China-Australia Economic Co-operation: Towards a shared transformation

Agenda Papers 2013The China Institutes of Contemporary International Relations (CICIR) is the premier Chinese foreign policy think tank and reports directly to the State Council and to major Communist Party bodies.

CICIR’s China-Australia Relations Project Group was established in 2013. It is an initiative aimed at advancing CICIR’s research work on Australian and to contribute to China-Australia relations in an unfolding environment. The group consists of: Yang Mingjie, Vice-President, CICIR; Zhai Kun, Director of the Institute of World Political Studies; Zhang Xuegang, Deputy Director of the Institute of South and South-east Asian and Oceanian Studies; Dr Guo Chunmei, Assistant Research Fellow of the Institute of South and South-east Asian and Oceanian Studies; and, Tian Jingling, Assistant Research Fellow of the Institute of South and South-east Asian and Oceanian Studies.

FOLLOWING THE Global Financial Crisis, global economic recovery faces unprecedented challenges. And while the Asia-Pacific region will be the most crucial region for development in the twenty-first century, it also faces the arduous task of undertaking a process of economic transformation. Within the weak process of economic recovery, pressure on the Asia-Pacific region to rebalance its economic fundamentals has grown sharply, while it has become more difficult to coordinate with other global economies. Existing mechanisms for regional economic cooperation and dialogue are facing challenges, and while attempts to build all kinds of new mechanisms are in full swing, there is a growing gap between differing ideas on how to do so, leaving the process of regional economic integration at risk of breaking down. While Australia and China as individual economies are undergoing their own challenges of restructuring, we should ask whether the two countries could evolve a new form of relationship, one in which each economy still maintains its own distinct characteristics. This new form of relationship would not only affect the future of both our countries, but could create an important model for the region or even the world.

China is the world’s second-largest economy. As it faces the reality of an increasingly difficult external trade environment, China has begun a process of rebalancing – moving from an export and investment-led economy to a domestic demand, consumption and services-led model of economic growth by focusing yet more on improving its industry structure and the quality of its economic growth. There are no precedents for this model of economic transformation, and it is inevitably experiencing some growing pains, the most recent manifestation of which has been the easing of economic growth leading to a series of social problems.

Australia is a major commodities exporter, and it has fully reaped the benefits of its ‘dividend’ from the last twenty years of global economic development, particularly in Asia and the Pacific. Post-Global Financial Crisis, Australia also faces unprecedented challenges due to its high degree of economic connectivity with the outside world. It will be difficult to continue with Australia’s commodities-led economic growth model in the face of a fragile world market and a sharp fall in global commodity prices. Australia’s manufacturing and services industries also face many bottlenecks. So Australia confronts a difficult question: How to restructure its economy to a more sustainable development model, one featuring a ‘diversified economy’.

China is Australia’s biggest trade partner, its biggest export destination, and the greatest source of Australia’s imports. If its economic growth softens or it restructures its economy, there will be a direct impact on Australia. This will manifest itself in a slump in both the quantity and price of iron ore and coal exports, and it is hard to be optimistic about the impact of this on Australia’s economy and jobs. Given the importance of resources trade to bilateral relations, some people believe that the end of the resources boom will mean the end of the ‘honeymoon’ in Australia-China relations. But, in fact, globalisation has gone so far, and the two economies are so closely tied together and have such different economic systems, that their relationship will not ‘disconnect’ from declining trade – rather, they face an opportunity to further develop their relationship through a process of economic restructuring.

We have a solid base for cooperation: The past decades have seen us utilise the trade in resources to build closer economic engagement and pursue mutual prosperity. This process has allowed two countries at different stages of development, with different histories and cultures, to build up a rich story of cooperation and build a solid foundation of national popular support to continue this collaboration into the future.

We are heading in the same strategic direction: Australia’s population base of some twenty-odd million people limits its economic potential. It will have to ‘keep looking outwards’ in order to develop a more diversified and sustainable economy Australia sees the ‘Asian Century’ as a great development opportunity, and for many years it has stressed the need to become ‘a part of Asia’. Co-operation with China, which has undoubtedly earned its title of Asia’s number one economy, will undoubtedly be one of Australia’s most important strategies.

