Firth 2005 p.261). China has a political culture reliant upon ethics rather than law, moral consensus rather than judicial procedure and benevolent government rather than checks and balances (Wang 1993 p.493; Kent 1997a p.171). Due to different cultural and historical backgrounds, countries like China and Australia have different views on the human rights’ issue (Shi 1993 p.5; Kent 1997a p.181). Thus, China is opposed to “any country making use of the issue of human rights to sell its own values, ideology, political standards and mode of development” (Firth 2005 p.261).

Nevertheless China agreed to maintain a human rights dialogue with Australia.

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Australia is not silent but hardly outspoken due to dependence on too much trade with

China to risk confrontation on the human rights’ issue (Firth 2005 p.263).

Since the formulation of diplomatic relations with China, both countries have so far handled the dispute in a sensible way and tried not allowing this issue to upset the overall relations. Although human rights figured in the bilateral dialogue from 1984 onwards (Harris 1996 p.11), human rights played only a little part and were seldom raised by either country until the Tiananmen event in 1989 (Firth 2005 p.260). During the period of the Tiananmen event, concern was for keeping the relationship with China safely on course for Australian trade and investment, and the official response was more muted than Hawke’s tears suggested (Firth 2005 p.261).

Although, China has been criticized for its human rights record, however, in 1994,

President Clinton severed the link between China’s human rights policies and the USA-

China trade, admitting what was already evident, that the USA’s political and economic interests outweighed human rights concerns (Mansbach and Rafferty 2008 p.207). One of the USA’s former Ambassador to China, Stapleton Roy, a China expert, was reported in 1994 as saying that human rights in China were better now than at any time in the last

150 years (Harris 1996 p.12). Australia’s human rights policy dialogue with China has experienced China’s attitude towards human rights changing from “confrontation” into

“cooperation” (Kent 2001 p.584). On the 5th October 1998, China signalled a changing attitude to human rights by signing the International Covenant on Civil and Political

Rights (ICCPR), which contained specific obligations prohibiting torture (Kent 2007

P.208). With the addition of the new Chinese worker representation on the International 121

Labor Organisation (ILO) Governing Body in June 2002, it appeared that China had succeeded, for the time being at least, in its goal to achieve representation, status and influence in the major international committees monitoring the implementation of human rights (Kent 2007 p.215).

Australia’s stance on human rights issue have differed significantly from the USA

(Thomas 2004 p.6). Australia, unlike the USA’s stance for punitive and shaming actions, has been active in monitoring China’s human rights status via human rights delegations and passive monitoring or human rights dialogue (Kent 2001 p.611).

Australia plays the game of human rights diplomacy as much as China (Firth 2005 p.263). Its approach to human rights in China is constructive and based on dialogue rather than public confrontation. China is too important to Australia (Firth 2005 p.263).

For Australia, human rights dialogue is a practical approach to pressure the Chinese government for improvement. Two-way trade was hardly affected. Nevertheless, whether this method is enough has been a major debating topic between human rights activists and state officials. The former argue that there are still scores of political dissidents arrested by the Chinese leadership for their anti-government actions.

However, the latter has pointed out the general popular satisfaction of China’s policies.

And through their soft method of pressure Australia has helped secure the release of dozens of Chinese political prisoners. Moreover, as Bob Hawke, the previous Australian

Prime Minister, who cried on Australian Television because of the Tiananmen tragedy, said comparing the China of 1978 to the China of today, "it is an immeasurably much more different society, much more liberal, people have more freedom" (TheAustralian

2009).

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Although the American administration links human rights and trade when treating

China, their actual monitoring on China’s human rights is focused on civil and political rights in China rather than on the economic and social conditions which were theoretically a central concern of Australia’s human rights policy (Kent 1997b p.174).

Australia believed that trade and human rights were quite separate from each other and would not allow human rights concerns to interfere with trade and other economic relations (Mackerras 1996a p.4). Australia has been active in attempting to persuade the

USA to separate human rights issues from other issues in China-USA relations

(Albinski 1996 p.46-48; McDougall 1998 p.195). Thus, in the Australian-Chinese relations too, Australian governments would not want its economic relations affected by human rights issues, thus affecting Australia’s prosperity.

3.3 Dalai Lama Problem

Before the mid-1980s, this was hardly an issue at all in China’s foreign relations

(Mackerras 1996a p.3). Since the late 1980s, the Tibetan issue has always had some impact on Australia-China relations. After major demonstrations took place in Lhasa in

September and October 1987 and the Americans had charged the Chinese with breaches of human rights for these events, Tibet has been a running sore that is affecting

Australia-China relations. The political role of the Dalai Lama is a complicating factor in the bilateral relations. China sees the Tibet issue as China’s internal matter not a human rights problem (Dorling 2011a). Thus, any kind of intervention from Australia e.g. intervention in the name of human rights on the Tibet issue is unacceptable for

China. China is willing to negotiate with the Dalai Lama only on the precondition that he recognise Tibet as an integral part of China, whereas Australia’s policy is to support

123 negotiations without any precondition (MacKerras 2004a p.24). For a neutral third party, what Australia says is contradicting what it does regarding the Tibet issue.

The differential treatment accorded to the Dalai Lama in Australia showed how his factor has affected the Australia-China bilateral relations. From his first visit in 1982, there have been eight visits to Australia up to 2011. Brief details of the history of the

Dalai Lama’s visit to

Australia are as follows (Dalai-Lama-in-Australia 2011):

1st 1982 At this time the Dalai Lama was largely unknown on the world stage. There was little if any interest politically in his tour and he was tour largely ignored by politicians, police and media. He stayed in a student’s private home and the organized body was a loose affiliation of Buddhist groups and supporters in Australia. 2nd 1992 This was a greatly different event. The Dalai Lama received the Nobel Peace Prize in 1989 and his status on the world stage had tour markedly increased. He was stunned by the enormous crowds. Suddenly he was besieged by media requests, the police provided some tactical support and politicians flocked to meet him. 3rd tour 1996 The Dalai Lama gave public talks in Canberra and Melbourne on this visit.

4th tour 2002 The tour was extremely large and complicated and the security and political issues were massive. The Dalai was protected by the Federal and State police on this trip. Yet, neither the Prime Minister, John Howard, nor the leader of the Opposition, Simon Crean, met him this time. 5th tour 2007 This was the most massive of the tours. Despite extensive opposition from China, both the Prime Minister John Howard and the leader of the Opposition Kevin Rudd met the Dalai on this tour. 6th tour 2008 The Prime Minister Kevin Rudd did not meet the Dalai on this tour, thus avoiding offence to China. 7th tour 2009 Again, Rudd did not meet him on this tour.

8th tour 2011 This time the Dalai appeared on Australia’s television program such as “Masterchef” but none of Australia’s important and powerful politicians met him. Source: (Dalai‐Lama‐in‐Australia 2011)

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From the above table, it is not hard to tell the difference as to how the Dalai Lama was treated in Australia before and after he got the Nobel Peace Prize in 1989. He was largely unknown before that time and ignored by politicians, police and the media

(Dalai-Lama-in-Australia 2011). His political value had not been discovered then and thus, not been used by the politicians for their political interests until he received the

Prize.

However, after the Dalai Lama received the Nobel Peace Prize in 1989, his status on the world stage had markedly increased. Then his official visit to Australia in May 1992 had a big change. He was besieged by media requests and politicians flocked to meet him (Dalai-Lama-in-Australia 2011). His high-profile allowed him to visit Perth,

Adelaide, Melbourne, Hobart, Canberra, Sydney and Brisbane on this trip and yielded him a strong political advantage. Although the Prime Minister, Paul Keating and the

Foreign Minister, Evans tried to keep a very low profile over the Dalai’s visit, their meeting with the Dalai had allowed the Tibetans to set up a Tibet Information Office in

Australia (MacKerras 2004a p.24). China’s reaction to this visit had been seen as very little fuss (MacKerras 2004a p.24).

The Dalai Lama revisited Australia in September 1996, and the public and media attention was considerably greater than it had been even in 1992. Although China adopted a far stronger stand against the visit, yet, John Howard still decided to meet him at the last minute and told the public on the Nine Network on the night before that “it was never on for the Prime Minister of Australia not to meet the Dalai Lama”

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(Mackerras 1997 p.224). For Australia, Tibet is a bipartisan issue, with the Howard’s

Coalition government taking much the same position as its predecessor, Keating’s

Labor government (Mackerras 1997 p.224). The Dalai Lama’s 1996 visit to Australia definitely damaged relations much more than the 1992 visit had done. China condemned the visit and the meeting with both the Prime Minister and the Foreign

Minister as a far higher profile including accusations of interference in Chinese domestic affairs. This was seen by some Australian scholars that Chinese nationalist feelings over Tibet and other issues concerning sovereignty had intensified since 1992

(Mackerras 1997 p.224).

When the Dalai Lama revisited Australia in May 2002, the Australian government was more cautious. It barred the Dalai Lama from a planned speech at the Parliament House.

Instead he addressed the National Press Club and garnered a considerable amount of favourable publicity in the media. Both Prime Minister Howard and Foreign Minister

Downer managed to be abroad during the visit so avoiding official ignoring of the Dalai

Lama. This visit seemed lower in profile than the earlier ones. This indicated that

Chinese influence had grown in Australia since 1996 and Chinese diplomatic efforts had to some extent paid off (Mackerras 1997 p.224).

The fifth revisit in May 2007 was the most massive of the Tours. The Dalai Lama had visited Perth, Melbourne, Geelong, Bendigo, Canberra, the Sunshine Coast, Brisbane and Sydney in this trip. He met the Prime Minister Howard, and the leader of the

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Opposition, Rudd. It was met with extensive opposition from the Chinese government

(Dalai-Lama-in-Australia 2011). China protested through diplomatic channels.

In his sixth tour in June 2008, he met with over 100 community and political leaders and 80 members of the Australian and Chinese Media (Dalai-Lama-in-Australia 2011).

He also met Immigration Minister, Chris Evans, who was then acting Prime Minister because Rudd was away in Indonesia, and briefly met Foreign Minister, Stephen Smith.

In December 2009, Australian Opposition leader Abbott met the Dalai Lama when he revisited Australia. In July the same year, there was a group of Australian MP’s and senators including the Independent senator Nick Xenophon, the Greens senator Sarah

Hanson-Young and the Labor MP Michael Danby, who had travelled to meet the Dalai

Lama in the Indian hill town of Dharmsala (Callick 2009; Sara 2009).

In his eighth tour in June 2011 to Australia, Prime Minister Gillard did not meet with the Dalai Lama but the Opposition leader Abbott did meet again.

Howard met the Dalai Lama twice as prime minister but not in parliament or at The

Lodge although he had addressed the US Congress and the European parliament. Rudd met the Dalai Lama when he was opposition foreign affairs spokesman in 2007, and also attended an informal parliamentary reception (Callick 2009). Rudd had managed

127 not to meet the Dalai Lama when he visited Australia during Rudd’s term in power to avoid offending China.

On every occasion when the Dalai Lama visited Australia, the prime minister had pressures from China and domestic political competitions. Regarding the domestic political competitions, if the prime minister did not meet the Dalai Lama when he visited Australia, it would be seen that the prime minister has succumbed to China’s pressure or pro-China. For China, China does not see the Dalai Lama problem as a human rights issue. It is territorial sovereignty issues and the maintenance of national unity is at or near the top of priorities of the state. This is why China feels so strongly on the subject of Tibet. In line with this view, Chinese leaders do not look kindly at separatist movements anywhere (Mackerras 1997 p.224). If Australia disagrees with this and insists on adding its own ideological value on China, or uses the Dalai Lama as a political tool to constrain China, then this political dispute would not be easy to avoid between the two countries. Also because of this factor in the bilateral relations, the

Dalai Lama acts more like a politician than a pure religious leader.

4. Diplomatic challenges: Rudd’s interaction with China (In office: 3rd December

2007 – 24th June 2010)

Kevin Rudd was the first Australian Prime Minister with a Mandarin-speaking background. He was also the first Western country leader who has Mandarin skills and understands the Chinese culture more than any other Western leader. When he became

Prime Minister, he made much of his Mandarin-speaking skills suggesting they would

128 boost Australia’s relationship with Chian (Jakobson 2012b). Thus, he won the favour of the Chinese-Australian voters in his election. A lot of people presumed that Australia-

China relations would have a new and better chapter under Rudd’s government especially since China had become Australia’s most important trading partner.

However, relations were not boosted during his time, first as Prime Minister and then as

Foreign Minister.

Kevin Rudd, before he became Prime Minister, said “A strong, stable and secure partnership between Australia and China for the 21st century will be good for China, good for Australia, good for the region and good for the world” (Rudd 2006a), yet, he regards the maintenance of strong relations with the USA (which he calls Australia’s

‘great friend and ally’) as an essential counterpart to an evolving relationship with

China (one of Australia’s ‘great friends and partners’) (Ayson 2008 p.4).

Bilateral relations had been an icy point in Rudd’s time. The Australia-China relationship has been in free fall from the highest point during Howard’s last term in office to the lowest point in Rudd’s time. In the end, Kevin Rudd turned out to be the

Australian Prime Minister who was elected by the highest number of votes but has the shortest term in office in Australian history.

4.1 Pressure from the USA

Pressure from the USA on Australia during Rudd’s time was not overt but still visible from time to time. The impact of the USA on Australia’s policy towards China is 129 dependent on the way in which the USA-China relationship evolves (McDougall 2011 p.2). In other words, if the USA-China relationship is going well, Australia will be happy and easy to deal with both its ally and business partner. If the USA-China relationship had any disputes, Australia would be stressed from the USA when dealing with China. Overt attempts to constrain a rising China would be counterproductive

(McDougall 2011 p.9) thus the pressure from the USA on Australia’s China policy is covert. In the event of confrontation between the USA and China, there might be pressure on Australia to support the US, thus leading to deterioration in Australia’s relationship with China. If Australia took McDougall’s suggestion that the alternative for Australia would be not so much to support China as to distance itself from the confrontation (McDougall 2011 p.10), what would Australia’s China policy be then? Or was this in fact what Rudd had done while he was in power? There are also significant elements of cooperation between the USA and China. They are not necessarily rivals or adversaries. This was why McDougall suggested that this situation also needed to be factored in when considering the USA dimension of Australia’s various options in relation to China and avoiding sudden changes in policy as much as possible, otherwise a high risk of confrontation with China is likely and would be counterproductive

(McDougall 2011 p.12-14). These explained the covert pressure on Rudd’s China policies and why he had a different attitude toward China. For example, Rudd seemed opposed to an open alignment of the USA, Japan, India and Australia in containing

China, but expressed strongly adversarial views towards China on some occasions according to the Wikileaks’ expose. Therefore, the pressure from the USA on

Australia’s China policy is covert, but indicated by Australia’s vacillating China policy.

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4.2 Rudd’s perception and attitude toward China

During the visit of the Chinese Olympic torch relay to Canberra in 2008, which attracted a mix of supporters and protestors, Rudd made it clear that Australian security officials had complete primacy over their blue-tracksuited counterparts from China

(Ayson and Taylor 2008 p.9). Rudd’s attitude showed that he did not understand very well how much China cared about its first Olympic torch relay.

Rudd’s government set up barriers for Chinese direct investments in the Australian resources sector. The Chinese direct investments in the Australian resources sector started at a similar time to the global financial crisis in 2008. Therefore, Rudd’s government indirectly led to the failure of the Chinalco deal with Rio Tinto (Grubel

2011). From some Australian government documents revealed by WikiLeaks, they showed that Rudd’s government did want to curb Chinese investments in the resources sector (Grubel 2011; Dorling 2011c). Nevertheless, only one month after the collapsed of the deal, Rio Tinto’s first representative, Stern Hu, was charged in China for commercial crimes he had committed for six years in China.

Furthermore, the introduction of a 40% resource super profits tax by Rudd’s government had been seen as Australia joining an unwelcome club of countries that have breached international investment treaties and angered foreign investors including

China and the ASEAN group of states (Cathro and Luttrell 2010). This resource super profits tax directly led to Kevin Rudd being kicked out of office and the Labor Party nearly lost its leadership of the Australian government at that time.

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Rudd’s attitude towards China might be analysed through the meeting report released by WikiLeaks in December 2010. The report was written by a US diplomat on the 28th

March 2009, about a confidential cable detailing a 75 minute lunch meeting in

Washington on the 24th March 2009 involving US Secretary of State, Hillary Clinton,

Kevin Rudd and a coterie of senior advisers and officials, including Australia’s ambassador to Washington, Dennis Richardson, and national security adviser Duncan

Lewis (Maley 2010). At that time, Kevin Rudd was still the Australian Prime Minister.

In the meeting, Rudd responded to Clinton’s question of “how do you deal toughly with your banker” by warning the USA must be prepared to “deploy force” if everything goes wrong (Flitton 2010). On Rudd’s plan for an “Asia-Pacific community”, Rudd said the goal was to curb China’s dominance. He wanted to ensure this did not result in “an

Asia without the United States” (Flitton 2010). What did Rudd get from Clinton in return was that Mrs Clinton has since publicly praised him for his advice on China and credited him for the USA’s decision in 2010 to join the East Asia Summit (Flitton

2010). Nevertheless, the Opposition foreign affairs spokeswoman, Julie Bishop, told

ABC Radio that this was not an appropriate piece of advice for Rudd to give the USA and she wondered whether this remains the view of the Labor government (Massola

2010).

4.3 Cases in which Rudd turned the bilateral relationship to the lowest point: Rudd’s speech at Beijing University, Australian 2009 White Paper, Rabiye Qadir issue

During Rudd’s time in power, there were three cases in which Rudd had turned the bilateral relationship to its lowest point since 1989.

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4.3.1 Rudd’s speech at Beijing University

Some have suggested that the seeds of discontent grew when Mr Rudd gave a speech to students at Peking University in 2008, in which he raised the issue of Tibet. ‘‘Australia, like most other countries, recognises China’s sovereignty over Tibet, but we also believe it is necessary to recognise there are significant human rights problems in

Tibet,’’ he said. ‘‘As a long-standing friend of China, I intend to have a straightforward discussion with China’s leaders on this.’’ This was reportedly deeply resented by

Chinese President Hu Jintao (Ricci 2009). The riots in Lhasa in March 2008 were the most serious incident in the region for decades (CCTV 2008). In March 2008, rioters attacked Han and Hui Chinese passers-by and burned down Han- or Hui-owned businesses and many places were attacked and burned to the ground. These included: 2 middle schools were burned (Independent-Online 2008); 18 innocent civilians and 1 police officer were burned or stabbed to death in the riots (People-Daily 2008); 382 civilians were injured, 58 of whom were critically wounded; 241 police officers were injured, 23 of whom were critically wounded; 56 cars were damaged or burned; dozens of public security officers and scores of armed police were injured; 10 in serious condition; rioters set fire to over 300 sites; burned down over 200 residential houses and shops; many Hui Muslim beef shops were burnt, also stationery shops, banks, a wholesale market at Tsomtsikhang (one of the most important Tibetan markets, where many shops are owned by Han Chinese and Hui Muslims); more than 150 rioters had turned themselves in to police and handed over what they had looted (CCTV 2008). For such a tragedy, Rudd’s attitude to it definitely affected the Chinese view of him.

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Rudd criticized China’s Tibet policy when he visited China as Australian Prime

Minister. He has chosen to do so was due to his Mandarin speaking background. If he did not do so, international political pressure from the West would intensify domestic political pressure on him. If he did not attack China’s human rights issue strongly as a

China expert when he visited China, he would be seen as pro-China and the attack on his existing nickname, the “Manchurian candidate”, would be much more intensified from the Opposition.

4.3.2 Australian 2009 White Paper

The Australian Defence White Paper that drew attention to China’s military modernisation and Australia’s response to it, has possibly added to the strain. The Rudd government classified China as a potential threat in the 2009 Australia Defence White

Paper. This was the first time that the Australian Government did so after the normalization of bilateral relations and at this time Australia’s national economic interests are unavoidably bound with China. Details are in the next security chapter.

4.3.3 Rabiye Kadeer issue

Rudd’s government granted an exiled Uighur leader, Rebiya Kadeer, who has been classified as a terrorist by the Chinese government, a visa to visit Australia during the

Melbourne Film Festival and broadcast her film in the festival. Rebiya Kadeer was classified as a terrorist by China because she organized a riot in Xinjiang and almost two hundred innocent men, women and children were killed in the riot in July 2009. But

Prime Minister, Kevin Rudd, refused the request, saying: ‘‘The Government I lead is

134 one where Australia makes decisions on who it issues visas to or not”. Based on these facts, Australia has been seen as “a champion of an anti-China chorus and siding with terrorists” in China (Sainsbury 2009) and all Chinese film directors, including those from Taiwan and Hong Kong, boycotted the Melbourne Film Festival.

4.4 Post Rudd time

After Julia Gillard ousted Kevin Rudd as leader for less than three months, Gillard was re-elected as a leader of a minority government and named Rudd as foreign minister on the 11th September 2010. On the following Monday (the 13th September) after Rudd became Australia’s Minister for Foreign Affairs, Rudd went on a trip which included

Afghanistan and the USA and talked with officials in Washington and spoke at the UN

General Assembly while in New York from the 18th - 25th September (Rae 2010). Thus, it would not be surprising that the Gillard government’s China policy will continue in

Rudd’s direction since Rudd became Gillard’s foreign affairs minister. Rudd’s first trip as the Minister for Foreign Affairs was to the USA to show his loyalty.

The four cabinet ministers and another former prime minister - Rudd, Wayne Swan,

Craig Emerson, Chris Evans and Paul Keating - converged on Beijing to visit the

Chinese leaders in early November 2010 (Garnaut 2010a) to show Australia’s sincerity and willingness to patch up the bilateral relations which were damaged by the Rudd government.

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Immediately the Gillard government insisted Australia’s relationship with China will remain strong (Massola 2010). The Australian Attorney-General, Robert McClelland insisted that Australia has a very strong relationship with the Chinese government and the people of China, a strong business relationship, strong diplomatic relationships, strong government-to-government relationships, and that arrangement will continue

(Massola 2010). The Labor backbencher, Doug Cameron, also defended Rudd stating that China would understand there was concern around the world about its rise and capacities and this is a natural reaction (Kelly 2010; Massola 2010). The Tasmanian

Independent MP and Iraq war whistleblower, Andrew Wilkie, went a step further by saying that he was wondering the degree to which Kevin Rudd was fair dinkum about

China. It is “just an inconceivable notion” that “the prospect about using force against

China or supporting the USA using force against China just because it might be sitting slightly outside the international community from time to time” (Kelly 2010).

Nonetheless, this view of Rudd can also explain why his government’s White Paper depicted China as a potential threat to Australia. Rudd’s attitude to China could do great long-term damage to Australia’s continuing prosperity (Toohey 2010). This is also why Hugh White worries that “Rudd’s remarks to Clinton were signalling a false choice” (Walker 2010).

Rudd has arrived in a Manchu muddle. Before he was ousted by Julia Gillard, the bilateral political relationship was at its lowest point again. After Gillard became the

Australian Prime Minister, Australia has been doing a slightly better job of grappling with China’s complexity than when Rudd was in the position. Treasury has set up a new

China Unit and Rudd handed $30 million, mainly to the Australian National University,

136 to study how China sees itself in the world (Garnaut 2010a). Moreover, four cabinet ministers and another former prime minister: Rudd, Wayne Swan, Craig Emerson, Chris

Evans and Paul Keating visited China in the first week of November 2010 and has shown more sincerity in avoiding diplomatic accidents (Garnaut 2010a). Although Rudd had been toppled from the prime ministership and with Gillard being re-elected in 2010, still Rudd was appointed as Gillard’s Foreign Affairs minister. It is assured that

Australia’s China policy in Gillard’s time would be a continuation of Rudd’s policy toward China.

Australia has played an important role in bringing the USA into the East Asia Summit when Rudd was the Foreign Minister. The sixth East Asia Summit in October 2011, featured two new members, the USA and Russia (Jakarta-Post 2011). Tension between the USA and China spilled over into the EAS as the two countries jostled over how to handle competing claims to the South China Sea (Blanchard 2011). The EAS stage had become a stairway for the USA’s strong return to Asia. No matter how the USA polished its words, its purpose was obvious – to return to Asia and Australia has played a large part in helping the USA with this. The question remains whether Australia’s attitudes to the USA and China in this regard are beneficial to its national interests while retaining the foundation of cooperation. The USA has been excluded since the first meeting (14th December 2005) inciting criticism from some American commentators.

Some American academics questioned if it was the result of China’s influence (Malik

2006 p.4; Romberg 2006) . Romberg (2006) in his “The East Asia Summit: Much ado

About Nothing So Far” and Malik’s (2006) “more discord than accord” showed their

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“sour grapes psychology”. Yet, Australia realized it “could not afford to be left out”

(Benvenuti 2006 p.275) and “Treaty won’t guarantee a summit seat” (Sheridan 2005).

Overt pressure from the US on Australia during Rudd’s and post Rudd’s time was to help the US return to Asia or to keep the US influence in the region. Bringing the US into the East Asia Summit and agreeing with the deployment of US troops in Australia and using Australian military facilities are the two main pragmatic actions to fulfil

Australia’s role as the US’ firm ally. In return for these two great helps which Australia has done for the US, the US President, Obama, finally visited Australia in November

2011. These are self-evidence of the US pressure on Australia in response to the rise of

China. The USA President, Barack Obama, had cancelled or in better diplomatic terms, postponed his planned trip to Australia twice in March and June 2010. His trip to

Australia was planned in December 2009, but until November 2011, when the USA really needs Australia’s support for its military deployment in Asia, Obama fulfilled a one and a half day short trip to Australia.

In regard to the issue of maritime security and territorial disputes in the South China

Sea, both China and the USA declared the South China Sea is its “core interest” and

“national interest”. Rory Medcalf advocates the use of regional forums to reduce tension by diplomatic means (Medcalf 2010 p.3; Rabar 2010). The Gillard government’s action to station American troops in Australia has been strongly criticised and viewed with suspicion by China that the USA is trying to encircle China and questioned why it would want to alienate its largest trading partner (Packham 2011). Hence, whether

Australia should get involved in conflicts between the USA and China or not, or in 138 other words, adjustment of the future direction of Australia’s China and the USA policies accordingly, is imminent.

5. The politics of ambiguity as the way of diplomacy

It is good to keep a certain level of ambiguity in managing disagreement over strategic issues related to each other’s core national interests. Ambiguity is useful major-power diplomacy for coping with thorny but immediately irresolvable issues. Ambiguity is meant to avoid unnecessary rigidity in tackling an impasse in the short-run and to gain time for laying a common ground to resolve it in the future. It helps to create diplomatic flexibility for manoeuvring, especially for dealing with other more important issues at hand. It is a rational mechanism particularly effective for weak powers in the international system. In fact the issues of Tibet and human rights are basically of an internal nature for the Chinese. They certainly have international implications and are related to Australia’s domestic politics, such as the Dalai’s visit to Australia and the

PM’s reception of him. Since these are not Australia’s core national interests, there is a wide range of policy options for Canberra that could have Beijing’s reluctant acquiescence. Put simply it is Canberra’s choice what to do with these challenges and, as proved by Howard, it was not too tough a choice. While it is hard for a win-win situation to be achieved, it is possible for a lose-lose situation to be avoided.

More concretely, in the Asia-Pacific region, the USA alliance network will continue to serve as the primary instrument for global stability. Increasingly, US-China security cooperation will become indispensable for war prevention, e.g. in the Korean Peninsula

139 and across the Taiwan Strait; and for threat management, as seen from issues ranging from anti-terrorism to anti-WMD proliferation. The Copenhagen climate summit showed that China and America were two key players in the world’s endeavours against global warming. China’s decisive role in managing climate change is part of its overall influence in world politics.

7. Summary

The bilateral relations can be developed up to today’s stage yet, it is not completely free of conflicts. The cooperation foundation of the relationship was beneficial. The

Australian Government pursues constructive and friendly relations with China on the basis of mutual respect and recognition of both countries shared interests and differences. The deepening economic relations and bilateral exchanges at all levels also greatly improved the relationship development. China’s importance to Australia has grown with China’s increasing economic, political and strategic weight (DFAT 2010c).

Although Australia's relationship with China remains fragile, sometimes it can be on a slightly firmer footing (Garnaut 2010d).

All Canberra needs to do is to exercise a bit more sensibility in handling the issues related to human rights, Tibet and the Dalai Lama. As for the issues of human rights and the Dalai Lama, there are many precedents that the government can follow to avoid a confrontation with China. As mentioned earlier, it is just a matter of choice, although sometimes a sensible choice is hard to make due to international and domestic political environments and pressures.

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As China is important to Australia’s economic development and to avoid risking

Australia’s continuing prosperity whereby Australia can also benefit from the rise of

China, some of Rudd’s lessons might help to smoothen the development of the bilateral relationship.

What made the Howard government managed the Australia-China relationship better than the Labor government was the timing and the USA influence. During the time of

Howard in office, the USA concentrated on its war on terror, which left a lot more space for Australia to develop its relations with China. Now the USA has realised that China has risen to the level that may affect its influence in the international stage especially in

Asia. Moreover, the war on terror has come to a conclusion along with the death of

Osama bin Laden and therefore, the USA has more effort to try to restore its superpower position and stop or slow its decline. One of the distinct actions the USA has done immediately was to enhance its security alliance with Australia in order to prevent

Australia moving more to China’s side. Thus, the politics of ambiguity as the way of diplomacy may be an effective reference for Australia-China relations and creating a bounded framework to manage Australia-China relations in Australia’s national interests.

