CHAPTER 7
Philip Chang, Jeffrey Hole and Kieran Brockman
After Australia established diplomatic relations with China on 21 December 1972, the governments of both countries invested heavily to strengthen and broaden their relationship. An amicable political relationship between the two countries enabled the growth of bilateral trade in goods and services, and extended cooperation into other areas, such as culture, defence, and scientific and technological exchanges. The growth in Australia–China trade was further enhanced through China’s market-oriented economic reforms, launched in 1978, along with Australia’s far-reaching economic reforms initiated in the early 1980s.
While the bilateral relationship ebbed and flowed after 1972, the general trend until recently was a strengthening of Australia’s trade relationship with China. Despite some major political differences, both sides prevented these incidents from permanently disrupting trade. The current diplomatic crisis between Australia and China has created a hostile political climate, affecting bilateral trade, investment and other areas of cooperation. This has led to calls by some major business groups and analysts to repair the trade relationship because both economies have benefited tremendously from trade with each other.
What can history tell us about this relationship? We find that two key factors – enlarged trade complementarity and robust political relations between Australia and China – drove the rapid growth of bilateral trade after 1972. However, trade opportunities between the two countries could narrow going forward as China moves towards an innovation-based economy, requiring more knowledge-intensive inputs and technology. If Australia wants to see high rates of future trade growth with China similar to the previous decades, policymakers will not only need to focus on improving the political relationship but also on finding new ways to expand trade complementarity. Australia will also need to develop a bipartisan China policy to provide an effective framework for future engagement based on the long-term national interest rather than short-term political considerations.
Australia and China: Key historical trends of bilateral trade
International trade has been an important contributor to Australia’s economic prosperity because it has helped fuel the country’s economic growth, create new jobs, and raise living standards. After 1972, trade with China became progressively more vital to the Australian economy. Trade in goods and services with China, as a share of Australia’s total bilateral trade, increased from 1 per cent in 1972–73 to nearly 30 per cent in 2019–20; and as a share of Australia’s gross domestic product it increased from 0.2 per cent in 1972–73 to nearly 13 per cent in 2019–20. In 2007 China overtook Japan as Australia’s largest trading partner.
Australia’s trade with China grew steadily between 1972– 73 and the early 1990s, but accelerated at a fast pace from the mid-1990s onwards as trade complementarities between the two economies expanded and as the bilateral relationship deepened (Figure 1, page 100). Trade complementarity arises when two countries make natural trading partners, or more precisely, when a country imports goods and services for production or for final consumption from another country that can supply those goods and services at competitive prices.1 The degree of trade complementarity is influenced by each country’s comparative advantage, national economic policies, and stage of economic development.
Australia’s goods exports to China as a share of total Australian goods exports increased from 1 per cent in 1972–73 to nearly 40 per cent in 2019–20. Primary products dominated Australia’s exports to China but the composition changed to meet China’s evolving development needs. Initially, wheat was the dominant export to China in the 1970s. Subsequently, wool became dominant in the 1980s and a large part of the 1990s. Finally, iron ore became the leading export to China in 1997, climbing from 22 per cent of total goods exports to China to 56 per cent in 2019–20.
As a share of total Australian goods imports, Australia’s goods imports from China increased from 1 per cent in 1972– 73 to 26 per cent in 2019–20. Manufacturing products were the major imports from China but the composition changed as China produced higher value-added manufacturing products. Between 1972 and 2002, textiles, clothing and footwear were the major Australian imports from China. As China became more efficient at producing higher value-added manufacturing products, electrical machinery, equipment and appliances became the dominant imports in 2003. These accounted for 40 per cent of imports from China in 2019, up from 30 per cent in 2003.2
FIGURE 1Australian exports and imports of goods and services to China, 1972–2020
More recently, growing demand for services in China and the broadening of the Australia–China relationship led to rapid growth in Australia’s services exports to China. Services exports to China as a share of total Australian services exports increased from almost zero to around 18 per cent in 2019– 20, with much of this growth occurring in the last 20 years. Personal travel services and education-related travel services dominated. Exports of personal travel services grew sharply from $257 million in 1998–99 to over $13 billion in 2019–20. Over the same period, exports of education-related travel services increased from $147 million in 1998–99 to over $10 billion in 2019–20. These two categories accounted for around 80 per cent of Australia’s services exports to China in 2019–20.