Although China’s external economic relations are already global in nature, the process of economic transformation emphasises even further the need to be based in Asia, giving it an even stronger reason to cooperate with Australia, rather than letting relations wither. Because Australia is not only geographically close to China, but is also a middle-sized developed country in the region.

There are many points of agreement over restructuring: While China’s economic growth is easing, it is still leading the world, and the direction of its economic restructuring has a great deal in common with Australia’s strategy of broadening its economic development. Such as: China is restructuring (and shrinking) its heavy industries, but the process of industrialisation and urbanisation will continue for a long time, and this will ensure a steady rate of demand for Australian energy and natural resource supplies. As China moves to a more domestic demand-led economy, its middle class will continue to expand, leading to far bigger markets for Australia’s agricultural, education, tourism and high-end manufacturing sectors. As China improves the quality of its economic growth through encouraging the growth of its services sector, it will provide Australia’s well-developed services sectors (such as banking, insurance, urban planning and technology transfer) a rare development opportunity. China’s comprehensive economic opening up, in combination with Australian government’s greater attention to developing infrastructure, improving agriculture and revitalising manufacturing, will make mutual investment easier and broader.

There are new economic frontiers: There has been a general but inevitable trend towards greater integration of international commodity and financial markets, and this trend is in our common interest. But the current fixed-price systems for iron ore and some other commodities are still far from mature, and there are large vulnerabilities. In the area of natural resources, Australia and China should jointly shape natural resource pricing regimes in the region. There is also great potential for jointly setting up futures markets for iron ore and other resources.

Furthermore, in recent years Asia and the Pacific have continued to open up, and regional trade has grown rapidly, becoming a new source of growth for Australia-China development. So now how about we go past simple economic cooperation and explore, along with other countries in the region, a new frontier of regional trade? We should base this new frontier on facts, make sure it is forward-looking, and ensure that it has a focus on institutionalising regional trade cooperation.

Of course, we shouldn’t just take this mutual transformation and development model for granted. In the current, complicated international situation (where we are only in the initial phases of economic transformation) it is unavoidable that both countries confront a range of difficult problems or potential threats – be this separately or together. We need all sectors of our two societies to negotiate these problems or threats as quickly as possible and move on to exploring positively mutual options and putting forward constructive suggestions.

The bilateral Free Trade Agreement (FTA): FTA talks have now been in process for eight years, and they’ve become a topic that the two countries can’t avoid as they try to update and advance economic relations. The present economic situation (both domestically and globally) requires serious consideration, and both countries maintaining public faith in trade liberalisation is more important than ever. With this in mind, both countries need to be grounded in realities, to reevaluate and readjust their respective expectations and to nimbly, pragmatically and quickly push on with FTA talks.

The same holds for trade diversification strategies: apart from paying close attention to policy decisions, both countries need to make an effort to reinforce cooperation on joint market studies in order to find suitable models for each country’s respective trading goods. We especially need to find new ways for our businesses to fulfill their joint potential, to strengthen exchange and cooperation on environmental matters, finance, communications, health services and other sectors. Both countries also need to make a special effort to find a balanced system for fixing the price of natural resources in order to continue our sustainable cooperation on natural resources.

On bilateral investment: investment is a particularly prominent and sensitive area for both countries, but it is an area with enormous potential future growth. Both sides should maintain relative independence and stability while paying close attention to economic cooperation to ensure that cooperation doesn’t suffer any undue disruptions due to changes in the political environment. We should take seriously our social ties, and take measures to strengthen links between our societies to ensure that public opinion related to our friendship remains fair and impartial. Within the process of boosting investment, we must follow market rules, and improve the understanding of the laws and regulations and society of the host country, while steadily increasing the rate of investment in each of our countries.

Apart from this, as important regional actors, both China and Australia should adjust to the circumstances they face, and take on the responsibility to make a greater contribution to the development of the region we live in. For instance: China and Australia should use their proximity to South-east Asia (China in the north and Australia in the south) in order to encourage South-east Asian countries to join with and increase exchange with the Indo-Pacific region so as to open up common markets throughout all of South-east Asia. We must keep open minds and, among other things, contribute positively to the building of greater economic integration in the region through strengthening institutional links and exchanges.