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Chapter 6 Australia-China security relations

1. Introduction

Primarily driven by the USA’s relative decline and China’s rise, the basic pattern of geo-politics is undergoing substantial changes in the Asia-Pacific region. A new multipolar order is emerging: China is rising, Tokyo advocates a more ‘equal’ relationship with Washington, Canberra seeks a more active role in building Pacific regionalism and India demands more say in Asian and global affairs. Although Beijing repeatedly states that it would not challenge the USA global leadership, it facilitates a dynamic alteration in the hierarchy of power status globally, as the rise and fall of major powers is about leadership. China has been propelled into the centre of the world stage in the last decade or so, often with visible reluctance and Australia-China security relations have not developed systematically (You 2006b; You 2010).

For a long time China’s post-Cold War foreign policy strategy has been 韬光养晦, namely laying low in world affairs when China was in a disadvantageous position vis-à- vis the West (You and Jia 1998). Of utmost importance for China’s strategy is that there is no alternative to economic development in a peaceful manner. Peace and development are the two key words on China’s national agenda (Pan 2007 p.2). This was decided by China’s national and international conditions as well as the common desire of all the Chinese people (Pan 2007 p.2). Furthermore, Sun Zi, the famous

Chinese strategist, had even warned at the beginning of his famous strategic book, “Sun

Zi Bing Fa”, that “war is the most dangerous act that may threaten the survival of the state” (兵者，國之大事，死生之地，存亡之道，不可不察也). This thinking has

142 influenced China’s strategic culture and decision-making for thousands of years. This is contrary to the impression of some observers who believe that China has a belligerent inclination in dealing with international disputes (Scobell 2003 p.29). However, the rise of China has given rise to another school of thought that calls for firm responses against foreign acts that hurt China’s core national interests, even when US dominance is still solid (Yan 2006 p.13). Reading from China’s strong reaction to the USA arms sales to

Taiwan and to Obama’s meeting with the Dalai, one can conclude that this school of thought may have exerted greater influence in the policy-making process than in the days before the global financial crisis. However, according to realism, the leadership game is often of a zero sum nature and creates winners and losers, and regional power transition may intensify the already fluid security situation in Asia: territorial disputes in the East South China Seas, the confrontation in the Korean Peninsula and the lingering

Taiwan problem. The conflicts of interest among major powers are structural, although not unmanageable. Therefore, the emerging multipolarity will not remove the sources of the existing security challenges in the region but may also arouse new uncertainties.

This is one of the departure points for Australia-China interaction in the years ahead.

Australia’s anxiety in answering this dynamic power shift is most vividly expressed in its 2009 Australia Defence White Paper (ADWP) that calls for a substantial increase in military capabilities. However, the justification for the increase is made on a worst-case scenario of the “China threat”, which may just betray the objective of defending

Australia, as China plays a crucial role in Australia’s economic wellbeing (Behm 2009 p.15). This round of talks of the China threat has its historical roots in the decades-long

Cold War, which means that the “threat perception” can easily be rekindled by a single

143 major event or a series of events (Strahan 1996 p.131). A “China-uncertainty” based hedging strategy has caused a lot of uneasiness among key strategists in Beijing amidst a number of events that strained bilateral relations: Rio Tinto’s cancellation of the

Chinese investment deal, the arrest of Stern Hu and Kadeer’s visit to Australia (You

2010). As for responses by the Chinese security experts, Han Fang, a long time

Australia watcher at the Chinese Academy of Social Science, wrote a series of comments, criticizing the biased tone of the Defence White Paper in regard to the characterization of China as a threat (You 2010). For a time a freefall in the Australian-

Chinese relations seemed to be unstoppable, to a point of worrying anyone hoping to see smooth bilateral ties. This chapter evaluates the challenges facing the two countries brought about by new domestic and broader external factors with the rise of China. It argues that as in the past Australia follows a traditional model to deal with any uncertain situations, such as alliance enhancement and the addition of defence capability. While this is necessary, it is not cost effective diplomacy, as it inherently heralds a level of confrontation with a country that is economically so important to Australia. A new approach should be sought to strike a balance between protecting Australia’s security and continuing the mutually beneficial Australia-China relations. The rise of China does not generate uncertainties but a lot of new opportunities.

2. Coping with an era of uncertainties

The volatile security situation in Asia and the Pacific has been the starting point for

Canberra to contemplate a national security strategy. Australia has been successful in formulating foreign and defence strategies in coping with these regional challenges traceable to the Cold War. The realist approach, as demonstrated by alliance building,

144 has become questionable in dealing with new uncertainties with the emerging new regional order. Although it is a matter of debate over whether Australia was marginalized in Asia under Howard (Asia-Times 1999; Darwall 2005; Kelly 2008), in actual fact it had difficulty getting access to various Asian summits (Benvenuti 2006 p.273), which served as an indicator of emerging Asian multilateralism. When Bush bungled Asia, it would affect Canberra (Pempel 2008 p.547). Regionally two mega trends seem to be in the making: the G2 logic and changing tripartite relations between

Washington, Beijing and Canberra. Each of them is partly the result of China’s rise in economic and military power. Clearly employment of traditional thinking in managing the changing regional balance of power would be too simplistic in managing the triangular relationship. A more sophisticated approach needs to be found to deal with the new challenges.

High politics is basically about the distribution of power, and sharing political power is much more difficult than sharing economic assets (Funnell 2011). Furthermore, in order to buy off China, the USA is even willing to go as far as offering Beijing an equal standing in the proposed G2 global governance condominium (Funnell 2011). However, apparently insoluble dilemmas such as USA-Taiwan relations, USA-Dalai Lama relations, the USA’s aircraft carriers ploughing China’s coastal waters, and the USA’s

“strategic encirclement” of China resulted in strategic mistrust in the bilateral relationship of the USA and China and increased uncertainties in the region and the world.

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2.1 Security dimension of China’s rise

As China’s economic weight grows to parallel that of America, it is probably the end of the age of Western strategic primacy in Asia. There is a strong and growing consensus that China’s long-term growth can and probably will be sustained, with immense political and strategic implications in Asia (White 2009a p.3). The rise of China indicates the increase in its economic and military power. China’s economic power will be discussed in the next chapter on economic relations.

China’s military modernization was accompanied by its economic development. With its economic development, China’s military power is rising too. Thus, China’s military modernization has led to suspicions about its military power. Nevertheless, since the collapse of the Soviet Union and the end of the Cold War in the 1990s, China has altered its security thinking (Thayer 2003). China has fundamentally changed its global and regional security diplomacy, abandoning ideology and revolution in an effort to gain acceptance as a responsible member of the international system (Gill 2007).

China’s New Security Concept, highlighted in a white paper on China's national defence, is one of China's most important theories in international security (People-

Daily 2004). The core of China’s New Security Concept includes mutual trust, mutual benefit, equality and coordination and the core purpose of the NSC is to conduct dialogue, consultation, and negotiation on an equal footing to solve disputes and safeguard peace (Ministry-of-Foreign-Affairs-of-the-PRC 2002; Shambaugh Winter

2004/2005 p.69). China is a strong advocate of the new security concept and the new security concept has become an important component of China's foreign policies

(Ministry-of-Foreign-Affairs-of-the-PRC 2002). China seems to have broken away from

146 a trajectory that initially looked set to repeat the turbulent rise of Germany, Japan and the Soviet Union, and steered a new course much more in harmony with the surrounding international society (Buzan 2010 p.8).

2.1.1 Strategic objectives

Structural realists explain why states want power as firstly, great powers are the main actors in world politics and they operate in an anarchic system; secondly, all states possess some offensive military capability; and thirdly, states can never be certain about the intentions of other states; fourthly, the main goal of states is survival; and fifthly, states are rational actors (Mearsheimer 2007 p.73-74). These explain very well China’s strategic objectives.

In the current world order transitioning from the USA-led unipolar to bipolar or multipolar, there is no doubt that the USA and China are the main actors in world politics. The USA has absolute offensive military capability. Many of China’s surrounding countries such as Japan, South Korea, Vietnam, Russia, India, and

Mongolia have offensive military capabilities too, even without the help from the USA.

Thus, it is likely that China can never be certain what the USA and these countries will do especially when Japan has a bellicose characteristic and border conflicts with China.

Furthermore, China’s military modernization purpose is for its own survival because it had experienced being abused for hundreds of years. The recent painful history stimulates China’s military development. Moreover, a balanced offence-defence is a force for peace (Mearsheimer 2007 p.82). China needs a peaceful environment to

147 develop itself. Finally, China gives strong support to the pluralist institutions of coexistence in regard to include sovereignty, non-intervention, territoriality, anti- hegemonism, diplomacy, and international law (Buzan 2010 p.9). The core of China’s

New Security Concept shows that China is a rational actor in the world’s stage.

Therefore, China’s strategic objectives are for its own survival including internal and external peaceful space for its development. China seeks security or power for its own survival but not domination. As the Chinese President, Hu Jintao said, “China’s development, instead of hurting or threatening anyone, can only serve peace, stability and common prosperity in the world” (Hu 2005a; Yee 2008 p.100). Hence, from the structural realist’s perception, China’s rise in military power is more for defence rather than anything else.

On Australia’s side, Australia is neither facing obvious and immediate threats, nor facing clear and present dangers of conventional military attacks (White 2008a p.64).

For Australia, strategic objectives no longer relate to the security of their territory from military attack, but to wider security, diplomatic, political or humanitarian purposes.

The Australian Government’s strategic objectives are reflected in its Defence White

Papers. In the 2000 Australia’s White Paper, Australia’s overriding strategic priority remains the self-reliant defence of Australia (Australian-Government-Department-of-

Defence 2000 p.30; Reith 2001). Furthermore, it ensures the defence of Australia and its direct approaches, fosters the security of Australia’s immediate neighbourhood, promoting stability and cooperation in Southeast Asia, supports strategic stability in the wider Asia-Pacific region, and supports global security (Australian-Government-

Department-of-Defence 2000 p.31). The 2009 Defence White Paper is the most

148 ambitious defence blueprint to be delivered by an Australian Government since WWII and Kevin Rudd, as the Prime Minister at that time was at the centre of the White

Paper’s production (Walters 2009 p.10). Principal tasks of the 2009 Defence White

Paper are deterring and defeating attacks on Australia, supporting domestic security and emergency response efforts, contributing to stability and security in the South Pacific region and contributing to military contingencies in support of global security

(Australian-Governement-Department-of-Defence 2009 p.13). It is likely that

Australia’s strategic objectives are not just defence itself, it also indicates Australia’s ambition to be one of the major players in the region and globally.

However, as White analyzed in an interview by Barrie Cassidy on ABC, Australia‘s national radio, the 2009 ADWP puts the Asia-Pacific region and the way the Asia -

Pacific region changes as China grows, right at the centre of the Government’s approach to defence, but it is not sure whether America is going to remain the dominant power in

Asia or whether China is going to take over. It is not sure whether Australia should regard China’s growing military power and capacities as a threat to Australia or not.

The question for Australia is not whether China’s growing and military power threatens

Australia directly. The real question is whether or not as China grows, will Asia start to work differently. White suggested that Australia needs to move away from a narrow focus on the China threat and think much more broadly about the kind of region

Australia will be living in and the kind of role Australia ought to be trying to play in it

(White 2009b). If the American strategic primacy is ending in the region, then there are

“the uncertainties about what the new order which will emerge might mean for

Australian security” (White 2009a p.3). These are muddled and ambiguous in Rudd’s

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2009 ADWP. White’s meaning in between the lines is that if the American influence is declining and the American strategic primacy is about to end, should Australia adjust or need to adjust its strategic objectives to adapt to the new order of the world and region?

This point has not been stated clearly in the 2009 ADWP, meaning Australian strategic objectives are not clear.

2.1.2 Capability analysis

Australia’s China policy would be affected unavoidably by its perception of China’s military capability. China’s military budget for 2010 was RMB$532.1 billion (about

US$78 billion), an increase of 7.5% over the previous year (Blanchard and Buckley

2010; Xinhua 2010b). Australia’s military budget was $25.7 billion for 2010-11

(Faulkner 2010). The United States military budget for 2010 was US$848.1 billion

(U.S.-Department-of-Defense 2009; US-Government 2011). Comparing the military budgets among these three countries, China’s military budget in 2010 is only about 9% of the USA. In other words, the United States military budget is more than 10 times that of China’s, meaning that China is still far behind in balancing the offence-defence powers between the USA and China. Between Australia and China, China’s military budget is 3 times that of Australia’s, but China’s population is 65 times that of

Australia. In terms of military spending per capita, China’s is only about US$60,

Australia’s is US$1300, and the USA is about US$2827. According to the World Bank,

China’s GDP in 2010 was US$9.872 trillion; Australia’s was US$889.6 billion and the

USA’s was 14.72 trillion (CIA 2010). Thus, China’s military spending was only 1.24% of its GDP in 2010; Australia’s was 2.9% and the USA’s was 5.8%. Hence, in terms of military budget or military spending per capita, or the percentage of military spending

150 in the country’s GDP, China has a long way to catch up to Australia and the USA. As

Johnston has described in his “Is China a status Quo power” that as a percentage of

GDP, Chinese military expenditures do not appear to have reached levels where one could conclude that the Chinese economy is being militarized and mobilized to balance against USA power (Johnston Spring 2003 p.39). In other worlds, China is still far away from having the capability to threaten anyone and the durable “China threat” view lacks facts to support it.

Top Defense Budgets in Asia

Country Expenditure in billions of USD in 2005, World Expenditure

est Ranking

United States $518.10 1

China $81.31 2

Japan $44.31 4

South Korea $21.05 8

India $19.04 10

Australia $17.84 12

Taiwan $7.92 19

North Korea $5.00 23

Singapore $4.47 24

Source: “25 Top Spenders”, Defence News, September 11, 2006 (Vaughn 2007 p.6)

According to the above table, the USA’s military spending is so huge that many countries combined could not rival it. Even Japan’s considerable military expenditure

151 was given a blessing whereas China’s military modernization was regarded as a menace to others and the region (Shi 2002 p.339). China has to get the corresponding military capability to defend itself as it is a large country with a vast territory and long coastline.

Hence, whether China can rise and develop peacefully is not just dependent on its military capability or its military spending. At the current stage, it is more dependent on whether China is construed as a partner or a challenger by the USA internal politics.

There is certainly quite a strong constituency in the USA that almost wants to cast

China in the role of ‘peer competitor’ in order to restore the clarity of purpose to US foreign policy which has been hard to find since the end of the Cold War. If this constituency wins out in the USA, then it will be difficult for China to rise and develop peacefully. It is because China’s rise inevitably questions the United States status as the sole superpower. Nevertheless, there is quite a good chance that no other major powers would feel threatened by a peacefully-rising China (Buzan 2010 p.14). In other words, the “China threat” is not due to China’s rise, the term was coined due to the needs of the

United States domestic politics and similar in Australia too. Australia’s international position is very different to the USA. Australia’s China policy is determined by its perception and attitude towards China. If Australia perceived China as a threat accordingly, it would remain a question of whether its China policy could serve its national interests. If the Australia’s China policy is within the framework of the

Australia-US security alliance, issues associated with China may prove to be the most severe test of Australia’s ability to balance the trilateral relations.

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3. Australian strategic culture (ASC) and Alliance Enhancing

The Australian strategic culture also is a factor which would affect its attitude towards

China thus affecting its China policy. For quite a long time, the American strategic primacy presents Australia with no choice as to who to depend on and where to stand in time of conflicts. Siding with Washington seems to be a natural one, deeply rooted in

Australia’s strategic culture that reflects a realist conviction. After all the ASC is the product of complex international politics. As long as these politics remain conflictual, the ASC guides Canberra to define its security environment according to the country’s historical experience, geographical location and value systems. Due to its geographical location, which is far away from the major powers and with the ocean as its natural protection, Australia does not have threats from outside. However, Australia is a terrorist target, both as a Western nation and in its own right (DFAT 2004).

The ASC sets key benchmarks for a world outlook to be translated into practical policies. Australia feels safer in a USA-dominant unipolar world due to its security and political alliance with the USA. Australia has anxieties due to uncertainties in the multipolar emerging world. These uncertainties associated with the restructuring of the international order may further consolidate a China-centred security anxiety. However, this anxiety is not so much rooted in Australian perception of China as a direct security threat as their difficult adjustment to the fact that the rise of China weakens US dominance in world affairs. Furthermore, the US Secretary of State, Hillary Clinton, rejected the view to apply a zero sum game on US-China relationship, insisting the two countries are working together for a positive, cooperative, and comprehensive

153 relationship in the new century in her Asia strategy speech in Honolulu, Hawaii, where she started her Asia trip on the 29th October 2010 (Xinhua 2010c).

The ASC is the ideal foundation for Canberra’s foreign policy-making, as it is linked to a populist tendency affecting election results; and the Australia-US alliance serves as the corner stone for Australia’s overall foreign relations (Rudd 2007). Each supports and sustains the other, forming a rigid policy environment with a major impact on

Australian-Chinese relations.

3.1 “Tyranny of Distance”: an obsolete concept?

Geoffrey Blainey described how distance and isolation have been central to Australia’s history and in shaping its national identity, and will continue to form its future (Blainey

1966). In the past decades since, although Australia’s integration with the Asia-Pacific region has increased exponentially, the mentality of tyranny of distance is still at the centre of the Australian Defence Culture (ADC), with good reasons. Australia’s geographic location has traditionally instilled a security dilemma in its people: Australia is too far away from countries with which it shares the same political system and democratic values and it is too close to countries with alien cultures. As a result a security anxiety becomes deeply embedded in Australia’s security-making efforts: it needs a security guarantor in the form of alliances with the world’s dominant powers

(Howard 2003). Nevertheless, economist deems it is an out of date concept (Barker

2011; Harcourt 2011). Thus, whether this concept should be retained or not would affect

Australia’s China policy.

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Historically this concept reflects Australia’s threat psyche. The resultant ANZUS Treaty provided ready access to US forward deployment in the region that made Australians feel safe in the East-West confrontation. Today the ADC has found itself mingled with the “clash of civilizations” which underlines the prospects of terrorism against

Australians. But at the strategic level it is the confrontation between major powers that poses the most serious threat to Australia. Apparently the Australia-US alliance has contributed to Australia’s wellbeing, from economic developments to security assurances (Medeiros, Crane et al. 2008 p.iii). Yet, history also proves that the pegging of Australia’s security with a US forward presence would involve Australia in conflicts mainly of a US nature. An alliance is not a free lunch. It pays to belong. The right premium certainly enhances Australia’s safety. But many Australians have asked whether they have paid too much through the lives of their young soldiers in the successive US-led wars (Tranter 2012). Now a related question arises: in the decline of

US global dominance and with the emerging of a more complex international order, how much should Australia pay for the insurance for US protection but avoid backlashes at home and regionally? While Australia should support US global initiatives the best it can, the fact that the country faces no real strategic security threat, e.g. invasion, should keep this premium in proportion. The challenge of the rise of

China to Australia lies in a question of where the balance is to be drawn between the sustained commitment to the Australia-US alliance and the best Australia-China economic interests. Is the New Zealand model viable for Australia? Is the Bali bombing a lesson for Australia to learn?

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3.2 The different perception on the 2009 Australian Defence White Paper

As some scholars perceive it, the basic tone of the 2009 ADWP echoes the thesis of tyranny of distance; and the Paper reiterates the special Australian-US relations in an era of uncertainties. However, the Lowy Institute Poll 2010 shows that there are 69% of

Australians that said the government paid too little attention to their opinions in making foreign policies (Hanson 2010 p,1). Does it not represent more than half of Australians’ views on the “China threat” which is different from the Rudd government’s 2009

Defence White Paper?

Never before had any of the previous 15 ADWPs made one foreign power as the driver for the ADF’s force building as the 2009 ADWP does China for the next 20 years. This is not a piece of good news for Australia-China relations since most of China’s analysts talk about the ADWP in a negative way, although the official Chinese position to the

ADWP has been quite mute (Garnaut, Grattan et al. 2009; You 2010). The Lowy

Institute Poll of 2009 on China and the world shows that in China, 48% of the Chinese people said Australia’s alliance with the USA had a very or somewhat negative influence on China-Australia relations and also 48% agreed that Australia was a country suspicious of China (Hanson and Shearer 2009 p.2). Thus, there were different perceptions over the central theme of the ADWP, as it was released at a time when the

Australia-China relationship was still regarded as at its peak. Is it because Australians have the same view as some Americans that “Americans would prefer to deny that

China’s government can legitimately exercise its power internationally” (White 2010a) and want to help the USA to constrain China? Especially, the question remains whether the ADWP represents Australia’s invisible participation in a global effort to coordinate

156 a united response to China’s rise in the form of hedging, whose posture was about containment, not even a Cold War type but something more subtle; or is it just the way that Australia pleases the USA?

This is about Australia’s readjustment of its China policy in the background of the

USA’s rising displeasure over Australia’s leaning toward China under Howard who openly dismissed the thesis of the China threat and depicted Australia-China relations in the way of a strategic partner, a most positive characterization by Australia, caught in interaction between a US ally and a US competitor (McDowall 2009 p.91). Japan had long resisted using the word strategic to define Sino-Japanese ties since strategic connotes a relationship of defence cooperation and global cooperation, something the

USA is very sensitive about (You 2006a p.24). Here the question is really that the

ADWP signals Rudd’s intention to rebalance the tripartite ties by assuring Obama where Australia stands. It is quite extraordinary and wrongfully-targeted that an official policy paper could classified China as a threat (Cottrill 2009; Walker 2012; White

2012a), something that has not occurred for over a decade.

Why did Australia’s sudden lurch against Beijing happen when the mutually beneficial economic relations were deepening and China had done much to help Australia recover from an international financial crisis? Does this mean that Australia has decided that a more aggressive approach is inevitable and worthwhile? Is it because this ADWP could express Australia’s hidden agendas that for obvious reasons, Australia could not express in the open (Lyon and Davies 2009)? The private conversation between Rudd and

Clinton, which was revealed by WikiLeaks in December 2010 proved all these 157 questions, and that the Chinese concerns were reasonable and that Rudd really had two different faces, public and private, on his China policy (Maley 2010; Garnaut 2010b) and explained questions of confusion and ambiguity in the 2009 ADWP. This also explained why Australia-China relations have fallen down to the recent lowest point.

3.3 The perception of security uncertainties: intent + capabilities

From a defence analysis point of view, the biggest challenge of the ADWP is that it presents a kind of military threat to China, commonly defined as intent plus capabilities directed against a target country. Here the intent is clear: the Australian Defence Force

(ADF) has a vision or even a contingency plan to assist US operations away from home, the most strategic ones being projected against the People’s Liberation Army (PLA)

(Thomson 2003-04). It is because the top priority of the USA’s military modernization is not the war against terror but a conflict with China (You 2006b; Kamphausen, Lai et al. 2009 p.76), for which the USA has to get Australians and Japanese on board. China is also at the first place in the USA’s strategic context (Lampton 2002 p.289). These messages have been strongly flagged to Australia, which plays a strong role in the drafting of the ADWP. This intent is specifically reflected by the new combat capabilities that the ADWP proposes to add to the ADF. Intent and capabilities are integrated with a justification against uncertainties in the changing regional order driven by China. However, seen from another perspective, this integration spells an Australian threat to China’s fundamental security interests if Australia decides to join a US-led war in the East and South China Seas employing these new capabilities.

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The ADWP typically unravels the contradiction between a stated policy and actual policy. The former is expressed by the ADWP’s central theme of beefing up the ADF for defending Australia, carrying out a Labor Party tradition and the ALP emphasis on homeland defence since the 1970’s and aligning with the “defence of Australia” school of thought in the Australian security research community. However, if one looks concretely at the major defence assets to be acquired, for example: a submarine- launched long range strike capability and a fleet of 12 new submarines, these would give Australia the capability to deploy 8 submarines at any one time with the mature fleet in order to enhance Australian ability to maintain a presence in extended range patrol areas or operate in many more choke points than now; in regard to its surface fleet, Australia plans to build three advanced Air Warfare Destroyers (AWD) including the SM-6 very long range surface-to-air missile system coupled with Cooperative

Engagement Capability (CEC) to optimize the ship’s anti air warfare capability; for the capability for submarine detection and response operations, eight ‘Future Frigates’ are planned to be built in order to be fitted with a sonar suite that integrates a long range towed-array sonar with a ship’s fit that enables anti-torpedo protection and close in submarine detection; and furthermore, these ships will be able to embark a combination of naval combat helicopters and maritime Unmanned Aerial Vehicles (UAVs); these are powerful enough for offensive, long-range power projection capabilities for expeditionary purposes, most likely for the allied operations led by the USA against another major power -- China. The Australian Government has stated that it wants to build a more viable defence force with a significant focus on enhancing Australia’s maritime capabilities. The force has to be able to deter and defeat attacks on Australia, as well as contributing to stability and security in the South Pacific and East Timor, and to military contingencies in the Asia-Pacific region (Barrie 2009 p.59). Thus, this also

159 conforms to the USA: forward engagement and global support to the USA. But it might not be in Australia’s national interests and out of Australia’s military capability to fulfil the goal of this ADWP (Barrie 2009 p.51; Cottrill 2009; Walker 2012; White 2012a),

This ADWP’s rhetoric of deterring or defeating any country attempting to invade

Australia expresses a territorial defence orientation. However, who would invade

Australia? There has been an overwhelming consensus in this country on the absence of such a probability. So this ADWP could easily meet its first objective at the strategic level with a rhetorical emphasis on the demand of many Australians who do not want to see overt use of the ADF abroad and thus would be satisfied. In truth, the real focus of the Australian Defence White Paper (ADWP) is how to develop an ADF force structure and capabilities in global combat. Most Australian scholars including Peter Drysdale seem to side with White that “war in Asia is thinkable but it is unlikely” and Desker emphasized that “the rise of China does not automatically mean that conflict is more likely” (Desker 2008; Drysdale 2008; White 2008b). China has not replaced the former

Soviet Union as a global threat to the USA interests and to the security of regions all over the world. China is not seeking to construct a network of client states all over the globe through which to challenge the USA and Western interests (Chambers 2002 p.66). China does not threaten its neighbours, with two principal exceptions: Taiwan and other claimants to the Spratly Islands in the South China Sea (Chambers 2002 p.68). The USA security commitment to Taiwan so far still remains ambiguous and this attitude is in the best interests of the USA (Benson and Niou 2002 p.191). Even China wants to curb the USA influence globally by promoting multipolarity, with China as

160 one of the great powers, but this is not necessarily a threat to international security

(Chambers 2002 p.66).

3.4 The operational environment and capability additions

The question is that even if an Asian war was likely, the ADWP designs a fighting force aiming at a wider strategic context than the approaches to the Australian mainland, securing the maritime areas of the Southern Indian Ocean, the South Pacific and waters close to Southeast Asia. The proposed assets surpass Australia’s real security needs.

The ADWP will substantially boost Australia’s naval strength and place it in the front ranks in the region. However, the operational guidance for the weapons to be acquired is blurry, if comparing the following two paragraphs. On page 55 the Paper states that the

ADF would need to possess weaponry to deal with threats of missile strikes, air attacks, special forces raids against Australian territory or offshore facilities, mining of our ports, maritime choke points, threats to or harassment of critical shipping between

Australia and its trade partners, hostile submarine operations in our approaches and cyber attacks on our defence, government and possibly civil networks……”(Department-of-Defence 2009). Some of these threats are real but many are hypothetical. The wide range of missions would already be a headache for force planners but the nature of these missions go beyond that of defensive defence, it is in the category of territorial defence.

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However, reading the following section, the contradiction becomes self-evident: the weapons required “need to take into account of our local defence needs in the event of retaliatory action being taken against us, which could not be ruled out if we are engaged in combat operations or if we are providing basing, sustainment and other support for allies and partners” (Department-of-Defence 2009). These open-ended contingencies would have China as the most likely target. The logic of the scenarios is that if the ADF assists the USA in a Taiwan war, the Chinese would inevitably think of retaliation. In

Asia, except for terrorist attacks, only The People's Liberation Army (PLA) of China is qualified for such an act of retaliation, as it is the only force with suitable long range power projection capabilities. Logically, this hint of a target state in an official document has aroused concerns from the Chinese analysts (You 2010), as this war game planning may pit the ADF against the PLA in the battle-field. Therefore, it reveals a hidden agenda of the ADWP, namely, Australia’s matching effort to beef up America’s overall strategic posture in the Pacific and Australia’s part in the collective hedging strategy against China. Under the circumstances, the PLA war preparation may have to factor in scenarios of the Pine Gap Base that provides strategic support and technological support to US operations against China, e.g. a Kosovo type of remote- controlled air and missile strikes against key Chinese targets.

