Containing the dragon: Australia-China relations reach a new low

After a year of provocations, originated by the Prime Minister questioning the origins of COVID-19 and continuing with the resultant spiralling, economically damaging trade dispute, Australia is resetting the relationship. Or it is trying to.

"We need to realise we're not talking about hugging a panda," Professor John Blaxland from the ANU's Strategic and Defence Studies Centre says.

"We're talking about petting or containing a dragon, and that dragon's breath is getting hotter."

Australia's strident move this week to invoke a "national interest" test and exercise foreign veto powers to cancel two of the Victorian government's Belt and Road agreements with China is the latest poke of the dragon.

It was labelled a "mistake" that had to be corrected by the Chinese foreign ministry; to do otherwise would be to continue to "rub salt on the wound of the already difficult Sino-Australian relations".

The tearing up of the non-binding agreements is the latest low point in the relationship, and it seems all but inevitable that China will respond.

"We won't have our values compromised. We aren't going to surrender our sovereignty," Defence Minister Peter Dutton told Channel Nine on Friday.

"[Victorian Premier] Dan Andrews did the wrong thing. He shouldn't be entering agreements that aren't in our national interest. I want to make sure people hear the message clearly, we are standing up for who we are."

Dutton's strong man act is designed for both the Chinese and local audience. The act of ripping up the deals is at least as symbolically important as the deals themselves.

"When you look at our part of the world, [when] you look at militarisation of bases, when you look at the cyber attacks - all of that is not the action of a friend," Dutton said.

"We need to make sure that, yes, we have an important trading relationship, but China and others need to understand that Australia is not going to be bullied and we're standing up for our beliefs and that will continue. It will not change."

The chair of the powerful Parliamentary Joint Committee on Intelligence and Security, Senator James Paterson, does not regard Australia as being antagonistic to China in any way.

"I think if we concede that that's what's happening. We're conceding far too much," he tells The Canberra Times.

"What the Australian government is trying to do is ensure the federal government [not state governments] controls foreign policy; almost every other country in the world would think that's a reasonable thing.

"If we back down from that, we would send entirely the wrong message - a counterproductive message - because it would encourage anyone that thought that a path of economic coercion against us was going to work."

China watchers have never seen it so bad for the Australia-China relationship.

"It is at, unquestionably, the worst point it has ever been since there was a bilateral relationship started in 1972. No question. Never been worse," according to Jeffrey Wilson, a trade expert at the Perth USAsia Centre.

"China has effectively got trade sanctions against every Australian export product that they haven't sanctioned out of self-interest, like iron ore and gas. Investments have basically stopped.

"There will be a political need to do something, but economically, there is little more China can do."

Indeed, Chinese students aren't coming to Australian shores due to COVID-19, and after a wave of trade sanctions over the past 12 months - wine, timber, barley, lobsters, hay and (unofficially) coal - where else could China go?

"Short of something that actually went out of economic warfare into actual real warfare, it would be difficult for me to see much more either side could do on the economic front really," Wilson says.

Tell that to Australian businesses and farmers, who are bracing themselves for further retaliation.

What could be next? The $5 billion-a-year international education market, which has taken a battering due to coronavirus travel restrictions, appears vulnerable.

Smaller but still substantial exports like apples and mangoes are also a cause for concern.

"I'm concerned about that, on [businesses'] behalf. And if that does happen, that will be very disappointing," Senator Paterson says.

"And it could potentially have a significant effect on them, but if it does happen, it will be the Chinese government's responsibility, not the fault of the Australian government.

"One point of encouragement I could give to those industries who might be anxious is that, with the exception of wine, almost all the other categories of products that have been singled out by the Chinese government for unacceptable, unnecessary, unjustified tariffs - all of them have found other markets. All of them have been able to place their products elsewhere."

Professor Blaxland believes there is little more China can do directly to hurt Australia as "we are already in the doghouse, in terms of the view from Beijing".

He sees Australia's growing confidence flowing from the early foreign policy positioning of the US Biden administration.

"There's a sense emerging from our reading of the American tea leaves, if you like, that the Biden administration is going to be a bit like Trump and follow up on being fairly hard-nosed on China," he says.

But Professor Blaxland urges caution.

"We need to appreciate that American foreign policy, and its economic policy, is a bit schizophrenic.

"[It is] assertive and quite adversarial on foreign policy, on defense policy, and extensively on trade.

"But in practice, the United States, the business world, [and] the international conglomerates, headquartered in the United States, remain heavily invested, and continue to double down on their investments in China. So I think we should be exercising some caution in our own assertiveness.

"I'm a great believer in Australia being a middle power with small power pretensions, but in trying to overcome those small power pretensions, we should not delude ourselves as to where we stand in the pecking order and recognise that there's some utility in some discretion."

Cancelling the two Belt and Road Initiative deals, among the four initial deals to be scrapped, was deliberate - the BRI is China's pre-eminent foreign policy and economic instrument, estimated to be worth $1.5 trillion and encompassing investment from south-east Asia to south Asia, to Africa and on into continental Europe.

Using government and state-run companies to help fund major global infrastructure projects, it has enormous symbolic importance and links China to the world through six "economic corridors". But it has also been linked to "debt-trap diplomacy" - locking countries into excessive loans that are difficult to pay back.

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Senator Paterson, the China hawk, is not shying away from listing his concerns; the militarisation of the South China Sea, the erosion of democracy in Hong Kong, the fate of the Uighur people in Xinjiang, plus issues closer to home.

"We're concerned about the Australian citizens who've been detained, in our view, without evidence," the senator says.

"Plus, of course, the threats to Australia. The cyber attacks. The attempts to intervene in our democratic system. It is fair to say that there are a range of concerns.

"The cancellation of the Belt and Road agreement was about ensuring the federal government is in charge of foreign policy and, on that issue, it's actually bipartisan federally.

"[At] the federal level, Labor has said they wouldn't participate in the Belt and Road agreement either. So, that is a discrete issue, but it is one among many."

Australian Foreign Minister Marise Payne has flagged "there'll be further decisions to be made in due course".

What that could mean for Australia - and how the dragon will respond - remains to be seen.