Australia and China: time for a bigger plan

Australia and China are two vastly different nations and often seem to be at loggerheads. However, they already have a huge, joint political, economic and social investment in the success of their bilateral relationship.

Their unique partnership stems from a deep alignment of interests that, short of highly negative policy choices, cannot easily be undone. China is big, it is highly integrated into the world economy, and it is not about to go away. Australia is a secure source of raw materials for all of East Asia including China, it has an alliance relationship with the United States and it is enmeshed with Asia.

Putting aside all the day-to-day, often confected, conflict between the two nations, the Australia–China relationship will undergo a huge and important change over the coming decade. The scale and complexity of the relationship is intensifying because of the increased role of services and investment, as well as its political and security dimensions.

China has for some years been Australia’s largest trading partner and one of its most important bilateral relationships. Australia’s economic growth and rising living standards are strongly linked to China’s economic success.

In the Chinese policy community, there is wide understanding and clear acknowledgement of the economic and political advantages of open, secure and competitive access to Australian raw materials.

As China’s economy matures and its middle class expands, the world’s second-largest is also enjoying the added dividend of access to Australian agriculture, institutions and services. This covers everything from infant formula and vitamins, butter and beef to education, tourism, advanced science, technology and research capabilities. Australia’s open society provides Chinese investments with security in a stable and well-functioning market economy that guarantees transparent recourse to political, legal and regulatory institutions.

Both Australia and China gain from growing and diversifying their economic relationship through new flows of tourists, students, investors and migrants. Despite recent slowdowns, China will remain a key driver of global growth. If its reform agenda succeeds, annual gross domestic product growth could still come in at around 6 per cent a year over the next 10 years.

However, the impact of China’s growth on Australia over the next 10 years will be very different from in the past. Australia will no longer only be a remote supplier of raw materials; it should be a palpable and distinctive presence in Chinese daily life, particularly for the urban middle classes.

Australia is economically enmeshed with East Asia, giving it a high stake in China’s success. It also has strong economic, cultural and strategic links to the United States, and therefore a compelling interest in a healthy relationship between the United States and China.

Australia’s geopolitical and geo-economic position and its multicultural society are thus unique assets in shaping China’s links with the West.

Chinese and Australian prosperity has depended on the liberal, rules-based global economic system. Both countries have a abiding interest in the successful adaptation of the institutions of global governance to the economic and security challenges of the 21st Century. A deeper partnership between China and Australia can be a powerful force for the strengthening and developing of these institutions. Australia’s longstanding commitment to global institutions, its deep engagement with Asia and its historical ties with Europe and North America are complementary to China’s status as a major economic power and its declared willingness to help reform and strengthen the regional and global frameworks of cooperation and governance.

The Great Transition

China is shifting its growth drivers from investment, exports and heavy industry to consumption, innovation and services. This slowdown does not threaten this transformation; it is a symptom of it.

Even under a downbeat scenario, in which average Chinese growth is below 5 per cent over the next 10 years, Australian exports to China could still grow by 28 per cent and Chinese exports to Australia by 20 per cent. The biggest gains, however, would be realised if Australia and China work to implement supply-side reforms. If this reform agenda is executed successfully, Australian exports to China will grow by 120 per cent in real terms, and Chinese exports to Australia by 44 per cent.

The structural changes in the Chinese economy presage a change in the structure of trade. The profound complementarity stemming from Australia’s energy and resource abundance and China’s industrialisation will remain a key pillar of the relationship, but will be increasingly augmented by services such as education and tourism. Inbound tourism from China is set to treble by 2025.

There is every reason to believe that the Australia–China relationship will become more, not less, important to both countries as the Chinese economy continues to change and upgrade.

In the 1980s, Australia and China established what they called a ‘model relationship’ between two economies with different political and social systems and at different stages of development. Now both countries need to commit to a partnership for change.

The need for an upgraded policy framework is broadly accepted in both countries.

That will be a complex task: it will require building a new set of national capabilities in both countries.

On Monday, the East Asian Bureau of Economic Research and China Center for International Economic Exchanges will present a breakthrough  report on how a partnership for change might be fashioned by the governments and people of our two countries. Drawing on the expertise, wisdom and common sentiments across governments, business leaderships, research communities and public leaders, it is an unprecedented endeavour at co-operation on the big choices needed to develop the relationship over the next decade and beyond.

The Australia–China relationship represents an impressive achievement; with wisdom it can be taken to a whole new level. While fully respectful of each other’s existing relationships, the new partnership can be a powerful force for the stability and prosperity of the region, and for the global system. It can serve as a principal vector of Australian and Chinese engagement within a rapidly changing world. Nurtured carefully and imaginatively, this deeper partnership could become one of the most strategically vital and productive bilateral relationships that either country has in the world.

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