It would appear obvious that a major attribute for proposed new submarines for the

Royal Australian Navy (RAN) is China’s rising naval capabilities vis-à-vis the USA in the West Pacific. Rear Admiral Zhang Zhaozhong asked: why the USA had chosen the

Australian navy to create the most fatal submarine force in the region. He seems to have an answer: to cater for allied ASW operations against the growing Chinese underwater capabilities (CCTV 2009). It is of strategic importance for the PLA Navy to break the 162 naval blockade by the Western powers, utilizing the first and second island chains in times of war. This is the primary task for the PLA submarines. Colonel Zhong Jing of the PLA National Defense University, who attended the 2006 course of the Australian

Defence College for senior officers from Asia and the Pacific, commented that the

South Pacific is a good place for the strategic nuclear submarines to launch intercontinental ballistic missiles (ICBM) against global targets. She regarded the enhancement of the Australian submarine fleet to be an integral plan to match the USA centred anti-submarine warfare (ASW) against the Chinese navy, together with the

Japanese and possibly the Taiwanese. Submarines of 4,000 tons are very effective as submarine hunters in deep waters. Australia’s conventional submarines may also fill a gap left by the USA in conducting anti-submarine warfare (ASW) in this region which is of strategic importance to support the USA forward deployment in the Far East

(CCTV 2009).

Australia’s new destroyers and submarines are designed to enable the Royal Australian

Navy (RAN) to undertake strategic missions far away from home. For the PLA, it would naturally ask the question of whether this would mean that Australia would like to help US operations in the West Pacific, especially in the Taiwan Strait or in the East and South China Seas where sovereignty is disputed between China and Australia’s allies and friends. Otherwise it seems clear enough as to whether there is a need to build such sophisticated area air defence destroyers and submarines with such a large displacement to protect the South Pacific only. In other words, the ADWP indicates, as

White described that Rudd saw clearly that the rise of China is fundamentally changing

Australia’s strategic position, but he lacked the policy skills and political courage to launch the equally fundamental changes to Australia’s defence policy (White 2012a). 163

4. Australia-USA-China triangle in flux

In a series of speeches, Prime Minister John Howard, while emphasizing the different foundations and dynamics of the two relationships, clearly indicated that Australia will not take sides between the USA and China on issues on which they differ (White 2005b p.469). Howard claimed that “I count it as one of the great successes of this country’s foreign relations that we have simultaneously been able to strengthen our long-standing ties with the United States of America, yet, at the same time continue to build a very close relationship with China” (Howard 2004). This indicates the Australian stance.

As the third party factor-the USA; the strategic culture of tyranny of distance, the balance between seeking US protection and boosting ties with the region (70% of the trade) have mainly driven Australia’s China policy in recent years. The growth of

China’s economic strength, political influence, strategic potential, and military capability is the major strategic trend now. This is the biggest change in Australia’s wider strategic environment in Australian history (White 2004 p.46). The development of stable and cooperative relationships between the USA and China is a key policy challenge not just to Australia, but also to the Asia Pacific region and the world.

Systemic enmity between the USA and China would be a disaster for Australia and no issue is more important than this to the future of Australia (White 2004 p.46).

Although the end of the Cold War may have left the USA as the only superpower in the security realm, its economy has been in relative decline for a decade (Edwards 2004).

After World War Two, the USA was both the world’s greatest creditor and a continuing

164 capital exporter to the rest of the world. Yet, in 2001 USA had become a net debtor. The

USA’s GDP was US$15.1 trillion in 2011 and will be US$15.6 trillion in 2012

(Chantrill 2012a). The USA’s debt was over US$14.8 trillion in 2011 and will reach

US$16.4 trillion in 2012 (updated on the 21st May 2012) (Chantrill 2012b). The USA’s debt surpassed 100% of its GDP after the government’s debt ceiling was lifted in 2011

(Fox-News 2011). Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds

(Amadeo 2010). On the other side, China has accumulated US$3 trillion ($A3.05 trillion) in foreign exchange reserves and about 65% of those holdings are invested in

US government bonds and other US debt instruments in 2010 (Garnaut 2010e). By the

3rd quarter of 2010, China had overtaken Japan to become the 2nd largest economy

(BBC 2011) and China could assume that it will overtake the USA to become the world’s largest economy by 2020 (Oliver 2009).

While Australia’s main trading partners were in Northeast Asia, its primary strategic alliance is with the United States (Thakur 1998). Managing relations between the USA and China constitutes perhaps Australia’s largest foreign policy challenge (Tow 2005b), as China has become as critical to Australia’s economic security and prosperity as is the

United States in terms of military security (Malik 2005 p.7; Malik 2006/2007; Gyngell and Wesley 2007 p.69). Given this vital importance of both relationships to Australia, a

Sino-American conflict (if it ever happens) would be “the nightmare scenario for

Australia’s foreign relations” (Pan 2006 p.440). Ungerer quoted sociologist Max

Weber’s saying to indicate his view on Australian foreign policy as “Interests, not ideas, dominate directly the actions of men” (Ungerer 2008a p.50). For instance, only seven

165 months after Australian Prime Minister Hawke wrote to China expressing outrage over the Tiananmen Square (the 4th June 1998 event) and wept in public, Australia signed a joint venture worth $250 million between the Chinese Government and Hamersley Iron

(Mackerras 1992 p.208). Hence, Australia, like all other countries in the world, will continue to calibrate its foreign policies to the realities of power and its exercise

(Ungerer 2008a p.50).

For the purpose of smoothing the changing positions of the USA and China in world politics, the USA Secretary of State Hillary Clinton on the 29th October 2010 in her

Asia strategy speech in Hawaii, where she started her Asia trip, rejected the view of applying a zero-sum game on the USA-China relationship, insisting the two countries were working together for a positive, cooperative, and comprehensive relationship in the new century (Xinhua 2010c). The reason for Clinton’s speech was that she wanted to tell the world that the USA was not declining while China is rising. The USA is aiming at sustaining and strengthening its leadership role in Asia because the “USA has its national interest” in the region (Gaouette 2010). As Clinton said, the USA practises an active form of “forward-deployed diplomacy” in Asia deploying high-ranking officials and development experts to “every corner and every capital” of the Asia-

Pacific region because “we know much of the history in the 21st century will be written in Asia and this region will see the most transformative economic growth on the planet”

(Xinhua 2010d). Clinton’s words just reflected a growing consensus that Asia has become the most dynamic region and the new power centre of the world (China-Daily

2010).

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The Chinese President, Hu Jintao’s, visit to the USA in January 2011 encountered increasing ambivalence among mainstream policy circles about the USA-China relationship (Freeman 2011). Although the USA policy toward China may continue to reflect the essential realism, yet any US administration’s policy has to necessarily account for a wide range of views due to the USA’s pluralized society and multiple interests (Freeman 2011). This explains why the USA has a multifaceted China policy.

Nonetheless, China is in many ways, e.g. economics, an ideal partner for Australia in

Asia (Edwards 2004). Although China is avowedly Communist and undemocratic and it does not uphold human rights, apart from China’s size and appetite for Australian raw materials, China also shares with Australia a straightforwardly commercial view of the world (Edwards 2004). China may or may not be a strategic competitor to the USA, but it is the biggest creditor and certainly and necessarily, an economic partner. The USA is not hegemonic in the global economy, cannot now set the rules, and will be less rather than more able to do so in the future. Moreover, the USA’s economic policies are not necessarily good policies, or policies that are in the Australian interests (Weiss,

Thurbon et al. 2004). Australia may often differ with the USA, and the USA will often not have strong views, information, policies or guidance on issues which are important to Australia but not to themselves. As Dr John Edwards suggested, Australia’s foreign economic policy cannot be based solely on the USA; Australia should not make a habit of supporting the USA against China; should resist tendencies for political conflict between USA and China; and refuse to be drawn into a choice between them (Edwards

2004). Siding with the USA would severely damage Australia’s relationship with China

(McDougall 2009 p.143). Or more correctly, siding with either one of them might

167 damage the relationship with the other one. Thus, the feature of the bilateral relationship under the Howard government is to seek to balance the political-strategic and economic dimensions (McDougall 2009 p.142).

Furthermore, Australia has declined to join the USA and Japan in pressing the European

Union (EU) to maintain its arms embargo on China, refrained from joining the USA criticism of China’s military buildup. However, to the Australian public, the main reason that the majority of Australians see China as a potential military threat, is that

China and the USA are likely to come into conflict in the future and Australia will end up being drawn into the conflict through its alliance with the USA. The 2011 Lowy

Public Poll found 87% of Australians agreed with this belief (Hanson 2011 p.13).

For Australia, the real question is not about how it balances its ties with the USA and

China. It is about how Australia protects its interests in this strategic transformation

(White 2005b p.470). Those interests are reasonably clear. Australia wants Asia to keep growing strongly, and for Australia to be part of that growth. Australia wants America to stay engaged in Asia, to prevent domination by China, but not in a way that forces

Australians to choose between them, or that inhibits Asia’s economic growth.

For a long time Australia’s strategic position in the region has been, overall, positive.

Largely, this is because in the political arena, the USA-Australian alliance cushioned

Australia from any overt regional threats. In the economic arena Japan was the country’s largest trading partner. The substantial bilateral trade was buttressed up by

168 their friendly political ties (White 2006). The unified three-way political and economic interests caused few surprises in their common pursuits in global politics.

China is a rising economic power vis-à-vis the USA remaining as Australia’s most important political ally. This generates stress in the balance in another set of tripartite relationships between Australia, the USA and China. To be more exact, this triangle has never been in balance, as the Australian-US relationship is one of alliance and the Sino-

US relationship is one of rivalry. Australia has been comfortable with this asymmetrical balance of power with Washington defining the nature of the tripartite interaction. Put in another way Australia is one of the few countries that hope to see lasting unipolarity which is somewhat synonymous to the world and regional certainty and is conducive to

Australia’s overall strategic interests. Conversely the waning unipolarity and emerging multipolarity in the Asia-Pacific region are clearly at odds with Australia’s expectation of the regional security landscape. The rise and fall of the two great powers has been viewed by Australian analysts as the sources of instability (Bisley 2010). Oddly when benefits from the trade with China is looked at from a security perspective, it is somewhat equated as security challenges, not opportunities. Seen from the traditional security point of view, the deepening Australia-China economic interdependence may interfere with key aspects of the USA-Australian alliance. When this happens, the bigger the mutual trade benefit between China and Australia, the larger the uncertainty and liability that may result in Australia - US security cooperation in regards to China, as any major conflicts between the USA and China would catch Australia in the cross- fire.

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Consequently Australia seems to be inescapably locked in the dynamic interactions between the two great powers: Beijing’s efforts to initiate creative realignment that accelerate restructuring of international relations in the region and the USA–led hedging practices that gradually turn the bilaterally based alliances into broad multilateral alliance networks. For the former, China persuades the regional states to adopt a China policy based on friendship and cooperation, mainly by employment of soft power, such as offering economic benefits to the region. This is the response to US persuasion on the regional states, e.g. ASEAN, to implement a China policy based on balance of power, which would contribute to an invisible containment effect against China in times of conflict. The realignment efforts have resulted in a kind of Chinese directional leadership that sets the broad direction of regional politics and especially over issues

China regards as linked to its core national interests, such as Taiwan or the Dalai (You

2004 p.75). To the extent that ASEAN has largely discarded a balance-of-power approach toward China, South Korea has made an open pledge that the USA bases in the Republic of Korea (ROK) would not be used to assist a Taiwan war, and Australia’s debate on whether the ANZUS Treaty would cover US operations against China in a faraway place continues.

In fact Australia’s position vis-à-vis China and the USA have been transparent all along: one is fundamental and the other pragmatic. Certainly occasional difficulties occurred in

Australia-China relations but most of the time these appear to be of a temporary nature and were overcome with relatively simple policy adjustments in Canberra, e.g. Keating in 1991 after Tiananmen and Howard in 1996 following his US-leaning moves upon

170 taking office (Zhang 2007 p.91). There have not been many irreconcilable strategic impasses that cause lasting damage.

4.1 Australian-US alliance in a broader context

The USA factor in Australia-China relations is unavoidable because in many respects, the USA remains a major factor in Australian foreign policy. Thus, it is necessary to understand the Australian-US alliance properly. The Australia - USA relations are entering a new phase in which the security dimension is no longer overriding

(Mediansky 1997a p.305). Where the Australian strategic interests lie are the key points to adjusting its foreign policy. Australia does not face a clear and present danger of conventional military attack (White 2008a p.64). A broad conception of national interest can cover everything about the world that affects Australia’s well-being (White 2008a p.66). Within this broad concept, security is properly conceived covering many kinds of threat including economic, environmental, criminal and natural hazards. Strategic interests are thus those elements of the international order that affect directly or indirectly the likelihood or seriousness of an attack against Australia (White 2008a p.66).

Australia’s official military alliance treaty with the USA is the ANZUS treaty. The treaty was signed in San Francisco on the 1st September 1951 as the ANZUS treaty

(Department-of-External-Affairs 2012). The treaty came into force on the 29th April

1952 (Department-of-External-Affairs 2012). The treaty was previously a full three-way defence pact, but following a dispute between New Zealand and the USA in 1984 over

171 visiting rights for nuclear-armed or nuclear-powered ships of the USA Navy to New

Zealand ports, New Zealand withdrew from the treaty (Webre 2010). Yet, Australia sided firmly with the USA (Harris 1998). The Australia-US alliance under the ANZUS

Treaty remains in full force. Since the signing of the treaty, every Australian government, despite different parties, emphasised and valued the alliance. In the post

Cold War period, Australia had been the USA’s sheriff in the region such as the East

Timor issue; had joined the second Iraq War; and the War on Terror in Afghanistan.

The Australia-US security alliance was further tightened under Howard. Largely this was reflected by Australia’s unconditional support for the USA global wars and by its willingness to take a leadership role in regional affairs on behalf of the superpower – the so-called “deputy sheriff” thesis during the East Timor settlement in the late 1990s. In this give-and-take relationship, Howard lent Bush an unwavering hand to the second US attack on Iraq against strong domestic protests, almost in the way of “I gave you take”.

He defended his decision in terms of buying an insurance policy for the safety of the country in times of crisis. As pointed out by one Australian strategist, “what is important about ANZUS is not what we can assume that the USA would send their armed forces to defend Australia. It is that any potential attacker would have to think very carefully about whether they would not” (Jennings 2001 p.87). In addition US protection of its allies is not only for preventing them from being invaded. It is more detailed and routine. For instance, the USA has allowed Australia to share its valuable intelligence, from economic to political to military (Ball 2001). This has helped

Australia to avoid being hit by the Asian financial crisis in the 1990s.

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Interestingly, the Howard doctrine resonated Shigeru Yoshida’s understanding of the

USA-Japan alliance in the 1950s when he said: the USA was like a sole horse pulling a large cart (Chanlett-Avery 2011 p.2). If its allies could not share its burden, it may collapse with detriment to all. In Australia it is common sense that the USA has a global agenda. Its allies must take more responsibility to help it in the regional setting. Yet the problem is Asia’s negative response to the Howard doctrine, which helped delay

Australia’s participation in a number of key Asian multilateral forums such as ASEAN plus Three and the East Asia Summit (Hou 2005 p.134). Many Asians feel that

Australia wants to have its cake and eat it too (Cobb 2007 p.72): economic benefits from its Asian trade and assured US protection against Asian threats. Howard’s statement that he would launch pre-emptive strikes against any terrorist groups in foreign territories that planned to attack Australia angered key ASEAN states. His position was seen as being insensitive and an extension of the Bush Doctrine (Acharya

2003 p.220).

Australia’s geographic proximity to the fast-growing markets of East Asia determines that it cannot turn away from Asia economically. But at the ideological and cultural levels there is nothing wrong with Australia putting the emphasis on its western identity. Again the question of balance is important (Keenan 2007 p.27). Rudd’s idea of an “Asia-Pacific community” is important in that it readdresses the balance according to the best Australian interests (Garrett 2010b p.5). Yet, his idea is still frame-worked in the overall Australia’s Strategic Culture (ASC) that stresses more on Australia as a firm cornerstone for US forward deployment than on its economic interests. The core of the alliance is the mutual security arrangement that highlights the military component of the

173 bilateral relationship. To be more concrete, this means that Australia will continue to guarantee US military access to Asia in order for the superpower to deal with expected or unexpected events in the region. In the words of the former US Secretary of Defence

William Cohen in July 2000, Australia is one of the two key anchorages for the USA forward deployment in the Far East that serves as the foundation for regional peace and stability (Tate 2001 p.2). Another anchorage is Japan, which is even more important to the USA to deploy a forward military presence in Asia (Tate 2001 p.2). To the USA military this anchorage is of far more strategic importance now after the closure of US military bases in Asia and the Asian powers out-reach for energy resources that may induce unfriendly naval encounters (You September 2007; Erickson and Goldstein

Spring 2009 p.49). This sets the background for the conceptualization of the 2009

ADWP, whose central thesis seems to be at odds with that of the Asia-Pacific

Community.

When the White Paper, “Defending Australia In The Asia Pacific Century: Force 2030” was released in 2009, an article titled “America will not protect us, warns Rudd” published by Jonathan Pearlman, explained why the Rudd government needed such a big budget for the Australian military forces. The article begins with “the Rudd

Government has acknowledged that the supremacy of the USA has begun to fade and

Australia is preparing for an uncertain future in which it can no longer rely on the protection of its main ally” (Pearlman 2008). Early in 2004, Hugh White had observed that there are limits to the military, fiscal and political power of America (White 2004 p.44).

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When the USA Secretary of State Hillary Clinton visited Australia in November 2010, it made the alliance relations even closer. During Mrs. Clinton’s visit, Australia agreed to join forces with the USA, likely to lead to US space sensors operating from joint facilities such as the Naval Communications Station at Exmouth in Western Australia, and the prospect of a heavier US military presence in Australia (Hartcher 2010). On the

7th November 2010, the Minister for Foreign Affairs, Kevin Rudd; the Minister for

Defence, Stephen Smith; and two US cabinet members struck an agreement to set up a joint working group to enhance the US military presence in Australia and the region

(Hartcher 2010). Nothing has been put on paper yet in this regard due to much speculation (Hartcher 2010). Apparently, the USA wants to keep a core partnership with

Australia (Cobb 2007 p.71) in the region. Because of the outcome of this visit, some defence and diplomatic commentators have raised their concerns that Australia may face a diplomatic backlash from China over closer relations with the USA (Kerr 2010).

Geoffrey Garrett, head of the US Studies Centre at the University of Sydney, warned in regard to this closer cooperation that “China, economically, politically and in military terms just really matters” and “the public statements, of course, will have to be very careful in that regard” (Kerr 2010).

Australia is to build a new multimillion-dollar US defence space base to spy on foreign satellites and keep watch on dangerous space junk (Xinhua 2010a; Beidel, Erwin et al.

2011). This footprint of expansion of the US military will be built at the top secret

Harold E. Holt Naval communications station at Exmouth in Western Australia (Xinhua

2010a; AAP 2010b). However, even though the USA wanted to begin rotating Marines through an Australian base in Darwin in a permanent new military presence due to

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China’s rise (Hartcher 2011), the federal government has ruled out the establishment of a Marine Corps base in Australia but reaffirmed plans to step up joint training and military exercises with the USA (AAP 2011). Furthermore for the ally relationship, the actual content of the Australia-US FTA was branded pro-American (Kelly 2011), yet, after promising Australian farmers it was non-negotiable in inclusion, has left a bitter taste in the mouths of Australian sugar producers (Emerson 2010). As Linda Weiss,

Elizabeth Thurbon and John Mathews have described in their book titled “How to kill a country: Australia’s devastating trade deal with the United States” that the Australian government misread their special relationship with the US (Weiss, Thurbon et al. 2004).

One has to ask whether the relationship is really in Australia’s national interests. If it is not, and also affects the Australia-China relations, what kind of China policy or trilateral relations would be the best for Australia’s national interests?

4.2 Taiwan issue

On the surface, the Taiwan issue seems to not directly affect the Australia-China relations but the USA-China relations. However, the USA’s attitude towards Taiwan and its meaning in the ANZUS Treaty will influence Australia’s China policy directly.

Thus, the importance of the Taiwan issue in the trilateral relations of the USA-China-

Australia is hard to avoid at present and the near future. Respect for the core national interests of each nation is a common law when dealing with international relations and it is also one of China’s New Security Concepts. China has reiterated a list of these interests, especially over issues related to Taiwan, Tibet and human rights. Australia does not openly convey to China what it regards as its core security interests but issues

176 related to the Australia-US alliance and to its democratic value system are clearly the ones affecting Australia-China relations (Harris 2005 p.237).

China’s core national interests are hierarchical. Until the regime change in Taipei in

May 2008, Taiwan occupied a key position in the list, as it is a matter about peace and war. Whether Australia is willing to support the USA in the event of a clash with China over Taiwan remains questionable (White 2005b p.470) although Howard and Foreign

Minister, Alexander Downer, both said that Australia will not be forced to choose between the USA and China, because escalating strategic competition between them is not inevitable (Downer 2004). The former Foreign Minister, Alexander Downer, even stated that “the ANZUS Treaty is invoked in the event of one of our two countries,

Australia or the United States, being attacked. So some other military activity elsewhere in the world… does not automatically invoke the ANZUS Treaty” (McDonald and

Forbes 2004). At that critical time, Hugh White also supported Downer’s famous speech by saying “it is good that Downer has come out and spoken publicly about this”

(McDonald and Allard 2004). Howard, in response to Downer’s speech, gave an artful demonstration of the side-step denial, delivered with a heavy garnish of praise, by saying that Downer had certainly not blundered and “he has been an excellent Foreign

Affairs Minister. I have no colleague more dependable and able than Alexander

Downer”, as to Taiwan? “hypothetical” said Howard (Dobell 2009). These comments reflected Australia’s position and attitude to China at that time.

In March 2011, International Relations theorist, Charles Glaser, has joined a growing chorus in Washington calling for the abandonment of Taiwan. Glaser begins with a 177 realist argument for why war between the United States and China for Taiwan is unlikely. He argues that it is up to the United States and not China, to make adjustments to its security posture and not exaggerate threats that China poses. The United States is safe because China will never have the means to destroy its deterrent. China has limited territorial goals. Yet Taiwan is China’s core interest. China believes that Taiwan is part of it and it is non-negotiable. The Taiwan dispute has no diplomatic solution. Glaser’s innovation is the abandonment of Taiwan, a necessary step to decrease the security dilemma and reveal China's truly limited aims (Blumenthal 2011). Another American,

Paul V. Kane who was a former international security fellow at the Harvard Kennedy

School and is a Marine who served in Iraq, also published an article in The New York

Times titled “To save our economy, ditch Taiwan” (Kane 2011). Kane said in his article that the Taiwan issue “is a vestige of the cold war”. President Obama should “redefine

America’s mindset about national security away from the old defense mentality”. Kane quoted Adm. Mike Mullen who is the chairman of the Joint Chiefs of Staff that “the most significant threat to our national security is our debt”. Kane suggested that Obama could correct the USA’s course, help assure his re-election, and preserve American children’s future by enhancing the USA’s economic relations with China and improving the political and security relations with China through “closed – door negotiations with

Chinese leaders to write off the $1.14 trillion of American debt currently held by China in exchange for a deal to end American military assistance and arms sales to Taiwan and terminate the current United States – Taiwan defense arrangement by 2015” (Kane

2011). If the USA really does so, it will be a great benefit for Australia. This is because the Taiwan issue is one of the main obstacles in the trilateral relationship. Therefore, if the USA had a war over the Taiwan Strait with China, it would be a nightmare for

Australia. This is what Australia wants to avoid the most. Hence, if Glaser’s opinion

178 plays a role in US foreign policy, then Australia can be free from the dilemma and can avoid getting involved with possibly, the most difficult choices. Then the security relations of Australia and China can be much smoother.

In the last few years, Australia’s position on the Taiwan conflict has registered visible shifts. For a long time, Australia’s Taiwan policy could be defined as two ambiguities and two clarities. The two clarities were that Australia was openly critical of China’s employment of force against Taipei for reunification and it clearly matched the USA’s

Taiwan initiative as its commitment to the ANZUS Treaty. This could be seen in the case of the Chinese missile tests in 1996 when Australia was the only Asia-Pacific state that voiced strong opposition to China and strong support for the USA’s dispatch of two carrier fleets to the scene. The two ambiguities were that Australia was ambiguous to

Taipei’s moves towards independence and ambiguous as to whether it would physically join a US-led war in the Strait. The Howard administration made policy shifts in regard to the “two-clarity and two-ambiguity” situation. Australia would make its position known against both China’s offensive reunification measures and Taipei’s de jure independence moves. At the same time it would be more ambiguous towards the issue of supporting the USA involvement in a Taiwan war. Or put in another way, it made it clear that it should not be taken for granted that Australia would join a US-led Taiwan war. Immediately this adjustment caused heated debate among Australians about whether the ANZUS Treaty should be applicable to the Taiwan Strait (Tow 2005a).

Both the Prime Minister and Foreign Minister expressed the view that it should not be taken for granted that Australia would be involved in a Taiwan war (ABC 2004). All

179 this led former deputy Secretary of State, Richard Armitage to question “whether

Canberra was with us” (ABC 2005).

Those who are opposed to the ANZUS Treaty’s applicability to the Taiwan situation insist that a Taiwan war due to declared independence rather than unprovoked mainland attack should not be interpreted as “a common danger” to the USA and Australia.

Moreover, Article Four of the Treaty stipulates that a constitutional process should be initiated to authorise Australian participation in a war. This process may force most political parties to question whether joining a war far away from home and against the country’s number one trading partner would serve its best interests, especially if the war is provoked by Taipei’s unilateral change of the status quo.

It is inconceivable that Australia would entirely sit idle if a war in the Strait erupts with

US involvement. The capability building of the Australian Defence Force (ADF) has been geared to provide assistance in such a combat, whether openly or in disguise.

However, Australia’s Taiwan policy is also set on war prevention through maintaining the status quo in the Strait. This is totally in line with Washington’s and Beijing’s position. Clearly the shifts in contents of the “two clarities and two ambiguities” were foundation-paving for a solid Australia-China relationship to emerge under Howard.

4.3 Addressing Australia-USA-China triangle carefully

Traditionally Australia’s support of the USA international leadership can sometimes become rigid to the point where it may have to sacrifice its own national interests, such 180 as the Vietnam War (Kilcullen 2007 p.53). Would history repeat itself in its handling of the Australia-USA-China triangle? It is a common view that “it would not be in

Australia’s interests for China’s growing power to result in a diminution of US strategic influence or to stimulate damaging strategic competitions between China and other regional powers” (Department-of-Defence 1997). If one concludes that China’s rise is automatically a challenge to the USA leadership, it is clearly simplistic, as both countries have their own resilient management mechanisms to address their differences.

Their differences are often exaggerated by old-fashioned realists who fail to see the bounded effects of interdependence on the USA and China.

The questions for Australians to address can be listed as the following: is there clear evidence that the change in the regional balance of power undermines Australia’s security environment? Would a close security relationship with the USA be possible only through cooling Australia-China relations? The most important question for

Australia to answer is “how to have its cake and eat it too” (Cobb 2007 p.72). Without an objective approach to these questions no balanced tripartite relationship can be achieved. Probably Australia does not want to have a regular triangle, but an asymmetrical triangle at least. Yet the change in power parity between the USA and

China will make this option more and more expensive. In a desperate move to rescue the Australian-Japanese relations Minister John Faulkner told the Japanese Foreign

Minister, Okada in February 2010 that, as commented by Hugh White, “we may disagree on whaling but Australia is on your side against China” (White 2010b). The approach is fatuous and dangerous. It does Australia no good ameliorating an insult to one major power by a gesture that antagonizes another.

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A worst case scenario mentality, as exemplified in the 2009 Australian Defence White

Paper (ADWP), offers no clear-cut operation for policy formulation in regard to China’s rise. For instance, the confusion in Australia’s defence guidance: defence of Australia or for helping US operations elsewhere, resulted in the ADF debate on what future military engagement it would plan for and for this scenario, the best suitable weapons systems: facing off the Chinese PLA, international terrorists or other adversaries? Australia’s

China policy, if it does have one currently, has become ad hoc since 2009. To some analysts, Australia’s security policy and economic policy seem to have disintegrated, as the former is driven by a hedging guidance and the latter by profit logic (You 2010).

Another example besides the ADWP also indicated that Australia-China relations seemed to worsen under Rudd. It was revealed by WikiLeaks in February 2011 that

Australia and the USA signed a secret satellite spy deal in February 2008 (Dorling

2011b), when the relationship was at its best. Although this will not affect the relationship immediately and directly, yet, it reflected Rudd’s attitude towards China and explained the contradictions of his China policy.

Will Australia agree to negotiate a new order with China that gives Beijing a bigger role and allows it to exercise more influence in Asia than it has for a long time? Or will

Australia refuse to negotiate, and insist on preserving the old US-led order leaving it unchanged? Although “whatever we do, China is now too strong to be contained within the old regional order”, yet, Hugh White deems surely that preserving the USA-led old order in Asia is safer than giving in to Chinese pressure to build a new one (White

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2010c). Therefore, the choice is only between preserving the safe old order or building a riskier new one.

Many people are tempted to see China in the same way as how the Soviet Union behaved in the 1940s. But as soon as one compares China with the Soviet Union the differences are clear. The Chinese Communist Party’s (CCP’s) legitimacy does not depend primarily on external enemies, but on internal success, especially economic success (DeLisle 2007a; You 2010). It is perfectly possible to conceive a new order in

Asia in which China plays a much larger role than it would under US primacy. Where will Australia draw the line between what it would not be willing to give up and some things that might be negotiable with both the USA and China? When will be the proper time for Australia to negotiate?