Economic reforms in China and Australia, 1972–2020
Trade complementarity was one of the key factors that influenced bilateral trade flows between Australia and China in the period 1973–2020. The level of trade complementarity between Australia and China increased progressively as both countries implemented economic reforms, which created new opportunities and markets. In order to understand the nature of the China–Australia trade relationship as it has evolved, we need to understand the key economic reform measures implemented during this period in both China and Australia.
Reform and opening-up in China
In 1978, China was one of the poorest nations in the world, with a GDP of around US$150 billion (2 per cent of world GDP) and a rural poverty rate of 97.5 per cent, where the rural population comprised 82 per cent of the total population.3 The Chinese government realised that to lift its population out of poverty, it had to restructure the inward-looking command economy, industrialise and urbanise to achieve high, sustained economic growth.
In December 1978, under the leadership of Deng Xiaoping, China launched the reform and opening-up process. It carried out the reforms in a gradual, experimental manner – extending them upon demonstrated success. China initially implemented rural reform in early 1979: collective farms were split into household farms, and farmers and township and village enterprises were allowed to sell their surplus production on the market. Subsequently, the annual average rate of growth in agricultural output accelerated from 2.9 per cent between 1952 and 1978 to 7.7 per cent between 1978 and 1984.4
Emboldened by the success of rural reform, China extended reforms to urban areas, particularly to support the development of individual businesses and private enterprises. The Chinese government granted land use rights and access to some inputs in 1981, amended the constitution to allow for the sale of land use rights in 1988, adopted the Corporation Law in 1993, implemented state-owned enterprise reform from the mid-1990s, and incorporated private enterprise and rule of law into the Chinese constitution in 1999. These reforms eased barriers to private sector development, which enabled rapid private sector growth in urban areas and the creation of millions of new jobs. This accelerated urbanisation in China.
China also initiated reforms to boost trade and attract foreign direct investment (FDI). It introduced laws permitting joint ventures with foreign businesses in 1979 and established four special economic zones (SEZs) between 1980 and 1984. These measures allowed China to open up the manufacturing sector to FDI, initially in the SEZs. Through FDI, many domestic manufacturing firms acquired new production technologies and know-how, which laid the foundation for the manufacturing take-off in the early 1990s. China’s accession to the World Trade Organization (WTO) in 2001 further opened up new domestic and overseas markets for Chinese and foreign enterprises. In the two decades after joining the WTO, the Chinese government eased restrictions on foreign investment in industries, such as civil aviation, energy, financial, infrastructure, resources and transportation (Figure 2).
FIGURE 2Reform and opening-up and China’s economic growth, 1978–2020
As a result of reform and opening-up, the Chinese economy grew at an average annual rate of 9.2 per cent between 1978 and 2020, unparalleled in human history (Figure 2). In 2010 China overtook Japan as the second largest economy in the world. Its middle class swelled from 3 per cent in 2000 to over 50 per cent in 2020.5 The miraculous Chinese economic growth and the rapidly expanding Chinese middle class created a major source of demand for Australian exports of goods and services.
Economic reform in Australia
When reform and opening-up commenced in China, the Australian economy was regarded as highly regulated and protected. Against the backdrop of a period of stagnation in the 1970s, a recession in the early 1980s, and major trade imbalances, a consensus formed among policymakers that the Australian economy had become uncompetitive, and that economic reforms were needed to encourage and enable Australian businesses to exploit the opportunities arising from growth in China and elsewhere.6 Furthermore, economic reforms would expand access to imported goods and services by Australian businesses and consumers at competitive prices from countries such as China.
Between 1983 and the early 2000s, the Hawke–Keating and Howard governments implemented a variety of economic reforms designed to expose the economy to greater international competition and enable markets to play a greater role in responding to changing economic and trade opportunities. Key reforms included floating the Australian dollar; the dismantling of the quota and tariff system; lifting restrictions on foreign investment; deregulating the financial system; introducing enterprise bargaining; and improving efficiency in state enterprises through structural reform, competition and privatisation.7 Policies and reforms implemented by subsequent Australian governments further opened up the Australian economy (Figure 3).
The dominant view among policymakers is that economic reform in Australia improved the flexibility and resilience of the Australian economy, and facilitated economic growth (Figure 3). Viewed in an economic context, the reforms implemented by Australia during this period had a positive effect by enlarging trade complementarity and hence trade flows between Australia and China. Viewed in a broader strategic context, the resulting growth in trade flows has tied the prospects for the Australian economy much more closely to conditions in China.