It is short-sighted to alienate China and its Asian neighbours and push them closer to

America’s side (White 2010c). No one wins if Australia sees China’s growing power as something that must be inevitably feared. If it was a zero sum game between the USA and China, Australia could gain something from it by adjusting its diplomatic and strategic policies. If it was not, or if Australia still hopes to make it a positive sum game, as it has been for the past forty years, then Australia would be clearly closer to the USA’s side (McDougall 2011 p.10). This seems a clearer explanation of why

Rudd’s (2009) White Paper sees China as a threat (You 2010).

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5. Summary

The historic power shift makes the rise of China a very important factor for Australian defence policy (White 2009a p.2). It is very possible that the USA-Chinese power transition can be very different from the past great-power rivalries in international relations that resulted in war (Tow and Rigby 2011 p.161). To Australia the ultimate challenge of China’s rise lies in its ability to “having the cake and eating it, too”, as mentioned earlier. Coping with an era of uncertainties is unavoidable. In fact this is a common practice of most Asian countries that have adopted a strategy of securing the

USA’s security protection while benefiting from China’s economic expansion. This is not really a hard thing to do: be sensible and sensitive to Chinese core strategic interests, and at the same time provide access to the USA’s forward deployment to guard against uncertainties in the process of regional order restructuring.

The Australian strategic culture, the concept of ‘Tyranny of Distance’, still shapes its defence policy. The 2009 Australian Defence White Paper is a typical example of showing this concept. However, if the perception of security uncertainty does not changed, then the sense of operational environment and capability cannot adapt accordingly.

The USA factor in Australia-China relations and Australia’s China policy are unavoidable. Therefore, managing the trilateral relations is a challenge to the Australian government. The Taiwan issue is an important factor in the trilateral relations although after the regime change in Taipei in 2008, the biggest security challenge for Australia,

184 namely participating in a USA-led Taiwan war, has been removed from the horizon for the time being. Given Australia’s special relations with America, Australia may have to make further efforts in striking a delicate balance between China and the USA than with other Asian countries. In fact this is not an impossible mission: Howard basically achieved this balance in his last term in office.

Although engagement between Australia and China on defence and strategic issues has been enhanced, the bilateral Defence Dialogue has been upgraded to the level of

Secretary of the Department of Defence and Chief of the Defence Force (DFAT 2010c).

It is not just the USA factor that has constantly been behind Canberra’s decision on its relations with China, but more profoundly, Australia’s own strategic defence culture sets the limits of what the government can do and the concept of ‘tyranny of distance’ still have influence on Australia’s ASC. Any major decision would call for an informed debate of what the most important Australian national interests are, in positioning itself in between China and the USA, the largest trading partner and the largest political ally.

The Australia-USA-China triangle relations are in a state of flux, thus addressing this triangle relationship more sensibly is necessary. This will be a hard learning process paralleling the on-going restructuring of the global order; and an inevitable one as well.

Citing William Tow and Richard Rigby’s conclusion of their ‘China’s pragmatic security policy: the middle power-factor’ that if Australian “policy leaders succeed in overcoming security challenges, such achievement could assist in achieving regional and global cooperation and stability (Tow and Rigby 2011 p.178).

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Chapter 7 Economic relations: Australia and China in

a relationship of interdependence

1. Introduction

Australian national interests cover everything from the workings of the global economic order and access to markets for its exports (White 2008a p.66). As a result of strongly complementary economics between Australia and China, trade and investment relationship is substantial and has developed well beyond its modest beginnings in the

1970s. According to Australian statistics, two-way merchandise trade has grown from

A$113 million in 1973 (Downer 2010), just after the establishment of diplomatic relations, to A$85 billion in 2009 (DFAT 2010b) and reached $113 billion in 2011

(DFAT 2011e p.5). Although world trade values fell 23% in 2009 and Australia’s two- way trade in goods and services fell 10%, yet, Australia’s exports to China increased by

29% (DFAT 2011g p.11). China is Australia's largest trading partner in two ways, with total trade (goods and services) in 2009 valued at A$85.1 billion, an increase of 15.1% over the previous year. These included total merchandise exports to China valued at

A$42.4 billion, an increase of 31.2% on the previous year; exported 266.2 million tonnes of iron ore to China (A$21.7 billion in value terms), an increase of 45.2% over the same period in 2008; coal exports to China grew by 1000% to become Australia’s second largest export commodity, behind iron ore; exported A$3.4 billion in agricultural goods to China; wool was Australia’s largest agricultural export to China (266,141 tonnes worth A$1.38 billion – 66% of China's total wool imports); valued at A$5.5 billion, services exports to China are dominated by educational and recreational travel and have averaged an annual growth of 18% over the past five years. Australian

186 investments in China reached $6.9 billion in 2008, approved Chinese investments in

Australia are worth around A$60 billion (on the 25th May 2010) (Australian-Embassy-

China 2010). Thus, the development of the economic relationship with China was of great importance for Australia’s continuing economic prosperity (McDougall 2009 p.143).

According to the International Money Fund (IMF) estimates, in purchasing power parity terms the EU accounted for 22% of world GDP in 2009, the USA for 20%, China for

12% and Japan for 6% (Hanson 2011 p.9). Also according to the IMF prediction in purchasing power parity (PPP) terms, China’s economy will surpass that of the USA by

2016 (Rudd 2011b). By 2016, China’s economy is likely to be seven times the size of

Australia’s (Rudd 2011b). Australia’s trade with China is worth $13,400 to every

Australian household in 2011, a 30% rise in the past year alone (Callick 2012). In the

2010 Lowy Poll, a majority (55%) of Australians said China is ‘the world’s leading economic power’, only 32% said the USA, 8% said the EU and 3% said Japan (Hanson

2011 p.9).

Obviously, politics and economics are inseparable (Scholte 2005 p.439). Economics may not be everything but no account of world politics is adequate if it does not explore the economic dimension (Scholte 2005 p.439). Globalization means the process of increasing interconnectedness between societies such that events in one part of the world increasingly affect peoples and societies far away (Baylis and Smith 2005 p.7).

These events include social, economic and political developments (Baylis and Smith

2005 p.7). Globalization became a phenomenon of major interest in the 1990s. It is 187 increasingly recognised as having a powerful influence upon business, governments and societies across the world (O'Neill, Basu et al. 2007 p.1). Thus, the international political economy is one of the most important elements of the structure of international politics and a central issue area for globalizing international relations (Tooze 1997 p.212).

By conventional wisdom, trade is conducive to development (Wan 2002). Trade has been crucial to the economic development of Australia, with its small population and consequent small domestic market for its goods (Kelton 2007 p.249). One in five

Australian jobs are directly related to trade (DFAT 2011b). Australian foreign trade has grown 600% during the lifetime of the WTO (DFAT 2011b). Through the age of discovery to the peak of colonial rule in the 19th century, trade has been a partner to the security agenda. Initially, Australia’s foreign trade depended on Britain and the protection afforded by high tariff walls. However, from the 1980s, Australia attempted to become more outwardly oriented and liberalise its trading barriers. Its active international trade diplomacy from the 1980s onwards demonstrated a brand of middle power activism, successfully exacting whatever gains could be had at the margins of world trade (Kelton 2007 p.249).

In global trade, there is no doubt that China, as a re-emerging superpower (Thirlwell

2007 p.3), and the world’s largest recipient of foreign direct investment (Coppel 2007 p.18), is a major economic force (O'Neill, Basu et al. 2007 p.5) on the new world market. Since China opened to the outside world in 1979, its real GDP has increased by over 9% per annum for over 20 years (Nicholson and Thompson 2007 p.49), as shown 188 in table 1 below. China may one day regain its historical position as the world’s largest economy (Friedberg Fall 2005 p.17). China’s importance to Australia has grown with

China’s increasing economic, political and strategic weight in the Asia Pacific region and the global economy (ABS 2007). Australia’s trade and economic ties with China expanded immensely, underpinning a new level of Australia’s prosperity. The highly complementary economic relations between Australia and China benefits Australia with economic growth but low inflation (Truss 2006a). Australia-China economic relations have boomed in the last decade and resulted in an unprecedented level of interdependence.

Table 1 GDP growth (% change year over year)

Country or Region 1987 2000 2004 2005 2006 2007 2008 2009 2010

World 4.8 4.9 4.7 5.3 5.2 3,1 -0.7 4.9

China 11.6 8.4 10.1 11.3 12.7 14.2 9.6 9.1 10.4

Australia 2.6 4 4.1 2.8 3.1 3.8 3.7 1.3 2.3

Source: World Bank Database. http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG and http://www.indexmundi.com/g/g.aspx?c=xx&v=66

The above table 1 showed comparison of GDP growth rates of the world, China and

Australia.

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1.1 Relationship of deepening economic interdependence

The nature of the economic relationship between Australia and China is interdependence (Crean 2010a). Australia’s economic relationship with China is the product of a changing Australian economy and Chinese economy (Edwards 2007 p.13) as shown in table 1 above. Prior to the 1990s, as evident from charts 1 and 2 below, reproducing Australia’s export markets and import sources, they showed China was an unimportant trading partner for Australia. But by the early 1990s, it had become one of

Australia’s top ten trading partners. This trend continued. By 2007, as demonstrated in chart 3 below, China had become Australia’s top import source and the second most important export destination. Trade with China in 2010 reached A$97.524 billion

(US$90.044 billion), a 24.54% increase compared to the year before (中國商務部

(Chinese-Ministry-of-Commerce) 2011). The share of exports in Australia’s GDP increased, and at the same time the share of exports going to China increased due to

China’s strong growth and industrialization, while the composition of exports changed.

Foreign trade contributed more than 61% of Australian GDP while trade with China accounted for 14.7% of total trade (DFAT 2009c p.5) and nearly 10% of Australian

GDP in 2009. With regards to the table of Australia’s trade by broad category, shown in table 2 below, and the charts of the composition of exports and imports reproduced below as charts 4 and 5, it is evident that manufactured and service exports are now consistently higher than rural exports. Charts 4 and 5 of Australia’s export market and import sources below demonstrated that there has been a corresponding increase in the import share of consumption, which is reflected in imports from China. China is developing an open economic model that will very likely characterise its development over the next several decades; this will provide opportunities for Australian business

190 that are quite different from the current commodities-dominantt pattern of Australian exports to China.

Table 2. Source: Composition of trade 2010-11 (DFAT 2011e p.Vii).

The above table 2 showed China was Australia’s biggest trading partner and the USA was the fifth.

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The above chart 1 showed in the years of 1988-1989 and 2008-2009 that Australia’s export markets had changed. Asian countries had imported from less than half of

Australia’s export market to almost two-thirds. Amongst these changes, China’s proportion had significantly increased from 2.6% to 15.6%.

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The above chart 2 shows in the years of 1988-1989 and 2008-2009, Australia’s import sources had changed. Asian countries had significantly increased their proportion of exports to the Australian market. The most obvious increase was China i.e. increased from 1.8% to 13.8%.

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The above chart 3 showed Australia’s export markets and imporrtt sources had changed during the period of 2009-20111. China was still the biggest Auustralian export market and import source.

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Source: Australian DFAT Australian fact sheet, Australia composition of trade, and ABS.

The above table 3 showed the top Australian export and import products. This can also indicate the structure of the Australian economy.

The above chart 4 showed the proportion of import products of the Australian economy.

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The above chart 5 showed the proportion of export products of the Australian economy.

Both charts 4 and 5 also indicated the structure of the Australian economy.

There is a simplistic view that all China requires of Australia is its resources (Crean

2010a). Australia has a variety of goods and services to export to China that goes through an important development phase. China is moving to a more consumption- driven economy from reliance on exporting cheap manufacturing products (Crean

2010a). Australia can play a key role in China’s development of service industries, such as consumer driven-economy-urban development, logistics, infrastructure, retailing, and financial sectors (Crean 2010a). In recent years, the growth of exports of Asian countries and the USA to China have been much faster than the growth of Asian exports to the USA or Europe (Edwards 2007 p.14). Thus, Australia’s ability to maximise the benefit gained from China’s economic development is important to its own development and continued prosperity.

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The Australia-China two-way investments have lagged behind the trade relationship but were growing. In 2006 China was the 17th largest investor in Australia with total investments of $3.4 billion and its largest investments were in the resources sector reflecting China’s development demands. In the same period, China was Australia’s 21st largest investment destination ($3 billion). China had approved 5000 Australian investments and these were mostly in financial institutions such as Chinese banks and some were in the Chinese mining sectors (DFAT 2008c).

Table 4 Australia’s investment relationship with China 2009 (A$m) (a)

Total FDI

Australia’s investment in China 6,327 2,347

China’s investment in Australia 16,637 9,167

Source: DFAT: Australia Fact Sheet. a. Stock, as at 31 December. Released annually by the ABS.

The above table 4 showed Australia’s investment in China and China’s investment in

Australia in 2009. Comparing the size of these two economies, investments in either country are uneven.

Non-resource merchandise exports were also benefiting from China’s economic growth during that period, in particular from spending by China’s emerging middle class. This growing middle class is opening up opportunities for Australian exports of food such as dairy items, organics and wine, and consumer goods such as art, jewellery, cosmetics, giftware and pet care products. Australian manufacturing is also benefiting from

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China’s emerging middle class, with exports increasing by 21% to $2.8 billion in 2006-

07. Australian companies also benefited by largely supplying production inputs, including machinery and equipment, electrical products and chemicals.

Table 5 Major Australian service exports to China 2009 (A$m)

Education - related travel 4,102

Personal travel excl education 603

Source: DFAT: Australia Fact Sheet.

The above table 5 showed that major Australian service exports to China in 2009 were education and travel.

Table 6 Major Australian service imports from China 2009 (A$m)

Personal travel excl education 578

Transportation 408

Source: DFAT: Australia Fact Sheet.

The above table 6 showed that in 2009, major Australian service imports from China were travel and transportation.

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Table 7 Comparing Australian foreign trade and China trade in Australian GDP

(US$bn)

2004 2005 2006 2007 2008 2009 (a)

Australian GDP (current prices) 640.6 738.3 784.5 951.4 1,038.6 920.1

Total Foreign trade (A$M) 338.288 378.651 430.803 454.232 560.8 506.8

% Foreign trade in Australian 52.81 53.04 56.95 49.78 55.35 55.08

GDP

Total China trade 24.14 31.28 38.26 58.0 73.8 85.1

% China trade in Australian 4.38 5.25 5.06 6.36 7.28 16.8

GDP

A$1=US$0.8344 (August 2009). (a) All recent data subject to revision.

Source: Australian DFAT: Australian fact sheet; Australia composition of trade (07,08,

09); and ABS.

The above table 7 showed the trend of the ratio of foreign trade in Australia’s GDP and

China’s trade in Australia’s foreign trade and GDP.

China is in the process of industrialization and is therefore reliant on raw materials e.g.

iron ore and energy resources to develop its heavy industries. China has become a major

buyer of iron ore and pellets, lead concentrate and LPG produced in Australia, and these

commodities accounted for 52%, 50% and 14% of total exports in 2006 (ABS 2006).

Table 8 below shows that Australia accounted for 52% of iron ore exported to China in

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2005, 53% in 2006, 55.5% in 2007, 59.61% in 2008 and 73.11% in 2009 (DFAT 2009c

p.27,172). The chart 6 below showed Australia was the biggest iron ore supplier for

China in 2009. All of this demonstrates how important the countries are to each other.

Table 8 Australia trade with China

Australia trade with China

A$’000 2003 2004 2005 2006 2007 2008 2009

Australia total export 144,697,000 157,240,000 180,933,000 209,609,000 217,644,000 277,900,000 249,900,000 value

Total exports to China 9,088,832 11,012,484 16,127,487 20,373,063 23,646,787 39,310,000 47,910,000

% in total Australian 6.28% 7.00% 8.91% 9.72% 10.86% 14.15% 19.2% exports

Australia total import 165,236,000 181,048,000 197,718,000 221,194,000 236,588,000 282,900,000 256,900,000 value

Total imports from China 14,256,029 17,923,377 21,364,467 25,483,258 29,014,954 36,700,000 37,345,000

% in total Australian 8.63% 9.90% 10.80% 11.52% 12.26% 12.97% 14.5% import

Total Australian foreign 309,933,000 338,288,000 378,651,000 430,803,000 454,232,000 560,800,000 563,700,000 trade

Total trade with China 23,344,861 28,935,861 37,491,954 45,856,321 52,661,741 76,356,000 85,108,000

% in Australian foreign 7.50% 8.55% 9.90% 10.64% 11.59% 13.62% 16.8% trade

Source: DFAT’s composition of trade Australia 07, 08, and 2009.

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Table 8 above showed Australia’s trade relations with China i.e. percentages of total

China trade in Australia foreign trade, percentages of exports to China in Australia’s total exports, and percentages of imports from China in Australia’s total imports.

Exports to China have been growing faster than imports from China since 2008. Trade with China was growing faster than Australia’s total foreign trade. It was this trade that saved Australia from recession during the global financial crisis in 2008 and 2009. It also indicates the importance of trade to the development of both countries in the light of international trade theories such as the comparative advantage and the H-O theory.

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The above table 9 showed that China was also Australia’s number one two-way trading partner in 2008.

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Table 10 China’s top trading partners 2008 (US$bn)

Rank Country/Region Volume % change

1 USA 333.7 10.5

2 Japan 266.8 13

3 Hong Kong 203.7 3.3

4 South Korea 186.1 16.2

5 Taiwan 129.2 3.8

6 Germany 115.0 22.2

7 Australia 59.7 36.1

8 Russia 56.8 18.0

9 Malaysia 53.5 15.2

10 Singapore 52.4 10.5

Percentage change over 2007.

Source: PRC General Administration of Customs, China’s Custom’s Statistics.

The above table 10 showed Australia was ranked as China’s 7th largest trading partner in 2008.

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Table 11 China’s top 10 export destinations 2008 (US$bn)

Rank Country/Region Volume % Change

1 USA 252.3 8.4

2 Hong Kong 190.7 3.4

3 Japan 116.0 13.8

4 South Korea 74.0 31.0

5 Germany 59.2 21.5

6 The Netherlands 46.0 10.8

7 UK 36.1 13.9

8 Russia 33.0 15.9

9 Singapore 32.3 7.9

10 India 31.5 31.2

Percentage change over 2007.

Source: PRC General Administration of Customs, China’s Custom’s Statistics.

The above table 11 showed that Australia was not among the top 10 most important destinations for China’s exports.

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Table 12 China’s top import suppliers 2008 (US$bn)

Rank Country/Region Volume % Change

1 Japan 150.7 12.5

2 South Korea 112.2 8.1

3 Taiwan 103.3 2.3

4 USA 81.4 17.4

5 Germany 55.8 23.0

6 Australia 37.4 44.8

7 Malaysia 32.0 11.8

8 Saudi Arabia 31.0 76.6

9 Brazil 29.7 62.2

10 Thailand 25.6 13.2

Percentage change over 2007.

Source: PRC General Administration of Customs, China’s Custom’s Statistics.

The above table 12 showed that Australia was China’s sixth largest import source.

In this economic relations chapter, the complementarities of the bilateral trade relations will be illustrated by the two-way merchandise trade; trade conflicts will also be analysed with reference to iron ore prices; Politics, diplomacy and strategic factors

205 behind trade conflicts will be discussed; and the Australia-China free trade agreements and barriers will be analysed from different angles.

1.2 Complementarity: the core of Australia-China trade theory

Australia-China economic relations are influenced by many factors. That each of the countries’ economic structures is complementary to the other reflects the comparative advantage theory. Australia’s comparative advantage in resources vis-a-vis China’s comparative advantage in its labour-intensive industries embedded in its large population and lower labour costs may give way to a new situation where China upgrades its industrial structure with a rising share of the service industries. The current comparative advantage of each side might decrease or disappear due to political influence or in due time.

The rapid increase in the Australia-China bilateral trade stems not only from the fact that the two countries experienced rapid economic growth in the first decade of the 21st century and reaped the benefit of trade liberalization undertaken by both countries as part of the Asia-Pacific regional economic cooperation, but also from their complementarities in their production and trading structures (Sheng and Song 2008). As an intensive agriculture and resource based country, Australia’s comparative advantage is in the form of wheat, milk, animal products, and mineral goods such as iron ore and energy products to China. As a rapidly industrializing country, China absorbs raw materials from Australia and exports its comparative advantage in the form of labour intensive manufactured goods such as textiles and clothing, electronic products as well

206 as some general machinery to Australia (Thirlwell 2007 p.6), which provides Australia with cheaper consumer goods. Hence, Australia-China bilateral trade has been driven mainly by the two countries’s underlying comparative advantage, which form a special pattern of international specialization between the two countries (Sheng and Song

2008). Such specialization plays a key role in each country’s overall trade with the rest of the world (Martin 2007 p.60). Hence, the Australia-China trade theory is mostly the comparative advantage theory as has been explained in Chapter 3.

2. Complementarities economic development

2.1 Interdependence as the key

According to Mai (2005),”the deepening of the economic partnership between Australia and China is due, in the main, to the complementarities in the dynamics of the two economies. The complementarity, which originates from the respective economic endowments and development paths of Australia and China, is revealed in the evolving patterns of bilateral trade and investment” (Mai 2005 p.2).

The complementarities of Australia-China economic relations can also be illustrated by the composition of Australia’s and China’s merchandise trade. The chart of Australian principal exports (chart 7) indicates that the top two Australia’s export commodities to

China were coal and iron ore in 2008. Table 8 showed that the single item of iron ore accounted for 72% of the value of its total or about A$22 (DFAT 2009a) billion earned by exports to China in 2009. Thus, iron ore dominates Australia’s exports to China.

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Australia’s main imports of merchandise from China in 2009 were clothing (A$4.281 billion), telecommunications equipment and parts (A$3.120 billion), computers

(A$2.798 billion), prams, toys, games and sporting equipment (A$2.197 billion) (DFAT

2009a). The types of manufactured goods that Australia imports from China have become more sophisticated and have increased in range in recent years. According to

Tisdell (2007) “there has been a noticeable increase in household electrical appliances supplied by China to Australia” (Tisdell 2007 p.15). Half of the categories of China’s top ten exports (table 13) and imports (table 14) consist of manufactured goods, the remainder being primary or near-primary products. Table 13 indicates that the top 10 types of merchandise exported from China were labour intensive manufactured goods and which “Australia could not or would not make” (Garnaut: SMH: 21st February

2009).

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Table 13 China’s top 10 exports 2008 (US$bn)

Rank Commodity description US$billion % Change

1 Electrical machinery & equipment 342.0 13.9

2 Power generation equipment 268.6 17.5

3 Apparel 113.0 4

4 Iron & steel 101.8 32.9

5 Optics and medical equipment 43.4 17.0

6 Furniture 42.8 19.0

7 Inorganic and organic chemicals 42.4 39.9

8 Vehicles, excluding railway 39.3 23.5

9 Toys & games 32.7 20.6

10 Mineral fuel & oil 31.6 52.0

Percentage change over 2007.

Source: PRC General Administration of Customs, China’s Custom’s Statistics.

The above table 13 showed that China’s top 10 categories of exports consisted mostly of labour-intensive manufactured products.

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Table 14 China’s top 10 imports 2008 (US$bn)

Rank Commodities description US$billion %Change

1 Electrical machinery & equipment 266.5 3.8

2 Mineral fuel & oil 169.1 61.1

3 Power generation equipment 138.9 11.8

4 Ores, slag & ash 86.4 59.9

5 Optics & medical equipment 77.7 11.7

6 Plastics & articles thereof 48.9 7.8

7 Inorganic & organic chemicals 48.5 8.3

8 Iron & steel 35.1 12.9

9 Vehicles other than railway 26.9 21.7

10 Coppers & articles thereof 26.1 -3.9

Percentage change over 2007.

Source: PRC General Administration of Customs, China’s Custom’s Statistics.

The above table 14 showed China’s top 10 imported goods in 2008.

China’s ongoing industrialization and urbanization require great amounts of raw materials. China imported a total of 630 million tonnes of iron ore in 2009, up 41.6% on a year-to-year basis, while the iron ore import dependency ratio increased from 44% in

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2002 to 69% in 2009 (Metals 2010; 王潔 Wang 2010). The chart 6 below showed that

66% of the iron ore imported by China was sourced from Australia. Australia’s economic structure is being transformed from an industrialized type economy to a high- tech type. This transformation needs capital support. Trade with China is one of the major sources of capital accumulation to effect the transformation. Thus, in terms of economic structure, Australia and China constitute complementarities for each other which emphasize that trade between them benefits both countries.

Chart6. China’s iron ore suppliers

Source: FT on: http://ftalphaville.ft.com/blog/2010/01/07/121431/china-iron-ore-and- frank-timis/

The above chart 6 showed that Australia was the most important iron ore import source for China in 2009.

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The above chart 7 showed Australia’s top exported and imported goods in 2006, 2007 and 2008. Coal was Australia’s top export and iron ore was the second in these years. In

2011, this situation changed. Iron ore became the top Australian export.

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Besides trade in resources and manufactured goods, a much less obvious example of complementarities was trade in food. Australia has been a major producer of food. The

Australian Bureau of Agricultural and Resource Economics (ABARE 2006) reports significant changes taking place in the demand for a range of agricultural products which China’s farmers were unlikely to be able to supply because of constraints such as shortage of water and land degradation. These changes have enhanced the comparative advantage potential for developing a greater export trade of food to China. In 2004 -

2005, exports of grain to China grew by 160%, boosting the growth of Australia’s food exports to China by 85% (AFN 2007; Basu, Hicks et al. 2007).

2.2 Uncomplementary factors as the source of trade rifts

The existence of trade inevitably gives rise to trade rifts. Such disagreements not only appear between developed and developing countries but also between countries with similar economic development stages (Polachek 2005 p.142). In general, the tools and general trends that international trade operates under are liberalization (Polachek, Robst et al. 1999 p.406) and protectionism. In terms of the latter, protective measures commonly include high import taxes and subsidies (Bernauer 2005) which shield national producers against lower priced and more competitive products that may enter the country from outside.

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2.2.1 Uncomplementary factors and clash of interests

No matter how great the complementarities, rifts are still likely to exist between economies. An example of the clash of interest between Australia and China is the dispute over the annual contract price of iron ore.

Table 15 Australia iron ore exported to China

A$’000 2003 2004 2005 2006 2007 2008 2009

Iron ore 1,739,466 2,515,238 5,763,310 7,627,491 9,023,521 17,931,980 21,699,921 exported to China

Total 5,095,884 6,163,535 11,071,318 14,365,713 16,258,000 30,221,000 30,249,000

Australia n iron ore exported

% in 34.13% 48.81% 52.06% 53.10% 55.50% 59.61% 72% total iron ore exported

Source: DFAT Australia composition of trade 2007, 2008, and 2009.

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Chart 8. Comparison of iron ore exported to China in total Australian iron ore exported.

35,000,000

30,000,000

25,000,000

20,000,000 Iron ore exported to China[1] 15,000,000 Total Australian iron ore 10,000,000 exported[2]

5,000,000

Source: DFAT’s composition of trade Australia 07, 08, and 08-09.

The above chart 8 showed that the growing iron ore trade with China was faster than total Australian iron ore trade and the Chinese market had consumed most of Australia’s iron ore exports.

It is obvious from table 15 above, that Australian iron ore exports to China increased exponentially especially from 2003 to 2009. In 2009, 72% of Australian iron ore was exported to China. The annual contract price for iron ore also increased significantly for more than a decade after 1993. The peak price increase was in 2008, which represented a rise of 97% or almost double the price (Baosteel 2008), compared with the previous year. Chinese media commentators reported that the accumulation of the annual iron ore contract price increase from 2003 to 2008, meant that the benchmark price had

215 increased more than 4.6 fold. Chinese steel mills asserted that they had over-paid more than US$700 billion due to the increase of the annual contract price. This amount is equal to more than twice the total amount of the Chinese steel producers’ profits over the same time period (Oriental Morning Post: 8th November 2009). This was also one of the reasons that the annual iron ore contract price of 2009 paid by Chinese mills to

Australian iron ore producers could not be settled as both parties strove for greater profits. Thus, although iron ore is one of the greatest complementary commodities in

Australia-China trade relations, its price is also the source of one of the greatest rift of interests.

2.2.2 Technical or structural problems?

Disagreements over complementarities are different to those of competitive conflicts.

Whether there are comparative advantages or complementarities in trade relations, trade disagreements are simply technical problems. Structural conflicts emerged, which are not merely technical, in the process of the Australia-China free trade negotiations, especially in the areas of agriculture, services and investments. Yet, while such rifts or conflicts may be unavoidable, they are not irresolvable. Furthermore, whenever there are economic and trade disputes or conflicts, China wishes to seek a peaceful solution and achieve a win-win progress which would be in the interests of all the parties concerned (Pan 2007 p.20).

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2.3 Politics, diplomacy, and strategic factors behind trade rifts

Australia has a competitive edge in the export of agricultural goods, mineral commodities, energy products, services and ideas including education, architectural, law and financial services in its trade with China. However, politics, diplomacy and strategic factors can create barriers for the Australia-China trade or directly affect bilateral economic relations.

An example is Australia’s image as a favoured destination for Chinese investments which is still dented by perceptions generated in 2008 when heated political debate on resources ownership by foreign investments blurred guidelines and confused investors

(Tasker 2011a). Ian McCubbin, Norton Rose’s China practice group leader, said that

“the reality is that there is a perception gap between the real and genuine benefits

Australia offers, so the Chinese are still saying Australia is a difficult jurisdiction. Thus they are turning their attention to other destinations” (Tasker 2011a).

Another example is when the US Secretary of State, Hillary Clinton, visited Australia and enhanced the military and political alliance between Australia and the USA. Some defence and diplomatic commentators have raised fears that Australia may face a diplomatic backlash from China over closer relations with the USA (Kerr 2010).

Australia and China have different political systems, ideologies and trade regimes that require policymakers to be skilful in handling their differences (Jia and Zhong 2007 p.35). The Howard government did well in this regard by concentrating on trade in the 217 bilateral relations, and avoided the politically sensitive issues, such as human rights

(Garnaut 2009h). China’s attitude to the bilateral economic relations indicates that it wants to maximize the cooperative aspects while containing differences. Australia for its part, wants to act as a middle power that can interact with a major power (Jia and

Zhong 2007 p.34). But as their stages of development are different, some rifts or conflicts are unavoidable. Challenges and opportunities coexist side-by-side. How to turn challenges into opportunities are tests of wisdom for the two states.

3. Australia-China Free Trade Agreement (ACFTA)

3.1 The need for a free trade agreement (FTA)

The Australia-China Free Trade Agreement (ACFTA) is an important subtopic in this chapter. The negotiation of a comprehensive FTA with China places Australia in a unique and potentially lucrative position (Burrows and Kirk 2007). FTAs are a vital part of trade policy (Crean 2010b). Worldwide economic integration has intensified as the expansion of global commerce, finance, and production links together the fate of nations, communities and households across the world’s major economic regions and beyond within an emerging global market economy (McGrew 2008 p.16). The

ASEAN– China FTA and the New Zealand–China FTA have stimulated the Australian farmers to clamour for a similar FTA between Australia and China. The ASEAN-China

FTA encompasses a population of 1.8 billion, and is also the third largest global trade group behind the European Union and the North American Free Trade Area (NAFTA).

The China-ASEAN FTA's annual trade volume is expected to reach $1.2 trillion by

2010. ASEAN leaders believe that “China’s rise presents a historic economic opportunity rather than a security threat” (Greenlees 2006). Most ASEAN nations are 218 neighbours of either Australia or China, which means that the power and influence of the ASEAN – China FTA are unavoidable and affect Australia’s national interests.

The New Zealand-China FTA sets an example for Australia to negotiate with China.

New Zealand, the first Western country to recognize China as a market economy in

April 2004, also became the first developed economy to launch bilateral FTA negotiations with China in November of the same year. The final agreement was signed on the 8th April, 2008. This indicated that New Zealand realised it was in a unique position to act as a gateway between Chinese, European and US firms. Any agreement with China would make New Zealand a more attractive place for investments for companies looking to access the huge Chinese market (Schwarz 2005). New Zealand learnt a hard lesson when Mexico joined the North American Free Trade Agreement

(NAFTA), since its market for dairy products disappeared almost overnight (Liou 2007 p.206). What was realized was that they could “gain from being first in the queue is the possibility of having a competitive advantage for a while and setting the FTA framework, rather than following bigger players and having to do a deal on their terms”

(Liou 2007 p.206). Both Australia and New Zealand categorise themselves as Western countries but have similar geographic locations closer to Asia. Furthermore, the

NZCFTA focus on promoting New Zealand’s commodities has stimulated the

Australian farmers to try to do likewise. According to the Australian Bureau of

Agricultural and Resource Economics (ABARE), “demand from China was the key driver in global commodity markets” (Liou 2007 p.203). China had become the top trading partner by the last quarter of 2007 and this was confirmed when trade value reached more than $76 billion in 2008 or 13% of the total, which was 48% higher than

219 in 2007 (ABS: 2008). Australian trade with Japan rose only 11% annually between

1995 to 2005 vis-à-vis trades with China up 77%. RAND Pacific Currents concluded that Australian “…policymakers and business leaders continue to see China as increasingly central to the health of Australia’s economy, a perception that will shape bilateral trade relations and broader China policy” (Medeiros, Crane et al. 2008 p.208).

For China, there are several reasons for pursuing FTAs and integration in a liberal international economic order (Delisle 2007b). A broadly liberal international trade order that includes China serves the national economic interests defined by reform-era

Chinese leaders. For more than thirty years, economic development has been the predominant goal, supported by international economic openness. Furthermore, China’s ideology and practice have stopped well short of establishing significant FTAs or providing much support for trade liberalization beyond the extant international norms.

A key component of China’s FTA strategy is to get wider acceptance of ‘market economy status’ (Sally 2004 p.44) by the international family. Moreover, China’s uneven and ambivalent approach to trade liberalization can be partly explained in terms of interest group politics with Chinese characteristics. China’s sharply expanded engagement with the increasingly liberal international trade order has delivered unevenly distributed benefits within China (Delisle 2007b p.44). China has now reached a stage of economic development that enables it to open up further to international competition and to integrate itself into the regional and global economy for long-term gains (Yang 2004 p.3). Hence, the FTA with Australia can satisfy China not only for economic development, but also for domestic and international politics.

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Australia and China agreed to commence negotiations on a free trade agreement on the

18th April, 2005 (DFAT). The aim of this putative agreement was to promote potential benefits to both countries. In a DFAT media release in 2008, Australia’s Trade

Minister, Mr Simon Crean said the trade figures with China “… show there is much potential for our trade to grow even further, which is why we are working hard to negotiate a free trade agreement with China” (Crean 2008). Kevin Rudd also “promised to try to get speedier progress on the China-Australia free trade agreement” when he was the Australian Prime Minister (Grattan 2008). If successful they would no doubt draw the two countries even closer together strategically as well as economically” (Pan

2006 p.403).

The global economy is experiencing a period of unusual uncertainty, with debt crises in

Europe, further quantitative easing in the United States and overheating in China

(Emerson 2010). However, it remained uncertain whether the deadlocked FTA negotiations with China could be unlocked or not. In the current absence of an FTA, barriers to the growth of the Australia-China trade are the existence of tariffs, tariff rate quotas and the cost of re-testing Australian commodities in China. Another problem is the regulations applying to the Australian services-sector efforts to access the Chinese market.

For example, the Chinese market is vital to Australia’s wool industry. Australia exports

98% of its wool clip globally and 60% of the total goes to China (Read 2006). Read

(2006), who has had 25 years of experience in the wool industry including positions of

General Manager of GH Michel, Executive Director of BWK Elders and a Director of 221 the Australian Wool Testing Authority, has said: “…the wool industries of Australia and China are closely integrated -what benefits one benefits the other”. Read further stated that “An FTA should formalize the already close integration and complementarities between the two industries and ensure that the risks posed to trade from the potential future application of the very high above quota tariff or other barriers are eliminated, and the benefits from free trade in wool for both countries make it clear that a good outcome on wool is integral to a successful FTA between Australia and

China” (Read 2006).

Despite the multitude of strong reasons for an Australia-China FTA, negotiations have been going on for more than six years (15 rounds of negotiations from May 2005 to

May 2011) and still seem no closer to being concluded. The six-year-old talks for a free trade agreement was one of the motions when Julia Gillard first visited China in April

2011 after she was elected as the Australian Prime Minister (Callick 2011). Reasons for the difficulties are thought-provoking.

3.2 Barriers to sign an ACFTA

3.2.1 The causes of difference

3.2.1.1 Different approaches

Difference in approaches to FTA negotiations and policy formulation are major reasons why the negotiation process has been slow and difficult. Because of very different economic and regulatory structures in their countries, both sides have spent considerable time in getting to know each other’s systems and drafting the architecture 222 of the agreement (DFAT 2005a). Thus the negotiation process has been “glacial” due to disagreements over the breadth of the FTA’s coverage, how much flexibility it should allow, whether it should include the World Trade Organisation (WTO)-plus commitments (Qin 2003; DFAT 2008e), and the understanding of the role of state and market in trade policymaking (Yang 2008 p.4). While a ‘commercially meaningful’ comprehensive agreement has been the key aim for Australian negotiators, China’s most important criteria for FTAs is that they are ‘mutually beneficial’, which means they bring profits to both parties while avoiding costs as much as possible. Both

Chinese President Hu Jintao and Premier Wen Jiabao expressed hopes that both sides could pursue the FTA under the guidelines of “mutual sympathy, mutual understanding, flexibility, pragmatism, and mutual benefit” (Hu 2005b). In other words that Australia’s approach is practical and China’s is more conceptual.

3.2.1.2 Selective vs. comprehensive approaches

China prefers a selective, gradualist approach to trade liberalization under the FTA rather than a comprehensive ‘single undertaking’ as preferred by Australia. Although the ‘complementarities’ between the economies of Australia and China have been emphasized by the Australian and Chinese governments, it has not automatically led to a smooth process of FTA negotiation. The different levels of development and industrial structures have so far seemed to be an obstacle to both sides’ willingness to accommodate the other’s interests because of sensitive domestic sectors (Yang 2008 p.4). That is in contrast to China’s FTAs with other developing countries under which they ‘understand’ each other’s difficulties in undertaking liberalization and have allowed each other to carve out sensitive sectors from the FTAs. And unlike what the

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USA achieved through its FTAs with developing countries, Australia, although a developed economy, does not have enough bargaining power to impose on China a

‘commercially meaningful’ outcome as understood by Canberra because of its interests in the huge Chinese market. Chinese Vice Minister of Commerce, Liao Xiaoqi, said that

“both sides need to consider the practical circumstances where the issues are tackled and …fully acknowledge the economic development level and special characteristics of their respective economies and carefully consider and accommodate difficulties of each other” (Liao 2007).

China thinks Australia should adopt a gradual approach to suit itself. That is why in the

FTA negotiation, Chinese negotiators have been confounded by Australia’s ‘high demand’ that China give concessions on all sectors in one agreement, especially agriculture and some services that China regards as fundamental to national economic security. Australia’s requests were too high for China’s realities; many of these demands required China to change laws or regulations.

In its approach to the negotiations, Australia tends to put forward a comprehensive plan and then work on its component parts while China prefers to negotiate sector by sector, starting with the relatively easy ones (DFAT 2006d). In this regard, China has preferred to negotiate on trade in goods first and then move to trade in services and investments later. Chinese negotiators have expressed reservations about the need for separate chapters on education, telecommunications, financial services, competition policy, electronic commerce and government procurement, and the sort of chapter that

Australia wants on investments (Hansard 2007). 224

The understanding of the two countries is different on ‘substantially all trade’. China understands it as liberalization as much as the countries can bear, and as long as FTAs promote bilateral trade and investment. Yet, Australia wants a high percentage (95-

98%) of trade as meeting the “substantial” coverage requirement (Yang 2008 p.6). As a result, the two sides cannot agree on the structure of an offer and have only exchanged some requests instead of the ‘usual’ means of exchanging offers.

3.2.1.3 Clashes in bottom lines

China’s bottom line in the FTA negotiations is its existing domestic regulation system.

Chinese regulators hold that many bottom lines, or WTO-plus issues, such as intellectual property rights (IPR), transparency, technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) measures, cannot be changed overnight (DFAT

2006d). China has been surprised by Australia’s draft chapters which clashed with

China’s bottom lines because China felt that Australia was attempting to alter the

Chinese domestic regulation system, and China thought this wholesale restructuring was not the task of a FTA, which is only supposed to give preferential treatment to the foreign partner under an existing domestic regime. Australian industries, in contrast, believe that progress on these issues is vital for their business with China.

The IPR issue has especially been a point of contention. China prefers the IP chapter to be minimalist and non-binding, focused on general principles, cooperation and information exchange, and strongly resists going beyond existing international commitments (DFAT 2006d). Australia’s negotiators argue that their manufacturers

225 cannot benefit from the Chinese market because of inadequate IPR protection in China.

However, China has a much more devolved and compartmentalized system of administration of intellectual property than other countries (Heath 2007 p.71). That was why the Secretary-General of the State Intellectual Property Office of China holds that

China has already developed a sound IPR legal framework including IPR protection and enforcement, and therefore foreign companies should be able to find solutions through

China’s legal procedures if they encounter any IPR problems (Chen 2006). However, on the other side, Australia deemed that the IPR in China is one of the most important non- tariff barriers to trade between China and Australia (Heath 2006 p.68). Thus, in the ninth round of negotiations, China reiterated its strong concerns regarding the scope and content of Australia’s draft IP chapter and the negotiations remain characterized by the two divergent visions for the IP chapter (DFAT 2007c).

China’s preference for the chapter on investments is to focus on investments promotion and protection, while Australia prefers liberalization. Australia’s requests on this issue are much more extensive than those tabled by China. When Australia listed a number of barriers affecting investments (predominantly in the mining sector) at the eighth round of negotiations (DFAT 2007b), China was surprised that these went to the heart of domestic regulation that underpins market access. That was why a Chinese scholar argued that FTAs are a means through which developed countries will hurt the autonomy of developing countries (He 2005a). Therefore, although theoretically FTAs could help countries streamline their governance to the standards of market economies by including behind-the-bottom line issues, it actually depends on the preference of individual countries and the relative power between the negotiating parties.

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3.2.1.4 Flexible vs. rigid

Another difference lies in China’s flexible and Australia’s strict approaches. These are reflected on issues listed below.

Rules of origin

China prefers a regional value added approach (DFAT 2006d), which allows China to have a different set of Rules of Origin for each of its FTAs. In contrast Australia prefers the change in tariff classification as the principal methodology which applies the same rules for all its FTAs and requires less administrative workload (DFAT 2008b). China, after two years of discussion and at the ninth round of negotiations, indicated an in- principle agreement to Australia’s longstanding proposal (DFAT 2007c) and the two sides started negotiating using change of tariff classification as the principal methodology (DFAT 2008b).

Dispute Settlement Mechanisms

Both parties acknowledge the importance of stipulating a dispute settlement mechanism in the FTA, and prefer bilateral negotiation and friendly consultation, with third-party adjudication as the last resort (DFAT 2005b). China also prefers a simple and practical procedure for dispute settlement rather than the complicated procedure under the WTO

(DFAT 2005b; Rong 2006). Thus, important differences remain to be resolved (DFAT

2006d).

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Negotiation Scheduling

Australia has a specific agenda for the FTA negotiation but China cannot decide on many details, including the schedule of negotiations because the government has to deal with many domestic issues and the negotiation team is overstretched. Moreover, China seems to have difficulty committing quickly to the written text. Draft text on about three quarters of the proposed structure tabled at the negotiating table on the fifth round was drafted by Australia (Drake-Brockman 2006). At the fifth and sixth rounds Australia complained that China failed to table a specific offer on tariff reductions (DFAT 2006a;

DFAT 2006d). Although Chinese officials have since repeated that they were preparing to submit a better offer, the timing remained vague (Toy 2007; DFAT 2007c).

There are also differences on understanding the concept of ‘market economy’, which reflects the different ideologies and values of their political systems. Deputy Foreign

Minister, He Yafei told Australian media before Howard’s visit in April 2005 that while the increase of iron ore prices was a commercial matter, Canberra “can certainly encourage companies to take a long-term point of view in setting prices…don’t just look at the benefits under their noses” (He 2005b). China believes the Australian government has the decisive power over the FTA (Yang 2008 p.11), and that the only difference compared with China is that the Australian government gathers more information from and communicates more with industries.

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3.2.2 External and internal pressures

Domestic resistance in Australia to the ACFTA is mainly motivated by Chinese direct investment in Australia. On the other side, China’s resistance comes mostly from the agricultural and services sectors.

3.2.2.1 Agriculture

Agriculture has been the most difficult sector in the FTA negotiation from the first round onwards (DFAT 2008d). Australia has reiterated that its rural products would not threaten Chinese farmers (DFAT 2007d). However, on the Chinese side, for example, the provinces in North China that may be affected by the FTA (Xinjiang, Gansu,

Ningxia, and Inner Mongolia) are areas where many ethnic minorities reside, including

Muslims and Mongolians, most of whom rely on cattle farming for a living. Ethnic issues have become sensitive in recent years in China’s domestic and external politics, with increasing incidence of violent conflicts between the Han majority and Muslims and pressures from the West on Xinjiang where Rebiya Kadeer is an issue, Gansu and

Ningxia to which the Dalai Lama has laid claim as areas belonging to greater Tibet. At the bilateral conference of the FTA agriculture issues in Xian in September 2006, the

Chinese research team from the Xinjiang Uygur Autonomous region advised the

Chinese government to open the wool trade gradually so as to avoid an adverse impact on Chinese fine wool growers, which is essential to “protect the ethnic minorities’ economy and maintain the border stability” (Tian 2006). Thus, agriculture is not a purely commercial problem but also has political and security ramifications for China.

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On the other side, Australia argued that Chinese producers of textiles and processed foods would benefit from cheaper raw materials from Australia (The-Age 2005).

However, further tariff reduction would damage raw material producers in China because their income barely meets livelihood needs. That was why “the Chinese were at pains to say that they were on the defensive on agriculture and would resist liberalization there” (Kohler 2005)

3.2.2.2 Services and investments

A big gap remains between the expectations of Australia and China on both services and investments; and progress continues to be slow (DFAT 2007c). Increasing Chinese direct investments intensified the ownership debate in Australia even during the global financial crisis of 2008-09 although Mark Paterson, Secretary of the Department of

Industry, Tourism and Resources, has addressed that Australia welcomes overseas investments and Australia has much to offer China in energy sources and minerals

(Paterson 2006). Two main reasons for Australian resistance to China’s direct investments are firstly, that the finance is from a communist country, and secondly,

Australian sentiment about ownership of Australian assets. Details of the ownership debate will be discussed in the next chapter on resources trade.

In services, a key area for Australia, there are significant differences between the approaches of Australia and China (DFAT 2006b). Australia wanted to begin market access negotiations as quickly as possible, and to proceed more or less in step with the negotiations in other areas (DFAT 2006b). On the other side, in recent years China has

230 paid more attention to developing its services sector rather than focusing only on manufacturing for industrialization (Yang 2008 p.15). Yet, Australia has an absolute competitive advantage in the services sector. Although in the conference on “Australia-

China Service Trade: Opportunities and Challenges of an FTA” held in April 2006 in

Beijing, Australia’s representatives such as the AIG’s, Michael Cripps (Cripps 2006), the CEO of Macquarie Bank, Warwick Smith (Smith 2006), Director of Cardno

International, Richard Kell (Kell 2006), Director of Cox Richardson, John Richardson

(Richardson 2006), Director of China Leighton Asia, Allard Nooy (Nooy 2006),

Chairman of Australian Logistics Council, Ivan Backman (Backman 2006), Monash

University’s Deputy Vice-Chancellor (International), Professor Stephanie Fahey (Fahey

2006), and Australian Team Leader of Australia-China (Chongqing) Vocational

Education and Training Project, Antoine Barnaart (Barnaart 2006), all stressed the many benefits an FTA would bring to both countries, China is still taking a more conservative approach (DFAT 2006c) in this area because economic security and stability have become the priority in China’s current reform and opening strategy (Yang 2008 p.16).

Negotiations on market access for services began at the seventh round (DFAT 2006c).

Besides all the above mentioned differences and reasons, another difficulty is that

Australia wants to have the same tariff concessions for all its commodities i.e. zero tariffs, which China has given to the China-ASEAN FTA. Or at least the same treatment that China has given to New Zealand in the area of agriculture trade in the NZCFTA

(Crean 2010a). In addition, on government procurement, although Australia is not a member of the WTO Government Procurement Agreement (GPA), it wants its suppliers and products to receive treatment as favourably as that given by China to WTO GPA

231 members (DFAT 2007d). Even after Australia joined the WTO GPA in 2008, the process to recognize this status is still likely to take some time (DFAT 2008b).

China on the other hand, wants to have the same direct investments conditions that the

USA has enjoyed since the USA-Australia FTA was signed in 2005 (SMH 2008b), namely, to be allowed to invest up to $1 billion without having to seek approval from the Foreign Investment Review Board. Although Australia has voiced repeatedly its openness and non-discriminatory nature of the investment screening and infrastructure access regimes, China feels differently since the Chinese direct investments in Australia have increased significantly in recent years. Moreover, China prefers the FTA to require less regulatory change (DFAT 2008b).

In summing up, most problems in the negotiations are structural issues and difficult to resolve as compared with the technical problems. Although the economic structure of

Australia and China form high complementarities, yet, a signed FTA needs a great deal of concessions and coordination on both sides. Strong differences remain in both sides’ approaches, underlining the sensitive and difficult nature of the negotiations (DFAT

2007b). Thus, up to the thirteenth round of negotiations by December 2008, the progress of the ACFTA negotiations remained slow and difficult (DFAT 2008d).

An FTA between Australia and China would result in considerable economic benefits for both countries such as “higher economic growth, more jobs and higher living standards” (DFAT 2006d). Nevertheless, even without an FTA, economic relations

232 between Australia and China will continue to grow because of complementarities between the two economies (DFAT 2006d).

4 The outlook for Australia’s economic policy towards China

Over the past decade, the Australia-China economic relations have prospered and China has become Australia’s top trading partner for both imports and exports. China has also replaced Japan as the centre of the East Asian regional economy. Both Australia and

China have comparative advantages in bilateral trade, despite the presence of some trade conflicts between them. These conflicts mostly are technical problems although the creation of the ACFTA may create some structural conflicts. However, complementarities of both countries’ economic structures mean that both remain important to each other. Although there are also some uncomplementary factors existing at the same time, yet, these are unavoidable but solvable. Without a doubt China will be the most significant long-term external force affecting the Australian economy. It is for this reason that the Australian government is working hard to conclude an FTA with

China although there are still many difficulties at the current stage of negotiation. A comprehensive high-quality Free Trade Agreement will offer the greatest potential to take the economic relationship to a new level across merchandise trade, services, and investments (Australian-Embassy-China 2010).

At its most fundamental, the objective of trade policy is to increase the prosperity of a nation’s citizens (DFAT 2011f). Will the increasing interdependence of the Australian and Chinese economies change Australia’s China policy? “There is no one in Treasury

233 who can tell up from down on China” (Garnaut 2010f). China is the centre of the regional economy in which Australia is integrated. “It should by now be a truism that

Australia’s national income and tax revenues rise and will one day fall with commodities prices, and those prices are largely a function of Chinese demand”

(Garnaut 2010f). All the above analysis proves this point. Yet, Australia is a security ally of the USA, shares many of its economic and political characteristics and with some important reservations, supports its role in global economic governance. China may or may not be a strategic competitor for USA, but it is certainly and necessarily an economic partner (Edwards 2007 p.17). This increasing interdependence will mitigate against the political disputes between the USA and China and this will also apply to

Australia-China relations. Hence, Australia’s economic policy towards China, or in other words, whether Australia is able to manage a concurrent deepening economic and trade relationship with China, will depend on whether the government can recognize the centrality of both great powers to Australia’s prosperity. As the Australian Minister for

Trade Simon Crean said “our trade relationship with China is the largest trading relationship we have” (Crean 2010a) and the Australian Minister for Foreign Affairs,

Stephen Smith said, “We have every reason to be optimistic about the future of the

Australia-China relationship” and “the links Australia has developed with China are flourishing” (Smith 2010).

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Chapter 8 Resources diplomacy: iron ore trade

1. Resources trade: deepening interdependent relationship

Since the beginning of the 21st century, the mining sector, especially that of Western

Australia, has changed Australia’s GDP structure. In 2007, mining in Western Australia accounted for 69% of that state’s capital expenditure (DOIR 2008). The Australian

Bureau of Statistics (ABS) private new capital expenditure statistics indicate that the

Western Australia’s mining industry invested a record $35.6 billion in 2011. This represents a substantial 44% increase compared to 2010 and highlights the surge in resource construction which continue to be a major driver of the economy (DMP

2012b). In 2011, Western Australia resources industry delivers a record $107 billion in sales (DMP 2012a). Iron ore was the State of Western Australia’s largest export sector accounting for a record $62.8 billion in 2011; an increase of 29% compared to the year before and represents 59% of total sales in 2011 (DMP 2012a). From 2004-05 to 2009-

10, mining investments as a share of GDP increased from 1.8% to 3.7% (ABS 2010b).

From the March quarter 2005 to the September quarter 2010, the estimate for capital expenditure by the mining industry increased by 258.4% or from $8,034m to $11,143m

(ABS 2010b). All these indicated there has been growing interests in the mining industry and its impact on the Australian economy (ABS 2010).

The Australian economy has been well placed to benefit from China’s rapid growth especially the mining industry (Basu, Hicks et al. 2007). The resources trade is

Australia’s largest export sector and has dominated the Australia-China trade. It accounted for around 64% of the total Australian exports to China in 2011 (Emerson 235

2011). In the first decade of the 21st century, the resources trade increased over three fold from $37.9 billion in 1999 to $130.8 billion in 2009. Their share in total exports rose 32.7% in 1999 to 52.4% in 2009 (DFAT 2010b p.11). Coal and iron ore have been important exports for Australia in the same period of time. These two commodities increased nearly six-fold from $12 billion in 1999 to $69.4 billion in 2009, an average annual rate of 20% per annum compared to just 5.4% per annum for all other exports

(DFAT 2010b p.11). Their share of total exports rose from 10.3% in 1999 to 27.8% in

2009 (DFAT 2010b p.11). China is the first primary market for Australia’s exports of coal and iron ore (DFAT 2010b p.15).

Since 2007, China was already the biggest buyer of Australian minerals, purchasing almost 44% of the A$51 billion worth of exports (Pearson and Daley 2009). During

2006 and 2007, over 80% of resource output was exported, accounting for approximately 49% of total goods and services exports. During that period, the minerals and petroleum industries produced over 8% of Australia’s GDP and accounted for 63% of Australia’s merchandise export earnings (DFAT 2008a). During 2006 and 2007, mineral resource exports totalled $107.8 billion or 77.4% of Australia’s total commodity trade (DFAT 2008a). During 2010 and 2011, the value of total exports for iron ore and concentrates reached $58.4 billion, accounting for 19.6% of total exports

(DFAT 2011e p.3). China imported almost $40 billion of iron ore from Australia

(DFAT 2011e p.170). In the decade of 1999 to 2009, the value of Australia’s exports of iron ore had increased from $3.6 billion in 1999 to $30 billion in 2009 – representing an average growth of 25% per annum compared with total Australian exports that grew by just 7.8% on average per annum (DFAT 2010b p.16). China was Australia’s largest

236 market for iron ore, accounting for 73% or $21.7 billion in 2009 (DFAT 2010b p.17).

Iron ore exports to China in terms of value increased by an average of 41.8% per annum from 1999 to 2009 (DFAT 2010b p.17).

1.1 The Australia-China resources trade

In 2004 China overtook Japan as the largest buyer of Australian iron ore. At that time and for several years afterwards, China’s demand for resources was driving a new

Australian mining boom. China also expected Australia to be a reliable long-term supplier of mineral resources (Zhang 2007 p.93). In 2003 Chinese President Hu Jintao, referring to Australia’s rich resources and the high level of economic complementarities between the two countries, affirmed that the “potential for China-Australia economic cooperation is immense. Past, present or future, we see Australia as our important economic partner” (Zhang 2007 p.93).

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Table 1. Australian iron ore trade with China

A$’000 2004 2005 2006 2007 2008 2009 2010

Iron ore 2,515,238 5,763,310 7,627,492 9,023,521 17,931,980 21,699,921 34,681,000 exported to China

Total 6,163,535 11,071,318 14,365,713 16,112,167 29,686,000 30,010,000 49,220,000

Australia n iron ore exported

Ratio in 48.81% 52.06% 53.10% 55.25% 60.4% 72.3% 70.46% total iron ore exported

Source: DFAT Composition of Trade Australia 09 and 90-10, Australia’s trade with East Asia

(DFAT 2011a p.48) at http://www.dfat.gov.au/publications/stats-pubs/Australia-trade-with-

East-Asia-2010

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Chat 1. Comparing iron ore exports to China and total Australian foreign trade.

60.00%

50.00% Share in total Australian export

40.00% Share in total Australian import 30.00% Share in Australian foreign trade

20.00% share in total export to China

Share in total iron ore export 10.00%

0.00% 12345

Source: DFAT Composition of Trade Australia 2007, 2008 and 08-09 at www.dfat.gov.au

The above table 1 and chart 1 demonstrated that since 2005, China has consumed more than 50% of Australian iron ore exports. While Australian exports to China have increased steadily over the past decade, iron ore exports to China have increased even more sharply. The table 1 and chart 1 also indicated that the increase in resources trade with China is increasing faster than the increase in total Australian foreign trade. This underlines the importance of the resources trade especially the iron ore trade with China for the Australian economy.

1.2 The effect of the resources trade with China on Australia

Australia is prospering as a result of China’s resources needs. This is why Howard, the former Australian Prime Minister said in 2003: “Australia must engage with China”

(Tucker 2008). This explains why, during his tenure of office between 1996 and 2007, his government went through a 180 degrees policy change from being an unquestioning

239 servant following the USA’s hostile attitudes to being very close economically to China.

Howard’s formula was simple: concentrate on trade. Everything else, including the sensitive issues of Taiwan, Tibet, defence, human rights, democracy and the Falun

Gong, was mostly excluded. The reward was a trouble-free relationship and $25 billion worth of LNG contracts. This was due, according to Harcourt, to “a once in a generation structural shift in the Chinese economy and it is going to drive a once in a generation demand for Australian resources” (Harcourt 2009). Even James Packer, the richest

Australian, has aired his regrets about missing the resources boat to China and invoked

“catch China wave” (Washington 2011).