FIGURE 3Economic reform and Australia’s economic growth, 1973–2020
Australia–China relations: Conditions influencing bilateral trade
The state of Australia–China relations was another important variable that influenced bilateral trade flows. Combined with increased trade complementarity, a favourable political relationship between Australia and China was a key factor that drove the rapid growth of bilateral trade between 1973 and 2016. The state of Australia–China relations was shaped by a combination of Australia’s China policy; China’s foreign policy; the state of US–China relations; and the effectiveness of Australia’s bilateral diplomacy. Here, we examine the conditions behind these variables that contributed to the constructive political relationship between Australia and China.
Australia’s China policy
The absence of diplomatic relations between Australia and China between 1949 and 1972 was primarily influenced by Australia’s security concerns. Australia’s security was tied to the United States through the Australia, New Zealand, United States Security Treaty (ANZUS) signed in 1951. Consequently, Australia’s foreign policy position towards China was similar to that of the US, because the Soviet Union and its allies, including China, were seen as a threat to global peace and stability during the Cold War period. By the early 1970s, China was perceived as less of a threat to Australia’s security.8 In December 1972 the Whitlam government ended its diplomatic recognition of the Republic of China (Taiwan) and transferred recognition to the mainland People’s Republic of China. This provided the foundations for the expansion of the bilateral relationship between the two countries. The Fraser government further cultivated Australia’s relationship with China to counter the Soviet Union’s expanded interests in Asia.9
From the mid-1980s onwards, security concerns in Australia eased, reflecting reduced global political tensions and the ending of the Cold War. Overall, Australia prioritised economic interests over security interests in its China policy between 1983 and 2016, particularly during the Hawke, Keating, Howard and Gillard administrations.10 While the first term of the Rudd government (2007–10) placed greater emphasis on human rights and political differences, it refocused on economic interests during its second term (2013). Similarly, the Abbott government (2013–15) recalibrated Australia’s China policy in the second half of its administration towards economic interests and signed the Sino-Australia Free Trade Agreement in June 2015.11
China’s foreign policy
In the 1980s and 1990s, China’s foreign policy focused on peace and development to support the country’s modernisation program. In the 2000s, China added ‘cooperation’ as the third key principle of its foreign policy, which emphasised China’s commitment to multilateral organisations. In 2007, President Hu Jintao stated that ‘China [would] work to make the international order fairer and more equitable’.12 In 2013, President Xi Jinping launched the Belt and Road Initiative – a global infrastructure development strategy, which became the cornerstone of China’s foreign policy. The five core objectives that have underpinned China’s foreign policy for some time have been: to foster domestic economic development, reassure Asian countries of China’s peaceful rise, counter efforts to contain China’s rise, expand and diversify access to natural resources, and reduce Taiwan’s space to engage in international political activities.13
United States–China relations
After the US established diplomatic relations with China in 1979, the state of the relationship varied from positive to highly negative. The bilateral relationship between 1979 and 2016 was centred on cooperation and managing differences. The US had two main strategies. The first of these was to engage with China, not only on trade and investment, but also on educational, cultural, scientific and diplomatic exchanges. The second was to balance Chinese military power in Asia, with an increased military or diplomatic pivot towards Asia between 2012 and 2016. The objectives were to encourage China to be a responsible stakeholder in the ‘rules-based’ international system, and to continue to liberalise its economic and political systems.14
Australia’s bilateral diplomacy
After establishing diplomatic relations, Australia worked constructively with China to develop the necessary institutional structure to foster bilateral relations and expand trade and cooperation. The Whitlam government opened the Australian Embassy in Beijing in January 1973, which facilitated information gathering and exchange; signed the first China– Australia trade agreement in July 1973, which provided the basis for the bilateral trade and economic relationship; established the joint trade committee ( JTC) in 1973, which created a platform for identifying trade opportunities and resolving trade differences; and facilitated the formation of the Australia China Business Cooperation Committee (now known as the Australia China Business Council), which aided bilateral business activities.
In 1978 the Fraser government established the Australia-China Council (ACC), which promoted mutual understanding and fostered people-to-people relations.15 In 1980 it also renegotiated the China–Australia trade agreement, extending cooperation to other areas, such as culture, defence, development assistance, health, science and technology.16
In September 1984 the Hawke government launched the China Action Plan, aimed at increasing bilateral trade and investment. That same year, it established the China-Australia Senior Executive Forum (CASEF), which institutionalised business contacts between the two countries. In 1987 it formed the Joint Ministerial Economic Commission ( JMEC), which provided the main platform for ministers from both countries to discuss economic, trade, scientific, technical and educational cooperation, address challenges and resolve differences.