Even in the serious global recession period in 2009, China bought huge volumes of

Australian iron ore and raised Australian base metals prices as much as 30% in March and April since the February trough (Garnaut 2009i). “The commodities boom isn’t dead-it’s just resting. The commodities bubble is dead-and that’s a good thing” (Pascoe

2009). Due to its increasing demand for Australian iron ore, China has increased its direct investments in the industry gradually. China purchased a 9.9% stake in BHP in

2007 at its peak price, 12% of Rio Tinto at its peak price too in 2008, and 17.5% of

Fortescue Metals Group Ltd (FMG) in 2009.

Australia’s thriving resources sector (comprising minerals and petroleum) is not only the country’s largest single export sector, but Australia’s mining boom has brought prosperity to Australia and transformed its rich list (Marsh, Smith et al. 2008). Andrew

Forrest, the CEO and founder of FMG, overtook James Packer to become the richest man in Australia before his company loaded its first piece of iron ore. According to Saul

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Eslake, Australia’s resources boom “has translated into an increase in Australian real per capita disposable income of more than $3600 per year, lifting the Australians’ average wealth to the 8th in the world (Eslak 2007).

2. Resources as source of bilateral cooperation and rift

The resources trade with China has become the source of bilateral cooperation and rift since the trade volume increased sharply. Coking coal and iron ore are Australia’s top two export items. Iron ore has become Australia’s number one export item since 2011 recording a rise of $23.3 billion (or 66.5%) to $58,4 billion (DFAT 2011e p.3,27). Iron ore exported to China in 2011 reached a record of $40 billion accounting for 68.5% of total Australian iron ore exported (DFAT 2011e p.170). The increasing volume of imported iron ore from Australia has resulted in an increase in price. The increased price would reduce Chinese steel mill’s profit. Thus, Chinese iron ore importers wanted to invest in Australia’s iron ore production in order to keep up their profits. This is why such an important trade became a source of bilateral cooperation and rift due to its price and investment for its development.

2.1 The nature of the ownership debate

China’s imports from Australia have continued to grow strongly but there has not been a boom in China’s investments in Australia (Tisdell 2007 p.11) by 2007. Australia was a relatively minor outlet for Chinese foreign investments and was also a minor source of investments in China (Tisdell 2007 p.18). In fact, China’s direct investments in

Australia was not within the top 10 countries (DFAT 2011g p.21) in 2009.

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Nevertheless, trade and investments are closely related to production. In order to trade,

Australia needs international investments (especially direct investments) with the purpose of expanding production and the business profits that come with them (Gionea

2003 p.98).

The Chief Executive of Rio Tinto’s iron ore division, Sam Walsh, said more Chinese investments were essential and helped create value in the Australian resources sector

(SMH 2009b). He likened comments in the media and by some politicians about

Chinese investments in Australia to the criticism meted out to Japanese companies when they invested in the Australian mining industries in the 1970s. He said “without that support, without that underwriting, it is impossible to imagine that Australia would have an iron ore industry, and our greatest export business would simply not have occurred” (SMH 2009b).

The increasing Chinese foreign direct investments in the resources sector is a repeat of events around forty years ago when Japan emerged as a major consumer of imported minerals and energy. However, the ownership debate is more intense now than it was with the Japanese firms mainly due to a lack of understanding and trust between the two different political systems in the two countries. Moreover, as Drysdale and Findlay observed that “an out-of-date impression of state-owned companies distorts the picture of China’s competitive landscape and mars both opportunities and threats facing multinationals” (Drysdale and Findlay 2008 p.28). The Australian attitude towards the rise of China is contradictory as the public poll showed. The 2008 public survey

242 conducted by the Lowy Institute for International Policy shows that 78% were opposed to Chinese state-owned companies buying a controlling stake in a major Australian company. In comparison with this figure, 72% opposed the Japanese and 63% opposed the USA (Hanson 2008 p.6). The 2010 Lowy Poll shows that a large majority (73%) of

Australians agreed China’s growth has been good for Australia – up ten points since

2008 (Hanson 2011 p.1). Yet, an increasing percentage of Australians said the government was allowing too much investment from China (57% up from 50% the year before) (Hanson 2011 p.10).

Originally, this new investment tide in the resources sector from China was purely economic and due to the huge demand for raw materials for its industrialization development, exactly the same as what happened with Japan four decades ago. Due to the significant increase in the price for raw materials as led by Australian mining giants

BHP Billiton and Rio Tinto, China’s miners and steelmakers are looking to invest in mining assets in Australia to lock in supplies of raw materials such as coal and iron ore to fuel an expected construction boom lasting decades and to ease reliance on resource sector heavyweights BHP Billiton and Rio Tinto. Thus, Chinese investments in

Australian minerals are actually a consequence of the growth in demand in China.

Drysdale and Findlay have similar views “that growth in demand has contributed to rising prices in the same way that, in the 1960s and 1970s, the growth of Japanese demand saw a similar rise in Australian and global commodity prices” (Drysdale and

Findlay 2008 p.20). For the intense ownership debate, Drysdale and Findlay (2008) argued that Chinese direct investments in the resources sector is no different to what the 243

Japanese did before. According to Drysdale and Findlay, the increasing Chinese investments in Australia is the result of Chinese economic development and the attractiveness of the Australian economy. This is purely a commercial result (Drysdale and Findlay 2008 p.23). However, in the case of China’s direct investments, there is an additional question of whether government or state-ownership should matter in the treatment of applications. The state-owned element also gave the Opposition leader an excuse to attack the Mandarin-speaking Prime Minister, Kevin Rudd, and the Labor government’s China policy in 2008.

The situation was getting more and more complicated due to the global recession. The

Australian Treasurer was facing a difficult choice. On the one hand, the increasing

Chinese direct investments is an opportunity for the mining sector to access the world’s biggest wealth fund in order to solve its financial problems, a huge opportunity to access the world’s biggest market, a huge opportunity to develop business in the world’s most potential area, and the long term economic and political interests. On the other hand, Australians emotionally feel pain by selling their strategic assets to the object country that is under a different political system controlled by the Communist

Party. If the object country was not China but any of the Western ones, there would be no problem at all (Drysdale and Findlay 2008 p.12). Anxiety over the growth of foreign investments by China is as unfounded as it was, in earlier times, over the growth in foreign investments by Japan that accompanied the emergence of Japan as Australia’s major economic partner and a major supplier of capital (Drysdale and Findlay 2008 p.1).

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The rising anti-China sentiment in Australia which was fed by the multibillion dollar

Chinese investment proposals in the resources sector manifested itself in the obstacles and delays dogging such deals, presenting a challenge to Mandarin-speaking Prime

Minister, Kevin Rudd. Mr Crean said that the Rudd Government had never tried to hide anything in terms of its relationship with China. “We’ve got to be confident about the nature of the relationship, not fear it. People who whip up xenophobic feelings do not serve the country well” said Mr Crean in China on the 30th March 2009 when he talked about a free trade deal between the two countries and urged Australia to be confident about its relationship with China and insisted that Labor had never been Beijing’s

“handmaiden” (TheAustralian 2009). Therefore, it is not hard to tell the nature of the ownership debate is a competition between economic interests and political interests.

2.2 China’s direct investments in Australia: state-owned vs. private enterprise

The Australian assets ownership debate has been raised again since China’s big state- owned firms multibillion-dollar direct investments in the resources sector significantly increased in the sensitive global recession time. The first Australian resource assets ownership debate occurred in the 1960s - 1970s due to the increased direct investments in Australian strategic assets by the Japanese. Yet, Australia had overcome its anxieties and benefited from the first resource boom due to the economic development of its East

Asian neighbour. This time, due to the needs of the much bigger nation, both in geographical size and population, with a much bigger market and opportunities from the rising China’s industrialization and urbanization, and also because of the background of red China’s Communist Party’s Government, and because some of these direct

245 investments are from state-owned enterprises, the ownership debate in Australia is more complicated than the last one because of the political and economic elements.

In February 2008, the Australian government made some new guidelines in consideration of the Chinese FDI proposals right after the Chinese state-owned

Chinalco announced taking a 9% stake in Rio Tinto. Those new guidelines which apply to government-owned firms are:

1. An investor’s operations are independent from the relevant foreign governments.

2. An investor is subject to and adheres to the law and observes common standards of

business behaviour.

3. An investment may hinder competition or lead to undue concentration or control in

the industry or sectors concerned.

4. An investment may impact on Australian Government revenue or other policies.

5. An investment may impact on Australia’s national security.

6. An investment may impact on the operations and directions of an Australian

business, as well as its contribution to the Australian economy and broader

community.

Source: (Drysdale and Findlay 2008 p.24).

The above statement reflects Australian suspicions and worries that investors with links to foreign governments may not operate solely in accordance with normal commercial considerations and may instead pursue broader political or strategic objectives that

246 could be contrary to Australia’s national interest. This argument creates uncertainty about foreign policy towards Chinese investments and is inconsistent because it includes a dimension that is ‘additional’ to the test of ‘national interest’ (Drysdale and

Findlay 2008 p.24). Prior to assessing the Foreign Direct Investment (FDI) from

Chinese companies with a state-owned background, there were some pre-judgments done within and these had to be treated consistently by the same standards with some other government firms such as the investment in Optus by Singtel which was owned by the Singapore government. Hence, what China faces in the wave of ownership debate is not just the issue of state-owned or private enterprise, it is also the issue of the colour of

“red” or the threat of communism.

2.3 Comparison of Chinese and other state’s direct investments in Australia

In fact, in the period of 2008 - 2009, Australia’s iron ore exported to China was worth

$22,115 million; China’s direct investments in Australia was only $3,048 million

(DFAT 2009a). Yet, at the same time, Australia’s iron ore exported to Japan was worth

$7,342 million, but Japan’s direct investments in Australia was $35,959 million (DFAT

2009b). According to the ratio of Australian iron ore export to Japan and Japan’s direct investments in Australia, China’s direct investments should be $108,319 million, which should be 35 times of what it was in this period. In other words, China’s direct investments in Australia are far below what they should be. If Australia can accept

Japan’s case, why cannot Australia accept China’s? What makes Australia treat China and Japan differently?

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Australia’s total trade with the USA was $33.5 billion in 2009-2010 (DFAT 2010a p.307). Yet, the USA’s investments for Australia in the same period of time was $120 billion which accounted for 27.9% of Australia’s total stock of foreign investments and ranked it as Australia’s number one foreign investor (Trade-and-Investment 2010). The

USA’s investment and trade ratio was 3.58 times. China’s total trade with Australia was

$113.5 billion in 2011 (DFAT 2011e p.170). According to the investment and trade ratio between Australia and the USA, China’s investments in Australia should be allowed up to $406.33 billion. However, Chinese investments in Australia were only

$19.525 billion in 2010-11 (DFAT 2011d). If China is to be treated as fairly as the

USA, then China’s direct investments in Australia should be allowed up to 20.8 times of what it is now.

China, excluding the Special Administrative Regions and Taiwan, had total proposed investments in Australia of $16.3 billion in 2009-10. The majority of these proposed investments were in the mineral exploration and development sectors, accounting for

$12.2 billion and representing 75% of that country’s proposed investment (FIRB 2011 p.33). China's total investment increased even faster at 57% annually yet, remains only about 1% of foreign investments in Australia from all sources up to 2010 (NSW-

Government 2011). China’s total direct investments in Australia was still less than 1% of the total stock of inward investments (Parkinson 2011 p.9) and not even within the top 15 countries up to 2010 as shown in the following table, which is provided by the

NSW Government.

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Table 2. Stock of Foreign Investment in Australia by Country, 20101

Foreign direct Total stock of Share of total Share of investment Country investment ($ foreign total FDI (FDI) million) investment (%) (%) ($ million) United States 549,881 27.9 120,089 25.4 United Kingdom 472,649 24.0 52,525 11.1 Japan 117,633 6.0 49,417 10.4 Netherlands 42,425 2.2 31,128 6.6 Hong Kong SAR 40,774 2.1 6,694 1.4 Singapore 43,771 2.2 20,240 4.3 Germany 40,756 2.1 16,224 3.4 Switzerland 40,731 2.1 20,735 4.4 New Zealand 33,773 1.7 6,460 1.4 France 23,861 1.2 12,563 2.7 Canada 21,497 1.1 16,377 3.5 Belgium 14,702 0.7 4,941 1.0 International 62,808 3.2 0 0.0 capital markets2 Total 265,936 13.5 28,350 6.0 Unspecified Other sources 196,609 10.0 87,930 18.6 Total all sources 1,967,806 100.0 473,673 100.0 Source:http://www.business.nsw.gov.au/invest-in-nsw/about-nsw/trade-and-investment/stock-of-foreign- investment-in-australia-by-country and ABS Cat. No. 5352.0, 2010 1. As at 31 December 2010.

Australia had gone through the same situation with Japan in the resources sector and got over it thirty years ago. Japan had invested in major Australian mining projects. The

BHP Billiton Mitsubishi Alliance (BMA), the largest mining company of steel-making coal in Australia and the world, is owned equally by Japan’s Mitsui and BHP Billiton.

Australian government analysts say they have combed through the history of international resource investments by Chinese corporations and found no evidence of

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Chinese companies doing anything but behaving as profit-maximizing multinational companies (Garnaut 2009b).

3. The effect of benefit and rift co-existing

Chinese direct investments in Rio Tinto, FMG and OZ Minerals (OZ) in 2009 were three typical examples to demonstrate how complicated it was when Australia dealt with the Chinese direct investments in its resources sector and the effect of benefit and rift co-existing.

3.1 Political interest

3.1.1 Domestic politics

It was a big test for the Rudd government’s China policy to face increasing Chinese direct investments in the Australian mining sector. Although the Australian Parliament overruled the Opposition Green Party’s proposal of blocking the Rio-Chinalco rescue deal on the 12th March 2009 (ChineseNews 2009), the deal cannot be completed until the Foreign Investment Review Board (FIRB) and shareholders approve it.

Since the Rio Tinto-Chinalco multibillion dollars (the deal would amass 18% of

Chinalco stakes in Rio) rescue deal proposal signed in February 2009, criticism and pressures on the government were huge and sparked heated political debates. The

Australian Senate has launched an inquiry into foreign investments and the “Keep

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Australia Australian” advertisements have emerged. Although the deal gives Rio $20 billion as promised, the deal was struck, mainly, to introduce Rio Tinto to potential financiers and project partners in China including the possible development of the mining of coking coal and copper deposits. But the four main points of the deal that the

Australians worry about were the Chinese government-owned Chinalco’s background, the annual contract price negotiations would be controlled by the Chinese, the price of the deal, and Rio’s share holders thought their stakes would be diluted by the cash injection from Chinalco.

Politically, in the case of the Chinese state-owned Chinalco’s rescue of Rio Tinto with a cash injection, the negative side of it was that Australians worry the Chinese

Government background ownership would lead the world-wide business operation. It is the second Australian mining giant - Rio Tinto – to be controlled or affected by the

Chinese Government. It was the truth those days as to be risible that “there’s kind of unthinking response which talks about China not only like it is a simple, uncomplex whole, but also a country where the Communist Party makes the decision and everybody else jumps” (Garnaut 2009b).

Blocking the Chinalco multibillion dollar investment in Rio Tinto would possibly damage Australia’s long and successful policy of engaging with and profiting from

China. This was why some analysts e.g. John Garnaut and Peter Drysdale appealed to the federal government that it should not meddle in the Chinalco deal and leave it to the businessmen to determine. (Drysdale 2008, Garnaut 2009) Labor’s Lindsay Tanner

251 accused the Opposition of using the racist yellow peril fear - mongering to defend the government’s China policy.

The side effect of the failure of the deal could be reflected by some Chinese media’s repercussion. A young economist and columnist in several Chinese media outlets said that the outcome of the Chinalco $19.5 billion deal was representative of “Cold War thinking”. He stated that "For Chinalco and Rio Tinto's deal, they say China aims to control iron ore price or for political interest: it's a reflection of Cold War thinking and prejudice against China." "The commercial conduct of Chinese companies is being excessively interpreted. When a Chinese company buys copper, they say China wants to control the copper market; when China buys strategic stocks of petroleum, they say

China wants to have more say at the international oil market” (TheAustralian 2009).

What else could it be if it wasn’t the “Cold War thinking”. The industry and corporate editor at Caijing (Finance), China’s leading business magazine, Zhao Jianfei commented about the failure of the deal that “Chinese companies are still very young, and they are gaining in experience through such events. The Rio bid will provide a big lesson for them to study” (TheAustralian 2009).

Another reason for the defeat of the Chinalco deal and the passive positions of China’s steel-makers in the negotiations of the previous few years annual contract price can be explained clearly by the Stern Hu case. Stern Hu is a Chinese - born Australian citizen and the general manager of Rio Tinto’s head office in China. He was detained by the

Chinese government on the 5th July 2009 and charged with espionage and bribery

252 allegations. Although China has insisted that the Stern Hu case is an individual case and will not harm the trade relations with Australia, yet, the Opposition still tried to politicize the case in order to attack Rudd’s Labor government. As the first ten days of the case unveiled, some Australian media e.g. articles in the Sydney Morning Herald

(SMH) and the Australian and the TV show “Inside the business” on Sunday morning, all stated the case is the revenge of the Chinese for the Chinalco debacle. These media opinions also simultaneously proved that it is hard to separate completely the relations of economics and politics. The Rio Tinto’s case of dealing with Chinalco and the

Australian media’s opinions on Rio Tinto China general manager, Stern Hu’s spy case also indicated the yellow peril thought still exists in some Australian minds. Once the

“dog whistle” blows, the sentiment of yellow peril would come back.

Although the Australian government has repeatedly said that the outcome of the

Chinalco-Rio Tinto deal was a “commercial decision”, yet, the Chinese did not believe so. A commentator with Hong Kong’s Phoenix Television (TV), who is popular in

China said that the Australian government “will never admit that this is a political decision” (Garnaut 2009e). Hence, from this case, it is unavoidable that politics is a part of business life too. Either through regulations or direct or indirect government intervention, politics is still visible in business in Australia. In history, there was never pure commerce or a clear separation of economics and politics.

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3.1.2 Resource nationalism

Resource nationalism is a term used to describe the tendency of people and governments to assert control over natural resources located on their territory and take direct and increasing control of economic activity in the natural resources sectors (Ward

2009 p.5). Although resource nationalism has a multitude of different definitions and interpretations, the term is assumed to have two components – limiting the operations of private international resource companies and asserting a greater national control over national resource developments (Stevens 2008 p.5). BlackRock Inc, the world’s largest money manager, warned resource nationalism was on the rise globally, threatening to undermine investment in sectors where governments were playing too heavy a hand

(Regan 2011; Stevens 2011). Resource nationalism is at the top of the business risk list for mining and metals companies around the world (Ball 2011; Tasker 2011b).

Resource nationalism has become an increasing concern for miners in Australia (Tasker

2012). Because of the new mining tax, resource nationalism had become a hot topic in

Australia since 2010 (Tasker 2011b).

Although Wilson argued that the Australian government’s attitude to Chinese direct investments in Australia’s resources sector is resource liberalism rather than resource nationalism (Wilson 2011b p.300). This is because Wilson’s resource nationalism involves a directed and mercantilism approach to the management of natural resources

(Wilson 2011b p.285). In fact, the Australian government’s Foreign Investment Review

Board and the new Resource Super Tax are two mechanisms which the Australian government is using to limit the operations of private international resource companies and asserting a greater control over its natural resources (Laurenceson 2012). For

254 example, in 2009, the majority of the Chinese direct investments in the Australian resources sector e.g. the $2.6 billion OZ Minerals rescue deal, the Hunan Valin’s $558 million cash injection in FMG, and the Chinalco proposed US$ 19.5 billion investment in Rio Tinto received an extra 90 days of scrutiny from the Foreign Investment Review

Board (FIRB). The delay in considering these cases during the global financial crisis, saw the bid fall over commercially, and raised questions in China about Australia’s investment regime (Drysdale 2012). These also revealed how the Australian government interferes and controls its resource sector and economic activities. This is also why the heads of the world’s largest miners e.g. Anglo American, Rio Tinto,

Glencore and Codelco, have met to discuss the increasing threat of resource nationalism as governments around the world look to earn a greater slice of their record profits

(Tasker 2012). Australia is seen by many as having spearheaded this issue by introducing a Minerals Resource Rent Tax (MRRT) that will transform the way iron ore and coal projects are taxed in Australia (Norman, Oliver et al. 2012). A tax on non- renewable resources was first recommended in December 2009 by a report called

Australia’s Future Tax System (AFTS) (Norman, Oliver et al. 2012). The federal government announced its proposal for a new Resources Super Profits Tax (RSPT) in

May 2010 (Norman, Oliver et al. 2012). Australian miners have been battling the resource nationalism debate for the past few years since Kevin Rudd tried to introduce the resources super-profits tax (Tasker 2012). BHP and Rio Tinto led the industry’s opposition against the tax.

Drivers of resource nationalism are: a perception that the resource will be needed for domestic uses or that the potential customers are somehow ‘unworthy’; and the

255 perception amongst ordinary people that they have seen little or no benefit from the extraction of ‘their’ resource, despite these resource companies paying taxes to their governments (Stevens 2008 p.6). These explained the Australians sentiments to their natural resource and their attitude to Chinese direct investments in their resources sector. Some Australians thought the government should control and not allow foreigners to use their natural resources and keep their natural resources for themselves.

For example, Senator Barnaby Joyce initiated the movement of “Keep Australia

Australian” on the 18th March 2009. The result was that Rio Tinto’s share price dived more than 9% on that day. Independent Nick Xenophon also featured in television advertisements urging Australia not to back the Chinese investments on the 10th May

2009. The Opposition Liberal-National Party and the Greens formed an ideologically rare alliance to force the government to call a Senate inquiry into the issue in March

2009 (Daley 2009b). Had not these movements presented resource nationalism to the public?

Resource nationalism has been characterized by a battle between national interests and foreign influences (Stevens 2008) (p.8). The intensifying resource nationalism debate revealed this battle between Australia and China. The former Labor Prime Minister,

Bob Hawke expressed his view regarding the increasing Chinese direct investments and said that during the 1970s and 1980s when the Japanese were investing in Australia, there were questions about the appropriateness of it and he said “it obviously made sense at the time it helped our growth. I take exactly the same view now”

(TheAustralian 2009). This is also the same view of many rational politicians,

256 businessmen and scholars and contrary to those who considered their own political interests or resource nationalism but ignored Australia’s national interest.

What some Australians and the government had done unavoidably had a bad effect on the Australian image. In fact, even though Australians or the government do not admit it, but their image of resource nationalism has been depicted in the Chinese media.

Thus, Australia needs to take some actions to amend its image in order to keep foreign investments for its development.

3.1.3 Control of resources

Australians worried that the more percentage of stakes that the Chinese owns in

Australia’s mining assets, the more the risk that the price of Australian commodities would be pushed down in China’s favour. Then the huge profits Australians can get from the huge Chinese market and demand would be affected. That was the main reason some of Rio’s shareholders e.g. AFIC (Australian Foundation Investment Company) were ‘deeply concerned’ about Chinalco becoming involved with the running of the business. However, if the price affects Rio’s profit then it would certainly affect

Chinese stakes too because China is one of the owners. Furthermore, “Chinalco has zero interest in helping China’s steel makers get cheaper iron ore and they are not capable of doing so” (Garnaut 2009b).

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Different views on Chinese direct investments in the Australian resources sector are indicated by what the media say about these. On the 1st April 2009 ABC morning news, the Chief Executive Officer (CEO) of Fortescue Metals, Andrew Forrest said an $844 million deal between his company and the Chinese steel group, Hunan Valin, is the yardstick for how foreign investments should be made (Bain 2009). He said clearly that

"having China invest in a minority stake where they have absolutely no control, they have no influence over management committees, they have no influence over our marketing, they can only put one person on our board and that has to be their chairman"

(Bain 2009), "I feel that we have been able to raise much-needed capital where capital is in really short supply in a way that is totally friendly to Australia and totally friendly to

Fortescue and doesn't affect the independence of either" (Bain 2009). Forrest said his dream for the past five years had been to get Chinese investments for FMG “in a way which completely respects Australia’s sovereignty” (Bain 2009). He emphasized that

"this particular investment (between Fortescue and Hunan Valin) really does demonstrate how China in a friendly way, in a minority way, in a totally non-controlled way, in a passive way, can invest in our operations without influencing the independence, direction or sovereignty” (Bain 2009).

As the former CEO of OZ Minerals, Andrew Michelmore, rejected criticism of Chinese investments in Australia and said that “companies in Australia in the resources industry have forever relied on foreign investments to be able to develop, Australia just does not have the capital to be able to develop its own assets” (Sharples 2009). He said to The

Australian that “Minmetals’ investment in OZ Minerals is about survival, not the development of Australia’s resources”. He emphasized that "the fear of a state-owned

258 enterprise taking Australia's resources purely back to China - that isn't the situation at all," and "you need to go right into the detail of what does this mean for the operations and their development and national interest to Australia.” He said that "I think these projected fears of Chinese companies - implying massive numbers of Chinese people coming in, taking control - that is not what is happening" (Sharples 2009).

The Chinalco rescue deal cleared the first hurdle by the Australian Competition and

Consumer Commission (ACCC) on the 25th March 2009 (Onstad 2009), the second approval was cleared by the German Federal Cartel Office on the 1st April 2009

(Mining-Journal 2009), and the third approval by the USA Committee on Foreign

Investment on the 15th May 2009 (SMH 2009c). All these approvals were based on not having an anti-competitive element in the deal. In other words, the reason these organisations approved the Chinalco investment in Rio Tinto was because they did not think Chinalco would have any power to control the operation of Rio Tinto after the deal.

Meanwhile, the most senior Chinese diplomat in Canberra, Beijing’s ambassador,

Zhang Junsai had warned against an overly “emotive” debate about China and declared

Australia should not fear Chinese investors--no matter whether they are state-owned or private. He said in an article written for The Australian that “Chinese companies investing in Australia do not seek to control Australia’s energy or mineral resources”

(Stewart 2009b).

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3.1.4 Ideological factors: the source of conflicts

“We want someone on the committee to make sure our investments are looked after, not because we want control” said Wang Wenfu, a Monash University-educated Australian citizen, who has led both of Chinalco’s investment deals with Rio (Garnaut 2009c) and is the Chinalco Overseas Holdings President. What looks like control of resources might sometimes be due to misunderstanding caused by ideological difference. As some

Australian scholars have observed “there is no reason in principle why state-owned foreign firms will not deliver benefits to Australia”(Drysdale and Findlay 2008 p.11), and the market economic represents the perception difference in reality and ideology.

Moreover, Australian businessmen have different perceptions than ordinary Australians on the ownership debate (Washington 2011). Yet, the different backgrounds of the businessmen represent the different interests behind them. There are no differences in ideology but more on interests they represent. A pure economic representative is

Andrew Michelmore, OZ Minerals CEO, whose company is the subject of a $2.6 billion rescue deal bid by China Minmetals who says “if China wasn’t there, I don’t know where we would be…what’s the alternative?” and “we should be looking at this and thank God we’ve got China there with cash” (Sainsbury and Tasker 2009).

The economies of resource-rich states are often under-developed (Wilson 2011b p.284), but luckily, Australia is an exception. Should Australia rethink its rules that “While

Australia is a country dependent on foreign investments, it has one of the most restrictive regulatory frameworks for foreign investment in the OECD” (Cook and

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Thirlwell 2008 p.6; Novak 2008 p.3; Thirlwell 2008 p.7) and it is an unavoidable question whether those rules specially target China. The world economic environment is changing and therefore, it would be questionable for Australia to continue the current policy for foreign investments, especially the China policy. Although the Australian government does not control the media, yet “there is a view that the Australian government can influence the media and the public debate” (Larum 2010 p.24).

Nevertheless, if the Australian government’s perception of China is not changed, it would be questionable whether the changed policy would be accepted by the ordinary

Australians.

Therefore, in Australia-China relations, not just the political and security relations, but also the economic relations, the different ideologies cause misunderstanding and mistrust, then misperceptions. Very likely, the ideological factor is the source of conflicts.

3.2 Economic interest: Rio Tinto, FMG

Some Australians deem mining assets as a strategic interest. Emotionally, Australians do not want to lose the ownership of their core resources asset. The thought of selling the milk but not the cow blocked Australians from a rational analysis on the new round of Chinese direct investments. Yet, there are always two sides to everything. The negative side is the political effect. The positive side is the economic interest: financial support and market access.

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Rio Tinto

One of the positive sides of the Chinalco-Rio Tinto case was the higher priority of Rio

Tinto to get access to the world’s largest market. This was also one of the reasons that

BHP wanted to impede the deal. “We are not going to get involved in pricing. We as a shareholder want them to make money. No one else is going to pay off our debt” said

Wang Wenfu (Garnaut 2009c). Moreover, the chances of Chinalco, which has no steel- making operation, attempting to subsidize its junior rival, Baosteel by supplying it with discounted Australian iron ore are close to zero (Garnaut 2009j).

Another positive side of the state-owned background is that Chinalco has a higher priority than any other privately-owned firms to access China’s sovereign wealth fund and is in a better position to survive. In other words the state-owned background could also be the advantage for Rio Tinto to gain financial support from China’s huge foreign exchange reserve especially during the global recession period. The USA is robbing

Chinese money by selling the USA national debt to China in order to transfer the risk to

China. The main purpose of the USA Secretary of State, Hillary Clinton’s first China trip, after her appointment in the White House, was to urge China to continue buying

US Treasury securities (Lakshmanan 2009). Thus, the state-owned background actually benefited Rio Tinto with access to the Chinese foreign exchange wealth fund or in other words the financial backer.