Successive Australian governments built on earlier bilateral initiatives. In 2013, under the Gillard government, Australia and China established the Strategic Economic Dialogue to promote closer economic negotiation, including an annual meeting between the leaders of both countries. Additionally, the frequent high-level ministerial and official visits between 1973 and 2016 were critical in deepening Australia–China bilateral relations, and safeguarding against possible external shocks to the relationship.
Resolving differences through diplomacy
In 1999 Australia’s Foreign Minister, Alexander Downer, described Australia’s relationship with China as ‘a mature and broadly based relationship, a relationship based on mutual respect and mutual advantage. And part of that mature relationship should always be a hard-headed appreciation that China and Australia have both commonalities and differences.’17 Indeed, there were many differences between Australia and China, such as China’s nuclear testing, the China–Soviet dispute, Australia’s de-recognition of the Khmer Rouge in Kampuchea, the Tiananmen Square incident, Dalai Lama visits, human rights, Taiwan tension, the South China Sea, Hong Kong protests, and the investigation into the origin of COVID-19. Some differences were tractable, and others were not. Nonetheless, diplomacy was used successfully in tackling some of the major differences. This section highlights three cases to demonstrate the effectiveness of diplomacy, including the framing of issues and approaches to raising issues with China.
The Tiananmen Square incident
The Tiananmen Square incident on 4 June 1989, which involved public demonstrations and a government crackdown, disrupted the Australia–China relationship. On 13 July 1989, the Australian government took concrete actions to express its displeasure over the incident, suspending all ministerial and political visits, defence and police exchanges, as well as bilateral development assistance programs. On the surface, the measures appeared to be a reversal of Australia’s China policy, but in fact ‘the Australian government demonstrated great flexibility in both rhetoric and conduct, leaving the door open for any new initiative as might be required by changing circumstances’.18
On 23 January 1990, the Australian government adjusted one element of the measures announced six months earlier, shifting its total suspension of ministerial visits to consideration of proposed ministerial visits on a case-by-case basis.19 Following this policy adjustment, in May the Chinese Minister of Metallurgical Industry, Qi Yuanjing, attended the commissioning of the Sino-Australian joint venture at Mount Channar in Western Australia. In September, the Australian Minister for Trade Negotiations, Neal Blewett, attended the third annual session of JMEC in Beijing. Other high-level visits soon followed. On 26 February 1991, the Australian government lifted the remaining restrictions on political and economic contacts with China, with the exception of defence exchanges.
Australian human rights missions to China
After the Tiananmen Square incident, Australia consistently raised human rights issues with China at official meetings. During his visit to Beijing in April 1991, Australia’s Foreign Affairs Minister Gareth Evans proposed allowing an Australian human rights delegation to assess the human rights situation in China. In this instance, the Australian government used diplomacy effectively to persuade China to allow the first foreign human rights mission from Australia.
In the lead-up to Evans’ visit, the Australian Embassy liaised closely with the Chinese Foreign Ministry and informed senior Chinese officials of Australia’s intention. During Evans’ meeting with his Chinese counterpart Qian Qichen, the Chinese side had ample time to prepare a well-considered response. Qian responded positively to the request and stressed that the mission would help improve mutual understanding. He suggested that the delegation be called the Delegation of Australian Parliamentarians rather than the Australian Human Rights Delegation. Evans agreed to the name change and was satisfied with the outcome. The first foreign human rights delegation visited China between 14 and 26 July 1991. The second mission visited Beijing, Chengdu, Shanghai and the Xinjiang Uyghur Autonomous Region between 8 and 20 November 1992. The main achievement of the missions was an acknowledgment that ‘human rights issues ha[d] a legitimate place on the international agenda’.20 As a result of Australia’s unprecedented human rights mission, China received similar visits from France, Switzerland, Austria, Britain, Canada and the US.21 If Australia had taken a ‘megaphone’ approach, these missions might not have eventuated.22
The Taiwan Strait crisis and other issues
When the Howard government assumed power in March 1996, a plethora of political issues during the first eight months of the new administration plunged the Australia–China relationship to the lowest level since the Tiananmen Square incident. There were five major issues: Australia’s support for the US military response to China’s missile tests in the Taiwan Strait in March; Australia’s condemnation of China’s nuclear test in June; allowing Chen Shui-ban, a leading Taiwanese pro-independence activist, to attend the Asia-Pacific Cities Summit in Brisbane in July; the visit of Primary Industries Minister John Anderson to Taiwan to negotiate the sale of uranium in September; and Prime Minister Howard’s meeting with the Dalai Lama in September.23
In November 1996, Howard approached China’s president, Jiang Zemin, on the sideline of the APEC Summit in Manila. He assured Jiang that Australia’s long-standing alliance with the US was for its own security and not directed against China. Howard also reiterated Australia’s support for the One China policy, and emphasised focusing on common interests. Howard used diplomacy effectively to resolve misunderstandings and reset the bilateral relationship.