Some Australians deem that the timing of these deals are not right because it was at the lowest price due to the global financial crisis and the Australian dollar was at its lowest

262 exchange rate. However, Rio’s share price had dropped 80% from its high position of

$157.45 in May 2008 to $29.91 in December 2008 before they started the deal. Yet, its share price rose 75% from its lowest at $29.91 to $52 on the 17th March 2009 since the deal discussions emerged to the public. Every time the deal proceeds well, Rio’s share price rises and vice-versa. When the deal faced extra scrutiny, Rio’s share price dropped e.g. once it dropped almost 9% on the 19th March 2009 when the news was announced that it was facing more hurdles.

The deal cleared the first hurdle on the 25th March 2009, when the Australian

Competition and Consumer Commission (ACCC) approved the Chinalco deal on anti- competition grounds that Chinalco could not control nor influence Rio’s daily operation, and was unlikely to have the ability to unilaterally decrease global iron prices below competitive levels. Immediately Rio’s share price bounced up 1.5% on the 26th

March 2009. Rio’s chairman, Skinner said Chinalco had offered the mining company, asset prices at the top level at bottom market conditions (Behrmann 2009). This deal was made by Australian businessmen and not by politicians. If the financial situation was not as bad as it was, Rio Tinto would not have handed out the olive branch to China first. In other words, if there were no global recession, financial support would not be urgent at that time for Rio Tinto.

Moreover, if Rio Tinto had a better solution to pay off its $40 billion debt, they would not have started this deal. They had been asking around the world including BHP

(Chambers 2009) and they could not get any better price or any better deal at that time.

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Mr Albanese said that it is “a long way from anything Chinalco would value it at”.

Rio’s shareholders ignored the deal that would solve Rio’s debt repayment problems, something that had depressed the group’s share price and was cited as a reason for BHP walking away from its hostile takeover bid in November 2008. Rio Tinto’s shareholders argued against the rescue deal that they should have the option to participate in a capital raising and their holdings might be diluted. Consequently, Rio took this option to solve its financial problem.

The share market is the most sensitive place to test business decisions. Since early this century, any company in Australia, no matter in what industry or area, once the China factor is added in, its share price will rise and vice-versa. Some businessmen or some companies use the China factor to raise their share prices such as FMG whose CEO,

Andrew Forrest, was sued in April 2009 because he misled share buyers by announcing a “binding agreement with China” in 2004. These are very common phenomena that exist in the Australian share market. In the Australian share market, the China factor signifies huge cash injections, financial support, a huge export market, rich profits and market power. Examples of this are innumerable and include BHP, Midwest

Corporation, Gindalbie, Apollo Minerals, Rio Tinto, Australasian, Mount Gibson,

Centrex Metals Murchison Metals, Ferraus, Jupiter Mines, IMX Resources, Western

Plains and Republic Gold. For instance, RAU (Republic Gold) only announced,

“Chinese delegator visited the company”, and its share price shot up between 30-150% in the market in one day. This was why when there was a market rumour that the

Chinalco multibillion deal might collapse on the 14th May 2009, immediately Rio’s share price crashed by more than 12% (Business-spectator 2009) in both Australia and

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Britain. However, on the next day, after Rio said it remained committed to the Chinalco rescue deal plus the deal had cleared the third hurdle by the USA, its share price rose back by 9.6% (SMH 2009c).

Rio’s chairman, Mr Skinner, said to Rio’s shareholders at its AGM (annual general meeting on the 20 April 2009) there were “no guarantees in this world. The only thing I can say is the world economic order is changing significantly. Clearly China and Asia more widely, are playing an increasingly more important role in shaping the future of the world economy. The combination we are proposing gives us a strong linkage to an important part of the global economic system, which will give great strength to Rio

Tinto” (Tasker 2009b). Rio shares were down 3.7% on the day amid investor concerns over the Chinalco deal. The Rio argument remained that the Chinalco deal was very good for Rio shareholders especially in the long term. "The Chinalco proposition is the best-value proposition available to Rio Tinto today," Skinner declared at the AGM,

"The potential partnership with Chinalco will strengthen our position during this period of extreme uncertainty” (Hewett 2009). Chinalco has promised to save thousands of

Australian jobs (Hewett 2009) with the deal. Mr Wang addressed the AGM that “the deal is worth very high value to Rio and is great contribution to the Australian economy. It relieves the pressure on a lot of Australian jobs and not only does it solve

Rio’s debt problem it enhances its ability to execute new opportunities” (Hewett 2009).

There are two main reasons why Rio Tinto changed its mind with the deal. First, was the share price of Rio Tinto has re-bounded almost 150% since the deal was announced.

Second, was the volume of commodities export to China and its price have re-bounded 265 a lot too. However, the increase in the volume of commodities exported to China in the first four months in 2009 was not because China had recovered from the global financial crisis, it was due to China’s wrong decision on policy. It was the outcome of the meeting of Xiao Yaqing, the former president of Chinalco, who is also an alternate member of the Communist Party’s Central Committee and the Chinese Premier, Wen

Jiabao (Garnaut 2009f). As the Australian correspondent of the Sydney Morning Herald on China, John Garnaut said in his article that “Xiao Yaqing played no small part in sparking the resources revival that emboldened Rio Tinto to walk away from the

USA$19.5 billion investment lifeline that he had worked so hard to put in place”

(Garnaut 2009f). When the Chinese realized its mistake and amended it, it was already too late to stop the collapse of the deal. Hence, for Australia, the greatest benefit of

China’s official buying, in other words, was Xiao Yaqing’s mistake or the Chinese economic policy mistake, which took place exactly when Australian mining companies needed it most. Also due to these two reasons, China lost its negotiations chip in the

2009-2010 iron ore benchmark annual contract price negotiations. It was a big lesson for not just Chinalco but also for Chinese economic development.

At the time during the intensified debate about the Chinalco-Rio Tinto deal, some scholars such as Peter Drysdale and John Garnaut were concerned that if Rudd and

Swan bowed to the Opposition and those who harboured thoughts of anti-Chinese investments or played the nationalism card, their efforts to push Australian financial services firms into the Chinese market would prove a waste of time and AMP and

Macquarie Bank angling for Chinese fund management licenses would be hung out to dry (Garnaut 2009d). Furthermore, Chinese companies would ramp up their investments

266 in other countries that were less equipped e.g. Indonesia, East Timor and Papua New

Guinea (Tasker 2011a). As a result, China has increased its investments in other countries or regions such as Central Asia, South East Asia, Africa and South America.

Furthermore, by the first eight months of 2011, Mongolia had overtaken Australia to become China’s first supplier of coking coal (Chinese-Daily 2011a). Coking coal was

Australia’s top export product for many years, but it became the second in 2010-2011

(DFAT 2011e p.3), as shown beelow, very possibly due to the Ausstralia-China Policy in regard to Chinese direct investments, which pushes China away.

Source: Composition of trade 2009-2010 (DFAT 2010a p.3).

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Source: Composition of trade 20100‐2011 (DFAT 2011e p.3).

The above two charts showed that iron ore and concentrates hass overtaken coal as the top number 1 export product in 2010-11. Iron ore and concenttrates exports reached

$58.4 billion, accounting for 19.6% of total exports, up $23.3 billion or 66.5%. Coal exports reached $43.9 billion, accounting for 14.7% of total exports, up $7.4 billion or

20.3%.

FMG (Fortescue Metals Group Ltd)

FMG is Australia’s third-biggest iron ore producer and exporter. Due to China’s high demand for iron ore, FMG’s boss, Andrew Forrest, had become Australia's richest man before Fortescue loaded its first shipment of iron ore on the 6th May 2008 (SMH 2009a).

However, since the global recession began, the share price of FMG fell 92% from its high position of $13.15 in June 2008 to $1.16 in December 2008. Andrew Forrest was kicked out from the top ten richest Australian lists due to his personal fortune

268 contracting by more than 90%. Yet, since the news of China’s cash injection emerged, the share price rose to $3.6 in February 2009 (67% rise from the bottom).

To save his company from being downgraded and to bolster its tight working capital position, Andrew Forrest had shopped around the world, but none of the European funds was interested in or capable of investing in FMG during the global recession period. In that precarious situation and without any other solution, the only choice that

Andrew had was a $558 million cash injection rescue from China’s Hunan Valin Iron &

Steel. In return, the rescue deal will give Valin a 17.5% stake in FMG (Freed 2009a).

Hunan Valin is China’s ninth-largest steelmaker and a major customer of FMG.

Chinese investments are facing increasing opposition in Australia as the world’s biggest consumer of raw materials speeds up takeovers amid a global recession. Only 4 days after blocking OZ’s takeover bid from China due to security concerns, Australia’s

Treasurer Wayne Swan approved China’s Hunan Valin Iron & Steel Group $1.3 billion investment in FMG on the 31st March 2009 with conditions (Riseborough and Scott

2009). The conditions apply to Valin’s board nominations and cover potential conflicts of interest with sales and marketing and FMG is required to report to Australia’s

Foreign Investment Review Board on its compliance with the conditions. Its share price jumped as much as 9.4% after the Federal Government approved the deal. FMG plans to ship up to 4 million tons a year to Valin. When the deal is completed, Valin will become the company’s second-largest shareholder after its company founder, Andrew

Forrest.

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The CEO of FMG, Andrew Forrest’s pending court case on the 3rd April 2009 about his misleading and deceptive conduct by overstating the substance and effect of the agreements pushed FMG’s share price down as much as 8%. The case was about those so-called binding agreements with the three major Chinese state-owned companies announced between August and November 2004 and which were not disclosed until

March 2005 (Reuters 2009a). Forrest faced being fined up to $4.4 million and banned from acting as a company director if court action by the Australian Securities and

Investments Commission (ASIC) was successful because those announcements pushed

FMG’s share price up a lot at that time. Thus, from another angle, it is a good example to show how the China factor works and is used in the Australian share market. What the market worried about at that time was that Forrest might be banned from continuing to act as FMG’s CEO.

Fortescue was open to joint venture investments in certain mine projects to help fund its expansion plans in the ore - rich Pilbara region of Western Australia, and did not rule out further investments by its Chinese customers (Reuters 2009b). FMG’s executive director Graeme Rowley said “Australia has nothing to fear from China”. He added that

Hunan Valin would help the company ride out a rough patch in the commodities cycle by increasing ore purchases (Reuters 2009b).

During the processing of the deal, when the market rumoured that China would not approve Hunan Valin’s investment in FMG, FMG’s share price dropped more than 8% on 7th April 2009. When FMG announced the Chinese Government’s National

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Development and Reform Commission (NDRC) had approved the deal (FMG 2009),

FMG’s share price rose by 7.1%, the most since the 22nd April 2009. With news such as

“Valin will help Fortescue to become the largest iron ore supplier to the Chinese steel industry” (Spears 2009) on the 11th May 2009, FMG’s share price jumped up by 9.9%, the biggest jump on a downward trading day. As the new FMG chief executive, Nev

Power, stated as long as China demands, FMG is secure (Burrell 2011). Hence, there is not much difficulty in foreseeing what would happen if the improper Australia- China policy pushed China away.

For at least a quarter of a century, Australian governments have recognized China’s centrality to Australia’s economic future and its position as the most important player on the geo-political stage after the USA. Economic interest is the main reason that

Australian governments notice China.

3.3 Competition between nations and companies: BHP, Rio Tinto, Vale

Brazil’s Vale, internationalised BHP and Australia’s Rio Tinto are the top three iron ore producers worldwide. Vale is Brazil’s state-owned company and the world’s biggest iron ore producer producing the highest quality of iron ore. However, due to its geographical location, its distance to China is double that of Australia’s distance to

China. Thus, its delivery costs double too. BHP and Rio Tinto iron ore production bases are in Australia. Due to Australia’s unique geology and geography, Australia, through luck rather than design, happens to be in the front row to benefit from China’s rise.

Australian iron ore is not as high quality as Brazilian iron ore, but it’s much closer and

271 therefore cheaper to ship to China (Wesley 2011). Indian iron ore is closer to China than

Australia’s, but it is not anywhere near the same quality (Wesley 2011). In the past, the iron ore trade annual contract price was mostly decided by Brazil’s Vale, yet, since

2009, due to the China factor, the benchmark price decision has been handed over to

Australia’s iron ore producers.

Brazil’s Vale preferred the annual contract price system but did not want to be the first to set the benchmark price in 2009 because the Australian miners could ignore it as they did in 2008. The three largest Australian iron ore producers i.e. BHP, Rio Tinto and

FMG were reluctant to agree to any benchmark annual contract deal because if the iron ore spot market’s price went up, they would lose a substantial profit if they set the benchmark price at a low level. Nevertheless, they would reduce the supply of iron ore at the contract price but would increase sales at spot market prices if they had been locked in at a “low annual contract price” as they had done in 2008 to secure the highest profit they could. If the iron ore spot market price continued to go down, the Australian miners could still sell their iron ore at the relatively high benchmark price. Australia would not miss the chance which China provides, and knows how to and is now very good at milking the cow.

Furthermore, the failure of the Chinalco-Rio Tinto deal proves Australia is an uneasy destination for China’s capital. Business will continue, but why should China give

Australia too much help at the other end when countries such as Brazil are proving far friendlier? The answer is clear and simple.

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Competition between BHP and Rio Tinto is not a secret in Australia. China is the biggest market for both companies. In other words, whichever had the bigger market share in China, would be the winner in the competition. This is why in the case of

Chinalco’s famous deal, what BHP did was one of the performances of the market competition.

BHP Billiton is the world’s largest miner. In February 2008, BHP announced a hostile bid to take over the world’s third largest miner, Rio Tinto. The Chairman of BHP said that BHP’s bid was directed at avoiding Australian resources falling into the hands of investors of particular countries, yet, BHP itself is about 60% foreign-owned (Drysdale and Findlay 2008 p.15). Obviously, BHP’s hostile takeover bid for Rio Tinto represented its ambition of dominating the market in order to maximize its own profit.

In other words to prevent others from gaining more and avoiding maximizing the total amount of gains for all parties involved. This is Neo-realism’s strategy. Yet, this strategy did not help to push up its share price but dragged it down from $50 to $20 per share until BHP announced it had decided to give up the takeover bid.

BHP Billiton’s share price rose in New York trading after The Australian newspaper reported Chinese interests wanted to team up with an Australian fund to purchase a 9% stake in the world's largest mining company (SMH 2008a). Since BHP went on the market in 1987, its share price reached its highest at $50 in May 2008 due to the market news stating that China would take a stake in it. But when Wayne Swan, the Australian

Treasurer, said (on the 9th June 2008) that he would set a high bar for state-owned

273 corporations investing in Australia (Garnaut 2008a), the share price of BHP plunged immediately and reached its low position at $20 in December 2008.

Rio Tinto is the world’s third and Australia’s second largest miner. Chinalco became

Rio’s biggest shareholder in February 2008, when it launched an audacious US$20 billion bid amassing a 12% stake in it. In the later Rio-Chinalco multibillion dollar rescue deal, Chinalco could obtain 15-year loans with principal payments not starting until the eighth year at the six-month London Interbank Offered Rate (now 1.74%) plus

90 basis points (Freed 2009b). “It’s an amazing deal, you can’t get that sort of money in this market” (Freed 2009b) said a banker who specializes in mining finance.

One of Rio Tinto’s major shareholders says plans by Aluminum Corporation of China

(Chinalco) to invest $U19.5 billion ($A28.29 billion) in the world’s third biggest resources company is good for Australia and the group (Bell 2009). Aberdeen Asset

Management Global Head of Equities, Hugh Young, also one of the top Rio Tinto shareholders, says that the deal proposed by the Chinese state-owned firm, which has been criticized by some Australian politicians, was “clever” for Rio Tinto. He told AAP in an interview during a visit to Australia that "we actually got a good deal from

Chinalco and Chinalco do not threaten national security or anything like that” (Bell

2009).

Rio Tinto’s chief executive, Tom Albanese, contradicting BHP’s position, was supportive of the moves to rejuvenate the Australia-China free trade agreement and 274 encouraged Australia to take advantage of the opportunities provided by Chinese investors in the resources industry. Albanese said “I don’t think that Australia would want to miss out on this substantial opportunity by not taking advantage of the full breadth of global capital and global relationships” (Robertson 2008).

When the biggest deal in Australian corporate history, the USA$19.5 billion ($24.4 billion) alliance between Rio Tinto and the Chinese resources giant, Chinalco, was heading for collapse, the London-listed shares of Rio Tinto fell 7% on the 4th June 2009.

Rio needed to raise about US$15.2 billion from its existing share holders. Plus, Rio needed to pay a compensation of US$195 million as a break fee (TheAustralian 2009).

Trading was halted on the Australian share market on the 5th June 2009 to reduce the big fall in its share price due to the news of the death of the deal; and the trading halt order was not released until Rio announced that it would get nearly US$6 billion from

BHP as part of an iron ore joint venture in the Pilbara region of Western Australia on the same day. Yet, this US$116 billion West Australian iron ore joint venture ended on the 18th October 2010 due to both parties being advised from the European

Commission, the Australian Competition and Consumer Commission, the Japan Fair

Trade Commission, the Korea Fair Trade Commission and the German Federal Cartel

Office that this joint venture proposal would not be approved (Chambers 2010; Keenan and Riseborough 2010) due to its market monopoly. BHP had been actively lobbying against the Chinalco-Rio Tinto alliance. It had also long been seeking a tie-up of the pair’s iron ore operations. However, for sure “there may be competition issues arising from BHP and Rio Tinto’s proposed iron ore venture in Western Australia” said the

Australian Trade Minister Simon Crean on the 5th June 2009 at Canberra (Daley 2009a).

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The Lowy Institute international economy program director, Mark Thirlwell, said that

“the way this has played out (the outcome of the Chinalco deal) has created a large level of uncertainty and the relationship is critical" (TheAustralian 2009). The other outcome from the death of the Chinalco rescue deal was to make Andrew Forrest’s FMG, which is not involved in the Pilbara iron ore compact of Rio Tinto and BHP, emerge as a big winner. On the day when the news of the broken BHP-Rio Tinto alliance was announced, Australian investors very cleverly pushed FMG’s share price up 13.6% higher (27.79% or $0.61 higher to $3.41 for most of the day) to close at $3.18 “on the basis that the combination of Rio and BHP in the Pilbara would prompt a backlash from the Chinese steel industry, the world’s biggest” (FitzGerald 2009b).

In the Rio Tinto-Chinalco-BHP party, “BHP played a shrewd and disciplined game to catch its fish but it may also have poisoned the water in which it swims” (Garnaut

2009e). “The deal turned out to be too much, too fast for either China or Australia to cope with. The down-out saga has damaged the cause of those in China who were pushing their country to be a stakeholder in the global system that plays by global rules”

(Garnaut 2009e). Furthermore, it has been revealed by WikiLeaks that behind-the- scenes BHP lobbied the highest levels of the federal government to block the deal (AAP

2010a). Wayne Swan’s chief of staff told US embassy officials that BHP lobbied the

Treasurer, Kevin Rudd and Resources Minister Martin Ferguson to block the Chinalco bid (TheAustralian 2010).

As thousands of Australian mining workers feared losing their jobs and the world was threatening to turn off the taps that fund Australia’s gaping current account deficit, it 276 was not only the Opposition opposing the deal but BHP was also leaning on Rudd’s ministers to block Chinalco’s investment in Rio and presumably save assets for themselves therefore worsening the problem. In other words, the side effect of the competition between BHP and Rio Tinto makes the problem worse.

3.4 Security issue: OZ case

OZ Minerals, created after the merger of Zinifex and Oxiana in July 2008, was

Australia’s third largest diversified mining company and was the world’s second largest producer of zinc as well as a substantial producer of copper, lead, gold and silver.

Since the financial crisis started in November 2008, OZ had fallen into serious financial problems. After months of speculation that the struggling Melbourne-based miner was on the verge of calling in the administrators, it appeared likely to survive the commodity plunge and tightened credit markets that forced it to look to China for help.

A trading halt was placed on OZ’s shares on the Australia Stock Exchange since the 28th

November 2008 due to OZ’s financial problems and compounded by the global financial crisis. OZ Minerals announced on the 16th February 2009 that an offer had been made of 82.5cps (50% premium to last trade on the 27th November 2008) for all the shares of OZ Minerals by China Minmetals via a scheme of arrangement (OZ-

Minerals 2009) valuing OZ Minerals equity at approximately $2.6 billion. This announcement brought OZ back to life.

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The transaction benefits for OZ as addressed by Barry Cusack, the chairman of OZ, is that the cash injection from Chinese Minmetals was in the best interests and is the best outcome for OZ’s shareholders compared with any other options available (ASX 2009).

Minmetals’ offer provided not only the 50% higher share price but also to pay out all of

OZ’s multibillion dollar debts, and also offered the financial support to OZ in pursuing developments and other growth opportunities. OZ Minerals believed that a combination of Minmetals and OZ assets would create a world-class metals and mining group.

However, if Minmetals’ rescue deal was turned down, OZ Minerals might have to go into administration.

On the 27th March 2009, Australia blocked OZ Minerals Limited’s rescue deal provided by China Minmetals Group. It was the biggest Chinese investment to be refused by the government at that time (Riseborough and Yu 2009). The Foreign Investment Review

Board did not approve the transaction because it included the Prominent Hill copper and gold mine, considered the jewel in OZ Minerals’ crown, but located close to a weapons- testing site in South Australia (Riseborough and Yu 2009). On the next day, Minmetals offered a revised offer which excluded the sensitive Prominent Hill project and OZ agreed on the new offer on the 1st April 2009, yet, a China analyst at the Economist

Intelligence Unit and former Australian Treasury representative in Beijing, Stephen

Joske’s response to the decision was “blocking this transaction will have significant consequences. It will add a risk premium to investments, devalue Australian resources assets and raise the risk that China becomes less enthusiastic about the rules and processes of globalization” (Hartcher and Garnaut 2009). This influential consequence

278 is also because the blocking decision of OZ’s rescue deal was the first rejection amongst the three main rescue deals (Rio’s Chinalco deal, FMG’s Hunan Valin and this one).

OZ had never been required to adopt any special security measures at its Prominent Hill mine before that. Yet, the firm’s operations had been placed at risk by the Treasurer,

Wayne Swan, excluding Prominent Hill from any takeover deal with the Chinese state- owned Minmetals. The market rumoured that the Federal Government could be using

OZ as a “sacrificial lamb” to show that it would not permit all proposed Chinese investments (TradingMarkets 2009). The Rudd government rejected the Opposition claims it was doing everything China wants, citing the OZ decision as an example of foreign investment rulings being made on merit. Yet, Federal Treasurer, Wayne Swan, said to ABC news on the 30th March 2009 that there was no link between his decision to block a Chinese company from buying OZ Minerals and criticism that the

Government’s relationship with China is too close (ABC 2009). Wayne Swan reiterated that his decision had not been affected by the Opposition Leader, Malcolm Turnbull’s attack on the ABC national radio interview.

Nevertheless, Mike Rann, Premier of South Australia, the most affected state government, told journalists on the 30th April 2009 that he was disappointed by the

Treasurer’s decision and he wanted an explanation from both Swan and the Resources

Minister, Martin Ferguson, about “the implications of the decision for South Australia”

(Darnbrough 2009). South Australia Chamber of Mines and Energy Chief Executive,

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Jason Kuchel, said China was the new source of foreign investments and Australia had to evolve with its new trading partner and “be precious” (Darnbrough 2009).

Prominent Hill is located 650kms northwest of Adelaide in the Woomera Prohibited

Zone, halfway between the townships of Coober Pedy and Roxby Downs, in South

Australia’s far north. The mine is about 160kms southeast from the zone’s weapons testing range (Darnbrough 2009). Mr Swan’s reason for blocking the deal was that “OZ

Minerals’ Prominent Hill mining operations are situated in the Woomera Prohibited

Area in South Australia. The Woomera Prohibited Area weapons testing range makes a unique and sensitive contribution to Australia’s national defence” (Taylor 2009).

According to Australian leading intelligence expert analysis, fears that Chinese spies could compromise the joint Australian-US intelligence operations at Pine Gap may have been underpinning the Rudd Government’s decision to reject the OZ takeover by

Chinese Minmetals (Stewart 2009a). In other words, the USA influence on the

Australian government was the main reason for blocking the deal.

Professor Des Ball of the Strategic and Defence Studies Centre and the author of books on the joint US bases in Australia, says the Pine Gap facility--600kms to the north-was likely to be the true reason for the decision. It was much more likely that any national security concerns relate to Pine Gap rather than Woomera and there is nothing that important or that sensitive at Woomera any more. If so, then the USA, which jointly

280 manages Pine Gap, would have played a role in the decision to block the Minmetals bid

(Stewart 2009a). Professor Ball said to The Australian on the 1st April 2009 that Pine

Gap is probably the most important Western intelligence facility in the world. It controls several geostationary listening satellites that intercept microwave signals including missile telemetry and microwave communications. “These transmissions would include telemetry on Chinese missile launches as well as intercepted communications from senior figures in the People’s Liberation Army (PLA) and the

Chinese Communist Party” (Stewart 2009a). He continued that “these satellites, parked in stationary orbits 36,000kms above the equator, have a smaller dish for transmitting the intercepts down to the Pine Gap ground station. From that altitude, even narrow

‘spot beams’ cover a substantial area of the earth’s surface, with a radius of about 800 km from Pine Gap.” Thus, the USA would not want China having any facility with communications equipment within this radius, otherwise it could compromise their eavesdropping operation due to Prominent Hill being about 600kms from Pine Gap.

The Woomera prohibited area is used largely for rocket and aerospace defence research.

While it is not used as frequently as it once was, sensitive testing of new military technology is still carried out there by the Defence Science and Technology

Organisation. Hence, it was the Defence Department that raised concerns about the proposal early in the process although Treasurer, Wayne Swan, made the final decision to block Minmetals’ bid to acquire the Prominent Hill site. The government’s refusal to detail security issues involved in the decision has raised speculation that it was driven partly by political considerations rather than by genuine security issues (Stewart 2009a).

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Only after four weeks of extra consideration and one day after the Australian Reserve

Bank announced that Australia was in recession and the unemployment rate might increase, Australian Treasurer, Wayne Swan, approved China Minmetals’ US$1.2 billion ($1.6 billion) rescue package for OZ Minerals (Tasker 2009c) on the 23rd April

2009 but excluded the Prominent Hill project and with conditions such as Minmetals can not intervene in marketing and pricing.

Only one day after Wayne Swan approved China Minmetals' US$1.2 billion asset deal with OZ, the miner announced that it had sold its Martabe gold and silver project in

North Sumatra, Indonesia to China Sci-Tech Holdings for US$211 million in cash

(Tasker 2009a). The proceeds from this sale will make an important contribution to addressing OZ Minerals refinancing issues and moving a step closer to resolving its debt issues. Analysts said the Martabe sale was good news for the company as the sale price came in above expectations. Most insiders had expected OZ to attract about $200 million (Tasker 2009a). After the Martabe and Minmetals deals were finalized, OZ

Minerals would focus on its remaining Prominent Hill mine. The Martabe sale required

Foreign Investment Review Board approval and the agreement of OZ lenders that had security over that asset. Yet, OZ’s share price jumped 7.14% on the back of the

Minmetals and Martabe news. OZ Minerals’ CEO, Andrew Michelmore, did join China

Minmetals when the takeover deal was finalized. The deal received final approval from

Chinese government on the 3rd June 2009.

In the meantime, although there was a US$1.2 billion recapitalization proposal by RFC

Group and the Royal Bank of Canada on the 5th June 2009, OZ still favoured the 282

Chinese Minmetal’s deal being of more value (FitzGerald 2009c). It was because the

11th-hour attempt by the Royal Bank of Canada and the RFC group contained “onerous conditions, which would have severely disadvantaged OZ shareholders if they denied the undisclosed new investors the opportunity to take equity in OZ on favourable terms”. OZ also rejected a second alternative proposal, which was received on the 6th

June 2009 from Macquarie Bank, but bore similarities to the RBC-RFC proposal and also failed the test on value and certainty.

The Macquarie Group’s US$1.4 billion offer to recapitalize OZ Minerals was rumoured to have been superior to a rival proposal by the RFC Group and the Royal Bank of

Canada, but the OZ board rejected both due to both offers containing very strict and complicated conditions. Both offers were highly publicized and both had claimed to offer a better solution for shareholders than the Chinese deal, but Macquarie pulled out its bid only hours before Minmetals boosted its offer by 15% to US$1.38 billion. OZ

Minerals shareholders backed its assets sale to China Minmetals on the 11th June, 2009 by voting at the AGM. Investors voted 92% in favour of the Minmetals deal (FitzGerald

2009a). Its share price jumped 17% on its first day of trade after the approval

(Riseborough 2009).

This case tells that security issues are certainly a point to be considered when foreign investments are involved especially when the investments are from China. Yet, economic interests are still important factors too in business.

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4. The effect of constraints on Chinese direct investments

What would the effect be of constraints on Chinese direct investments? Would the damage be more for China or Australia? If Chinese investments are not welcomed in

Australia, they would simply invest somewhere else. Australia is not the only country which has resources. There are many other opportunities for Chinese investments. If it was considered from the neo-Liberalism’s point of view that cooperation is to maximize the total amount of gains for all parties involved, should there be an unnecessary regulation on the capital from Chinese state-owned firms or sovereign wealth funds?

The side effect of the tough new regulations designed for Chinese direct investments may possibly drive the rare funds in the global recession period to other markets. Then the consequences would be damaging to both Australian long term economic and political interests. Increased uncertainty about the treatment of Chinese direct investments in the Australian resources sector is likely to damage the potential growth of the sector and Australia’s full and effective participation in the benefits from the

Chinese economic growth through the growth of its market for industrial materials

(Drysdale and Findlay 2008 p.32).

New hurdles to investments in Australia by China’s state-owned companies appear to be deterring investments from China (Uren 2011). Between November 2007 and

January 2008, 53 Chinese state-owned companies had withdrawn investment proposals before the board had a opportunity to rule on them and probably, most of these were from the resources sector (Uren 2011). Australia’s image as a favoured destination for

Chinese investments is still dented by perceptions generated in 2009 when heated political debate on foreign investments blurred guidelines and confused investors

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(Tasker 2011a). Ian McCubbin, Norton Rose’s China practice group leader commented to The Australian that “the reality is that there is a perception gap between the real and genuine benefits Australia offers, so the Chinese are still saying Australia is a difficult jurisdiction” (Tasker 2011a). Even Australian billionaire, Clive Palmer, said that the

Australian government has “racially discriminated against Chinese investors” and the chairman of China Nonferrous Metal Mining, Luo Tao, complained of “bias against

Chinese investors” (Garnaut 2011a). As has been discussed earlier in this chapter when comparing the ratios of proved investments and the trade volume between the USA and

Australia, Japan and Australia, China and Australia, it is hard to deny that Australia is not biased when treating investments from China. It is has been mentioned in the economic chapter that the USA has absolute freedom to invest in Australia if the amount is not over $100 million. However, as was mentioned earlier in this chapter the

Australian government set additional conditions for investments from “red” China.

What would Chinese investors feel under these circumstances although Chinese investment in Australia is still increasing in general?

The result is that Chinese investors are turning their attention to other destinations due to Australia’s attitude and policy (Tasker 2011a). As John Garnaut said, “lower inflows of Chinese investment have reduced the value of Australian assets, reduced mine and infrastructure construction and, inevitably, they will reduce Australia’s export share in the global market long after the boom has ended” (Garnaut 2011a). The development of the Australia-China resources trade and conflicts of price and investment due to the trade might possibly co-exist for a while, but the reality is if China could get a cheaper supply of resources elsewhere and with fewer political risks, it is also possible that

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China would walk away without hesitation if Australia continues its current China policy regarding the relevant issue.

China does not favour security alliances e.g. the pact between Australia and the USA since World War II. But “China will be a great and powerful resources and economic partner” (Fels and Brenchley 2009). Australia wants to manage its security alliance with the USA while at the same time deepening its strategic economic relationship with

China. In diplomatic terms, it is called “walking both sides of the street”. If Australia has pretensions to act as a go-between in the natural tensions between the USA and

China, this requires a special relationship on both sides. As a step along that walk on both sides of the street, Australia should be “just as welcoming of Chinese investment as it has been with investments from elsewhere” (Fels and Brenchley 2009) and “saying no to Chinese investment based on the narrow interpretations of national interest paraded could be disastrous” (Fels and Brenchley 2009). This is how some Australians foresee the effect of constraints on Chinese direct investments.

Due to the increased Chinese demand for Australia’s commodities, there have been sharp rises in commodity prices. From the March quarter 2005 to the September quarter

2010, the export price index for the mining industry increased 150.2% (ABS 2010a). In the two mining states of Queensland and Western Australia, mining’s total factor income increased by 234% (or $16,473m) and 244% (or $35,711m) respectively from

2000-2001 to 2009-2010 (ABS 2010b).

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Iron ore is one of the resources in which Australia is rich, and China has a huge demand for (China consumed 73% of Australian iron ore export quantity in 2009). Iron ore’s annual contract price had kept increasing significantly for more than a decade from

1993 to 2010. The peaked increase in price was in 2008 with a yearly increase of 97% on the 23rd June 2008 (Blas and Bream 2008), almost doubling that of the price in the year before. Even after the financial crisis in 2009 and 2010, the price of iron ore which

Australia could still get from China was around US$150 to US$160. It is worth considering that Rio Tinto and BHP are mining iron ore in the Pilbara at a cost of about

US$20 a tonne and paying freight to China of between US$8 and US$10. Subtract those production and freight costs from contract prices and one can begin to grasp what luck it is to be an Australian at the peak of a once-in-a century resource boom (Garnaut 2010c).

However, since the financial crisis began in November 2007, most of the developed countries were in recession and the export of steel from China to Europe and the United

States had dropped significantly. The world’s largest steel manufacturer, China’s demand for iron ore has dropped too because of the fall in global consumption. The price of iron ore has dropped by 80% in China’s spot market – the biggest drop during the recession. Thus negotiations of the iron ore annual contract price were sporadic in

2009. From 2009, the thirty year old, annual contract price system for iron ore ended in the international trade and was replaced with a half yearly or quarterly contract price system.

The increasing Chinese demand for resources is driving a growth in investments in the resources sector in Australia (Drysdale and Findlay 2008 p.3). The increasing Chinese

287 direct investments in Australia also encountered a similar reaction to that which the

Japanese had faced i.e. the strong Australian resources nationalism’s reaction. The difference is that Australia smoothly overcame the wave of negative reaction brought about by the sudden increased Japanese direct investments in the Australian resources sector. However, although Australia has stressed that Australia welcomes investments from China and treats China as fairly as any other countries, yet, an original document revealed by WikiLeaks shows that the Foreign Investment Review Board (FIRB) privately admitted that it is seeking to limit investments from China in response to political concerns about the control of Australia’s strategic resources (Grubel 2011;

Dorling 2011c). According to Reuters, “Australia’s changes to foreign investment rules in 2009 were aimed at limiting Chinese investments in local mining companies, according to confidential US embassy cables” (Grubel 2011). This is contrary to the

Australian federal government’s claims that it supports a non-discriminatory foreign investment policy. This secretive FIRB document told the US diplomats that the new guidelines approved by Treasurer, Wayne Swan, signalled “a stricter policy aimed squarely at China’s growing influence in Australia’s resources sector” (Dorling 2011c).

This FIRB secret document also revealed Australia’s attitude towards China’s investments in the Australian resources sector and the results of China’s investments in it. Which is the true face of the Australian government? Are the double faces of the

Australian government due to the reason that Australia wants money from China but at the same time Australia also needs to show the USA its loyalty? Hence, along with the developing of the Australia-China resources trade, conflicts due to the increasing commodities price and direct investments in the resources sector are co-existing.

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Australia has perhaps the most efficient mining sector in the world due to its openness to foreign investors’ competition and participation. The development of the opening for foreign investments is not a smooth and straight line but has lots of fluctuations.

Australia was ranked one of the most restrictive among OECD countries in its treatment of foreign direct investments (FDI) in general (Drysdale and Findlay 2008 p.2). When the door was opened to direct foreign investments, it created uncertainties about the resources investment climate during the last global resources boom during the 1970s,

“the change in policy tone was encouraged by a big shift in the relative price of resource goods in those years and reflected the emergence of a measure of resource nationalism”

(Drysdale and Findlay 2008 p.2). Now Australia is experiencing the same feeling and facing a similar situation. The present situation makes it even harder for Australia to choose. Whether the development and conflicts of the Australia-China resources trade can continue to co-exist peacefully depends on Australia’s China policy. If Australia continued its present China policy on the issue, it would be very possible that China would walk away one day.

With the collapse of the Chinalco deal, in the short term, everyone wins except the

Chinese. However, in the long term, the images of Rio Tinto and Australia in China have been damaged due to the outcome of this deal. “Rio Tinto is like a dishonourable woman: once she loved the money in Chinalco’s pocket but she actually did not love the man himself. Now she is breaking faith and kicking down the ladder.” John Garnaut cited some Chinese comments in his article regarding the outcome of this deal. In

Chinese thinking, Australia’s racism image has been proven in this case in Chinese thoughts. A lesson that the Chinese learned from this case is that “There is only one rule

289 in the international dealings: that is, there is no eternal friendship, only eternal profit”

(Garnaut 2009g).

Concluding the typical example of the Rio Tinto-Chinalco case, in the short term, Rio

Tinto won the battle and the profit, but lost its image in China. In China, since Rio Tinto betrayed the Chinalco rescue deal, Rio Tinto has been portrayed in the Chinese media as a dishonourable business partner, a liar, a cunning businessman who will betray its partner for its own benefit at anytime. Righteousness, trustworthiness and prestige are very important principles in the Chinese moral standard and philosophy. No one would like to deal with those who are untrustworthy and dishonourable businessmen. Hence, for the long term, who is the real loser is obvious. Therefore, development and conflicts might be able to co-exist continually for a while. And for long term, it might still be possible if Australia could adjust its China policy accordingly.

China not only has huge investments in Australia but also in the resources industries of

Africa, Latin America, Central Asia and the Middle East in order to secure a stable supply and a steady price of raw materials (Ding 2011). The Rio Tinto-Chinalco multibillion dollar deal, the FMG and OZ cases show how the China factor affects

Australia’s share market and how Australian domestic political issues affect its China policy, then affect Chinese direct investments in the mining sector, then the survival of the mining industry, then the resources trade, then the prosperity of Australia, and ultimately, the Australian national economic interests.

290

5. Summary

In summing up the Australian resources diplomacy, without any doubt Australia and

China are increasingly interdependent in regard to the resources trade. The increasing interdependence also gives the Australian government strength for its China policy.

However, at the same time, as Theodore Wilson pointed out, in recent years, the question of Australia’s regulation of Chinese FDI in its mining sector has become a significant political issue (Wilson 2011b p.287). There are always supporters and detractors for every government policy. The Australia’s China policy is not an exception. Most of the Chinese direct investments have been driven by iron ore and coking coal demand from China’s rapidly growing steel industry. It is also part of a broader Chinese effort to secure foreign sources of minerals and energy to meet demand for its industrialisation and urbanisation, which increasingly cannot be met by domestic reserves (Moran 2010; Wilson 2011b p.289). Those against Chinese investments in

Australia’s resources sector were concerned that these Chinese state-owned firms would act in a policy-driven manner and distort market processes by prioritising the economic interests of the Chinese state, as well as fears that these would give the Chinese government some measure of ‘control’ over the Australian resources industry.

Australian domestic groups calling for a greater scrutiny of Chinese investments on nationalistic grounds come from a disparate range of political and ideological backgrounds (Wilson 2011b p.288) e.g. the alliance of the Opposition Liberal-National

Party and the Greens, advertisements of Barnaby Joyce and Nick Xenophon. Some of these were due to domestic political interests. Some have a clear ‘resources nationalistic’ preference for restrictions aimed against China (Wilson 2011b p.228).

However, views opposite to these were concerned from the point of economic interests that the heightened regulatory scrutiny was deterring Chinese investors from investing 291 in Australia and thus investing in other countries and regions e.g. the Australian China

Business council; some scholars such as Peter Drysdale, Christopher Findlay and Mark

Thirlwell; many mining firms such as Rio Tinto, Fortescue Metals Group Ltd. and OZ

Minerals.

Many Chinese firms which were involved, included those that have been mentioned earlier in this chapter, have publicly claimed their investments are commercially - oriented, and rejected the suggestion that their investment activities have been driven by

Chinese government priorities (Irvine and Freed 2008). The Australian government has consistently denied that its policy is nationalistic in orientation or application (Swan

2008a; Swan 2008b; Garnaut 2011b). Moreover, WikiLeaks revealed that, in fact, the

Australian Foreign Investment Review Board privately admitted it is seeking to limit investments from China in response to political concerns (Grubel 2011; Dorling 2011c).

The Chinese also feel that they have been discriminated against and treated unfairly. As a result, the not – being - welcome feeling in Australia and Australia’s bad image keeps

Chinese investors and buyers away (Chinese-Daily 2011a; Tasker 2011a).

There are always causes and effects. The former Foreign Minister, Kevin Rudd’s speech at Parliament House for the Australia-China forum for the 40 years of the Australia-

China relationship on the 2nd November 2011 remarked on the importance of the

Australia - China resources trade by saying that “7 out of our top 10 merchandise export items are mining and energy products—79.5% of our $64.9 billion total merchandise exports to China” (Rudd 2011a). However, if Australia does not adjust its China policy to adapt to the situation, Australia’s prosperity might be affected. Then the Australian national interests might be affected.

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Chapter 9 Conclusion

This chapter concludes how Australia’s China policy should be shaped to maximize its national interests against the uncertainties of a rising China; how Australia and China have tried to strike a balance between challenges and opportunities when they both pursue their diplomatic initiatives; how Australia should respond sensitively and sensibly to a rising China; how Australia should adjusts its China policy to maximize its national interests, especially those economic and security ones; and how to deal with the inevitable negative consequences either through its own hedging strategies or through strengthening ties with its allies, especially the USA. China’s challenges and opportunities to Australia are not irreconcilable. Is the realist theory adequate to explain

China’s rise? What had happened in the past and what are the implications for the present bilateral relations? What are the current security issues? What will be the economic conditions under which China will be a benign or an interventionist regional power? What are the current economic relations and the resource diplomacy status?

This dissertation studied the Australia-China relations in the areas of politics, security and economics from the history of the two nations, literature review, documents and especially the current affairs. The study showed that Australia can maximise its national interest through its China policy in terms of politics, security and economics in the

Asian century. Although Australia and China are very different in many areas such as the political system, the strategic culture and economic structure, the author deemed that these two countries can have a peaceful relationship and overcome disputes in areas of politics, security and economics. Australia can also balance the tripartite of Australia-

USA-China through adjusting its China policy. 293

Australia’s place in Asia is easily threaten by the prospect of great power rivalry between its primary security guarantor, the US, and its main economic partner, China

(Wilson 2011a). Australia relies on the US for the majority of its external security but has become economically interdependent on the trade with China. These relationships are relatively healthy, but there is a problem – Australia’s choice between ANZUS and the mining boom if deepening China-US rivalry forces Australia to choose. Australians from different backgrounds have different opinions and place a different valuation on

Australia China relations. Australians from a defence background have more likely pessimistic views on China’s rise whereas the Australian economists have more optimistic views on the bilateral relationship. The author agreed with Nick Bisley, who deems that Australia is not facing a zero sum choice between China and the USA and better economic relations with China do not necessarily mean worse relations with the

USA (Bisley 2011b).

Nevertheless, mistrust still exists in the bilateral relations especially in terms of politics and security. When Australia’s Defence Minister, Stephen Smith and his entourage including media advisers, visited China in June 2012 seeking to allay the concerns of

Australia’s dominant trading partner about deepening defence ties with the USA, they took extraordinary precautions against Chinese espionage i.e. left mobile phones and laptops in Hong Kong before proceeding to Mainland China (Garnaut 2012). There is a vast imbalance in the development of economic and security relations between Australia and China. There is still a long way to go to match up the development of the bilateral relationship. Underdeveloped political and strategic relations between Australia and

China weaken Australia’s ability to exert influence regionally (Jakobson 2012a p.1).

294

This up-to-date literature review showed that studies are still required in this area to help the government and the public to improve their understanding of each other. There are many current issues due to misunderstanding or mistrust. Due to the different backgrounds of the academics, there are different perspectives on Australia-China relations in the areas of politics, security and economics.

Those academics, who have engaged in cultural and historical studies, usually have optimistic perspectives on bilateral relations according to their research. More research on culture and history can help with understanding each other better in the way people think. Usually, how people think leads to how people act. Thus, people who have researched extensively on Australian and Chinese culture and history would prove that we can have an optimistic perspective on bilateral relations.

Those academics that are from politics and security background usually have pessimistic perspectives on bilateral relations. This is mainly due to them observing

China’s rise through the offensive realist lens but not the defensive realism together with a lack of understanding of the culture and history. Offensive realism deems power is the ultimate goal of a rising state. However, China is seeking international space for survival and development more than anything else and survival is what defensive realism deems as the ultimate goal of a state. If a state pursues power as its ultimate goal, then war would be unavoidable and this state would be dangerous and threaten other states’ survival. If the ultimate goal of a state is to pursue space for development and survival, then war will be avoidable. Although this state behaves like a revisionist power, yet, it is still a status quo power. 295

Those academics who have engaged in economic practice would usually perceive China as a normal and useful state. Economic interest is also a core interest of a state. A government cannot survive without economic support. Thus, these economic academics deem economic interests as being equal to the security interests of a state. Hence,

Australia should neither over-estimate nor underestimate the rising China and treat it as a normal and useful country.

Due to no single existing theory being able to explain today’s complicated Australia-

China relations, liberalism and realism have been applied and studied for political and security relations; classical international trade theories such as comparative advantages and factor endowments (the Heckscher-Ohlin theory), contemporary international trade theories such as strategic trade policies and national competitive advantages have also been applied and studied for economic relations.

China’s acquisition of increased power projection capability beyond its borders generates a great deal of security uncertainties that warrant Australia to assess China’s real and potential strength and intent to restructure the global and regional order at its realist angle. Indeed, China’s rise has not only generated power for China but also vulnerability, as the rise has stimulated major powers and China’s smaller neighbours to engage visible coalition building, with the US pivotal to Asia and more coordinated efforts among Asian states that have territorial disputes with China. Uncertainty was the key word in Rudd’s 2009 Defence White Paper that captured such security worries which has been translated into enhanced Australian-US military cooperation. If

Australia perceives China from the offensive realism’s lens, China looks like a potential 296 threat to Australia e.g. the “China threat” thought and Rudd’s White Paper. If Australia perceives China from the defensive realism’s lens, Australia does not need to fear

China. China’s ultimate goal of development is for its own survival, not for threatening others.

At the same time China has been Australia’s largest trading partner. The economic interdependence has mitigated tension in the security areas. If Australia perceives China from the liberalism’s lens, China has more opportunities than challenges. According to the liberalism theory, more interdependency means more possibility to avoid conflicts.

Economically, Australia and China are getting more and more interdependent due to their highly complementary economic structure. Thus, it is more possible to avoid conflicts due to their common economic interests.

Both Australia and China have their own comparative advantages and possess some factors in greater abundance than others. Australia is rich in natural resources and China has huge demands on them for its own industrialization and urbanization. China’s cheap intensive labour production supplement Australia’s high labour cost for clothes and electrical goods. Therefore, Australia should have a proper strategic policy to secure its national economic interests and not waste its national competitive advantages.

Australia and China are inextricably linked in history. Australia-China relations developed along with its civilization. As Howard said “…Two countries with very different political systems, very different histories, very different cultures can build a

297 strong future together if they focus on the things that they have in common rather than the things that they don’t have in common” (Howard 2004; Norris 2010). Australia and

China have differences in many areas. Even now, the bilateral relations are still not completely smooth although they have progressed from fear to friends and now, towards strategic partnership. This process includes from fear to normal relationship

(prehistory to 1972), from friendship to constructive partnership (1972-1989), then from reluctant engagement due to the Tiananmen event to comprehensive cooperation (1989-

1996), then the swings of the Howard government: from a balance of power approach to one based on comprehensive engagement (1996-2007). The fluctuation of bilateral relations in the past forty years were sometimes caused by China and sometimes caused by Australia. There were no unavoidable conflicts in the history. Most conflicts between

Australia and China are avoidable, mainly, due to the Australia’s China policy. If

Australia could adjust its China policy accordingly, most conflicts will be avoidable.

Australia’s political relationship with China is far less developed than its economic relationship (Jakobson 2012a p.1). Australia-China political relations should have a better opportunity in the future. This is because: Australia-China relations have been free from major conflicts of strategic interests such as free from historical hostility and major outstanding problems; the cooperation foundations are mutually beneficial e.g. deepening economic relations and bilateral exchanges at all levels. The United States has played a crucial role in Australia-US-China trilateral relations. Australia-China relations have been free from direct conflicts. Yet, sometimes there were political clashes due to the USA factor and ideological differences. Australia always has middle power aspirations. Australia is not a superpower or a great power but still has a

298 moderate influence and international recognition. But due to the security alliance with the USA, Australia seldom has the freedom to act like a real middle power. Thus, if

China clashed with the USA, or if China threatened US interests, Australia would have to face a difficult choice because China is Australia’s economic interest. If the power shifted between the USA and China from asymmetric to symmetric, in other words, if

China’s power equals that of the USA or overtakes the USA, Australia would feel uncomfortable and wouldn’t know how to adapt to the situation. Therefore, Australia should start to consider the situation and prepare for the possible power shift.

The ideological differences are mainly focused on the human rights issue due to the differences in understanding human rights. The Dalai Lama problem is China’s internal affair. Anything relating to the Dalai Lama or Chinese human rights, China would see as an intervention in its internal affairs. Confucius said do unto others, do not impose on others (己所不欲，勿施于人). Hence, if Australia could understand more of the

Chinese culture and ideology, many conflicts between Australia and China could be avoided.

Rudd’s China policy had been seen as a failure although he thought he knew the

Chinese culture. Rudd was the first Australian Prime Minister with a Mandarin- speaking background and also the first Western country leader who has Mandarin skills and understands the Chinese culture more than any other Western leader. He won the favour of the Chinese-Australian voters in his election due to this background.

However, this background became Rudd’s burden after he was elected. Rudd turned out to be the Australian Prime Minister who was elected by the highest number of votes but 299 has the shortest term in office in Australian history and this too was related to this background. Something that other Australian Prime Ministers could do or say, he couldn’t, e.g. being friendly to China, because his special background would lead to a stronger reaction from those in domestic politics. Other Prime Ministers could be tough on China, but he couldn’t because it would result in a stronger reaction from China.

Therefore, from the Prime Minister’s position, his Mandarin background was a burden that made it more difficult for him to please the two sides. Thus, it was even harder for him to have a proper China policy.

Australia’s security interests cannot be separated from the USA. Australia has had a security alliance with the USA since the Second World War. Before China’s rise,

Australia was very comfortable to be under USA protection. Since China’s rise,

Australia and China became more and more interdependent economically. To Australia, one side is security, the other side is economic. Both security and economic interests are important national interests. This is why if the USA clashed with China, Australia would have to face a very difficult choice. Australia has to cope with an era of uncertainties. Although China has insisted on a peaceful rise, but whether the existing superpower, the USA, will accept other emerging superpowers and cope with them peacefully is doubtful. Thus, Australia has to face many uncertainties. China’s military power is far below the USA now and will remain so in the near future. So the uncertainties most likely will be caused not from China but the USA. China’s influence, both in the region and the world, is mainly economic.

300

China has neither a hostile intent against Australia nor any operational plan against

Australian interests. However, Australia’s existing strategic culture was designed to supplement the US effort to deter any other nation which, the USA suspected, might affect US interests. Rudd’s 2009 White Paper defined China as a potential threat to

Australia and many cooperative activities with the USA in the Asia-Pacific region showed the Australian security policy is hardly a smart one, as it inherently heralds a level of confrontation with a country that is economically so important to Australia.

Australia does not need to make a premature strategic choice of siding with the USA against China, militarily, based on a presumption that the latter would inevitably challenge the USA leadership and thus hurt Australia’s vital interests.

However, siding with the USA is a natural choice rooted not only in a realist conviction, but more so in Australia’s strategic culture (ASC), which is the product of complex international politics. As long as major power politics remain conflictual, the ASC guides Australia to define its security environment according to the country’s historical experience, geographic location and value systems. However, the Chinese perception on the ASC or more specifically, on the 2009 Defence White Paper is that the Chinese worry that Australia might scapegoat China in order to please the USA. It is unwise to act for another state’s interests but not one’s own. Thus, if Australia can act more individually on its foreign policy, then it would be much better for its national interests and foreign relations.

The USA is Australia’s top political ally thus, generating stress in the tripartite interaction between Australia, the USA and China. Respecting each other’s core 301 strategic interests can most possibly lead to avoidance of unnecessary conflicts. Most analysts identify China as the primary driver for the changing security order in Asia.

However, the USA’s ostensible assertiveness in Asian politics in 2010, i.e. through showing raw power by way of war drills, restated the fact that it outweighed China in their tussle for order-shaping in the region. In fact, the USA is more instrumental than

China in constructing a new Asia-Pacific security architecture. This is concretely embodied in its pursuits of coalition building aimed at enhancing the constraining effects on China. The USA has smartly utilized the series of security events in East Asia in 2010 and successfully laid down a discernible foundation for future coordinated responses to the China challenge. Australia is an integral part of this realignment that is structured into the USA-centred defence networks. This will define the Australia-China security relations in the years ahead. Hence, it is not the USA factor that has constantly been behind Australia’s decision on its China policy, but more profoundly, Australia’s own strategic culture which set the limits of what the government can do.

China was still Australia’s largest individual two-way goods and services trading partner in 2010-2011, accounting for 20% ($113.3 billion) of the total of Australia’s foreign trade (DFAT 2011e). The Australia-China economic relationship is getting more and more interdependent. The complementary economic structure of both countries is the core of the Australia-China trade theory and benefits each other’s economic developments. However, due to the different development stages, some uncomplementary factors and clashes of interest are inevitable. Nevertheless, these conflicts, mainly, are technical problems that can be avoided by policy adjustments and negotiations. Even some structural problems e.g. the rural products or dairy products

302 trade are still reconcilable through more communication and understanding. Politics, diplomacy and strategic factors behind trade conflicts should not be ignored. Australia and China have different political and value systems and trade regimes that require policy makers to be skilful in handling their differences. Challenges and opportunities coexist side by side. How to turn challenges into opportunities are tests of wisdom for the two states.

The Australia-China free trade agreement, without doubt, can benefit both economies.

However, the negotiations had taken more than seven years and seventeen rounds by the end of 2011. Negotiations have covered an array of issues, including agricultural tariffs and quotas, manufactured goods, services, temporary entry of people and foreign investments. The difficulties of negotiations were due to many reasons. The way of people’s thinking might be the main barrier that created many differences for the negotiations. Australia wants to have the same benefits which ASEAN countries can get from the China-ASEAN free trade agreement for agricultural tariffs. China wants to have the same treatment for its direct investments in Australia as the USA does from the

USA-Australia free trade agreement. If both parties want to conclude a mature free trade agreement, then both sides must make some concessions on many issues.

Although some Australian academics and politicians have every reason to be optimistic about the future of the Australia-China relationship and the links Australia has developed with China are flourishing, yet, if Australia did not have a proper China policy, the bilateral economic relationship would be damaged. The varying degrees of damage to Australia would be greater than to China. Therefore, shouldn’t Australia be 303 very careful with its China policy? Should Australia sacrifice its economic interests for domestic politics or a third party? The answer is clear.

The emergence of the Australia-China resources trade is the result of China’s rapid development. The effect of the resources trade with China changed Australia’s riches list and has translated into an increase in Australia’s real per capita disposable income of more than $3600 per year, lifting Australians’ average wealth to the 8th in the world

(Eslak 2007). However, developments and conflicts, e.g. commodities prices and investments in the resources sector, are co-existing. The effect of these co-existing conflicts might redirect China’s investments and trade to other areas and regions.

The nature of the ownership debate is actually that resource nationalism is used by politicians for their struggle in domestic politics. The actual Chinese investments in

Australia are not matched by its trade with Australia. China is Australia’s largest importer but its direct investments in Australia are not even within the top ten list. The increasing Chinese investments in Australia are the result of the increasing Australia-

China trade. By limiting China’s investments in Australia, will the trade be limited too?

The answer might not be seen immediately but it would be.

Case studies of BHP, Rio Tinto, FMG and OZ showed the political effect behind the resources trade. Resource diplomacy takes a very important place in the Australia-China relations. The long term result to Australia will be greater than to China. Proper resource diplomacy will benefit both countries. If Australia’s resource diplomacy

304 succumbs to the domestic political struggle or a third party, the damage to the Australia-

China relationship or more correctly to Australia’s economic interests is self-evident.

Although occasional difficulties have occurred in Australia-China relations but most of the time, these appear to be of a temporary nature and were rectified with relatively simple policy adjustments. There have not been irreconcilable strategic impasses that cause lasting damage to bilateral relations. As China is so important to Australia, any major decision by Canberra would call for an informed debate of where the best

Australian national interests are, in positioning itself in between China and the USA, the largest trading partner and the indispensible political ally.

The Australia-USA-China triangle is in flux and has never been in balance, as the

Australia-US relationship is one of alliance, the China-US relationship is one of contention and the Australia-China relationship is hierarchically subordinate to the

Australia-US relationship. A new bounded framework to manage Australia-China relations should be sought to strike a balance between protecting Australia’s security and capitalizing on China’s economic boom. The rise of China does not only generate uncertainties but many new opportunities. The reversal of economic fortunes will also come due to a reversal of political fortunes, as China assumes the leading role on the global geopolitical stage and the 21st Century is likely to be China’s after all

(Eichengreen 2012), although the USA will resist China’s challenge to the US leadership in Asia, using all the elements of its power including military force to perpetuate a future for Asia framed by American values and interests (White 2012b).

The ideal China policy for Australia is measured by an outcome of taking into account 305 both its security and economic interests and not being one sided and sacrificing the other national interests. In the process of the on-going restructuring of the global order, if Australia could respond sensitively and sensibly to China’s rise, then Australia would adjust its China policy to maximize its national interests.

306

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