Lessons from history: We need both good relations and expanded trade opportunities to boost prosperity
After diplomatic relations were established in 1972, trade with China became more important for Australia’s economic prosperity. The exponential growth of Australian exports to China was driven by both increased trade complementarity and a favourable political relationship between the two countries. However, in 2017 bilateral relations between Australia and China began to deteriorate, as the key factors influencing the bilateral relationship started to change significantly.
In the first place, because of its strong alliance with the United States, Australia’s relations with China have been influenced by the changing nature of the US–China relationship. After the ascendency of Donald Trump to the presidency in 2017, the United States’ China policy shifted from cooperation and engagement to strategic competition.24 For instance, the US went down the path of partial disengagement with China by imposing tariffs and restrictions on technology transfer.25 More recently under President Joe Biden, the US has continued to balance Chinese military power in Asia and the Pacific through mechanisms such as AUKUS (a trilateral security pact between Australia, the UK and the US). For its own part, China’s foreign policy has become increasingly assertive, through actions such as the militarisation of the South China Sea and increasing diplomatic pressure on Taiwan.
Partly in response to changes in US policy attitudes towards China, Australia’s China policy has focused increasingly on national security over economic interests. This was reflected in the passing of the foreign interference and espionage laws in June 2018, the exclusion of Huawei from Australia’s 5G network in August 2018, the adoption of the foreign relations laws in December 2020, the revival of the Quad (a strategic dialogue between Australia, India, Japan and the US on security and economic issues) in 2017, and the announcement of AUKUS in September 2021.26 Megaphone diplomacy also seemed to be used more frequently by the Australian government between 2017 and 2020.27
A confluence of these factors created a brittleness that affected the Australia–China relationship. Australia’s unilateral call for an international inquiry into the origins of COVID-19 in April 2020 then acted as the impetus for a steep downward spiral. Starting in May 2020, China suspended imports of Australian coal, cotton, log timber, lobster and beef; imposed tariffs on Australian barley and wine; and reduced imports of Australian copper ore and concentrates, and sugar. In addition, China suspended ministerial contacts and the China-Australia Strategic Economic Dialogue.
While the total value of Australian exports to China had not been affected in 2019–20 due to record high iron ore export revenue (driven mainly by high iron ore prices), other export commodities subjected to the trade restrictions were affected badly.28 The risk of a protracted dispute could permanently damage bilateral trade (especially in tourism and education services), as well as business and cultural links.
At present, there is no clear path to resolving this diplomatic rift. Some commentators have suggested that Australia could use back-channel diplomacy by sending a mission comprising Australian business leaders with access to the Chinese leadership to help repair the diplomatic relationship, and/or ease restrictions on some Chinese FDI in Australia.29
Debate about resolving the current diplomatic crisis should consider both the context and approaches that have worked in the past, while being mindful of changes in domestic and international conditions, particularly the altered policy stances of the US and China. However, several key lessons for policymakers emerge from examining the history of the Australia–China trade relationship.
First, Australia has previously used diplomacy effectively to address major differences with China. Given that Australia has limited control over the foreign policies of China and the US, if Australia still wants to engage with China in trade and other areas, it would need to use diplomacy in a more intensive and smarter way to tackle differences.
Second, history suggests that a robust political relationship between Australia and China does not guarantee a high rate of future trade growth without increased trade complementarity.30 Given that China aims to accelerate technological development and innovation, as reflected in its 14th Five-Year Plan (2021– 25), trade complementarity between China and Australia could shrink in the near future. If Australia wants to plug into the next phase of China’s economic development, it will need to build domestic capabilities to meet emerging Chinese demands.
Finally, it should be remembered that for a large part of the period from 1973 to 2020, Australia’s China policy was bipartisan and prioritised economic interests. However, as pointed out earlier, Australia has recently prioritised national security, partly in response to China’s increasingly assertive foreign policy within the context of heightened rivalry between China and the US. Additionally, China’s economic, technological and military strengths are projected to grow even stronger in the coming years. Given these changing conditions, the challenge for Australia is to clearly define the country’s national interest, and craft an astute and bipartisan China policy that advances the national interest. A bipartisan policy would also provide a framework for effective engagement and help minimise domestic political advantage that might undermine the national interest.