Commentary on Political Economy

Friday 18 January 2019


Just as Xi Jinping was coming to power in late 2012, there was a popular theory he viewed Singapore as a potential model for China to replicate.
As a "reformer", the theory held, Xi would lean towards the city-state's brand of guided democracy, where some opposition was tolerated within single-party rule, the courts were relatively independent and the private sector was free to flourish with only a little help from the state.
It was a captivating argument and completely wrong.
Rather than opening up China, President Xi Jinping has done the very opposite over the past six years. Now the world, led by Canada, is finally speaking out. David Rowe
Rather than open up China, Xi has done the very opposite over the past six years and this week the world – from Germany to the US, Canada and Australia – has stepped up its response.
It might even be seen as the week in which the world's slow awakening on China began to move very quickly.
The most surprising contribution came from Germany's top industry organisation, which called time on the myth Xi ever intended to open up China's economy.
"China is no longer developing structurally in the direction of a market economy and liberalism but is in the process of consolidating its own political, economic and social model," the Federation of German Industries (BDI) said in a position paper calling for a tougher line on China from the European Union.
"The Chinese model of an economy marked by substantial state control thus enters into systemic competition with liberal market economies."
This statement – a more sophisticated version of US President Donald Trump's mantra that "China has been ripping us off for years" – shows german industry, the epitome of rational policy making, now sees China as more threat than opportunity.

Radical mini trade war

This is partly due to China moving rapidly up the manufacturing value chain to challenge Germany, but it also reflects a realisation that Beijing's model of state-sponsored capitalism, cyber theft and protectionism is not fair competition and would ultimately harm German national interest.
And so the BDI is now advocating a mini trade war of its own that would see Chinese firms blocked from tendering on big European government contracts and the European Commission more closely scrutinising mainland takeovers backed with state money.
"The BDI is in favour of introducing a new instrument to control subsidies for foreign investment," the paper said.
German industry is basically making the reciprocity argument that China should no longer be permitted to free-ride on open global economies, while blocking access to many of the most lucrative areas of its own economy.


How does Australia navigate a new era of trade warfare?

How does Australia navigate a new era of trade warfare?

By Shiro Armstrong and Peter Drysdale 
The 54-point pitch is being made ahead of European elections this year and the BDI wants its harder line to be adopted by all member countries.
It's a radical departure for German industry, which has long championed pragmatic engagement with China in the belief – that now appears naive – that Beijing would gradually start playing by international rules.

Australia's dilemma

Australia has come to a similar conclusion about China's model of state-sponsored capitalism, albeit from a different direction.
In comments to The Australian Financial Review on Thursday, a senior official with connections to the foreign investment regulator said it no longer saw a "distinction between private and state-owned companies in China".
While that realisation has not prompted an official change of policy in Canberra, it effectively means greater scrutiny of deals coming out of China.
Australia's concern is not so much about protecting the local industrial base, which was whittled away years ago but, rather, about how Chinese ownership, indelibly linked to the Communist Party, could seek to exploit data or market power for Beijing's larger strategic aims.
The issue is that as Canberra takes an increasingly tougher stance towards Beijing, Australia's economic reliance on China continues.
Figures from the Department of Foreign Affairs and Trade show in the past financial year Australian exports to China were worth $123 billion or nearly 31 per cent of the total.

This is more than all exports to Japan, the US, South Korea and India combined. When it comes to tourism, Chinese visitors accounted for a quarter of all spending, at $11.3 billion, more than the next four-largest countries combined. And to round out the picture, Australia enjoyed a $53 billion trade surplus with China.
This reliance is in strong contrast to the likes of Germany, where China ranks as its third-largest export market at about 7 per cent of the total, while Berlin has a substantial – $US16 billion ($22 billion) – trade deficit with Beijing.
China's status as Australia's biggest trading partner is why Canberra has traditionally kept its criticisms of Beijing muted, preferring to focus on narrow areas of agreement.

A global issue

But in recent years, that policy has been gradually junked, part of a co-ordinated push among allies to call out China's increasingly bad behaviour.
This week, Australia's acting Foreign Minister Simon Birmingham came out in support of Canada after one its citizens, Robert Schellenberg, was given a hasty death sentence for drug smuggling.
"We are deeply concerned with this case," the Minister said.
"We expect a level of principle that not only the death penalty should not be applied, but also whenever people are in trouble the rule of law ought to be applied fairly."
Beijing didn't appreciate Australia's intervention. Schellenberg's sudden retrial followed the detention of two other Canadians in China in what has been viewed as a thinly disguised campaign to punish Canada for its arrest of Huawei's chief financial officer Meng Wanzhou for alleged breaches of US sanctions with Iran.
Anxious not to become the next Mikhail Gorbachev, Xi has cracked down on liberalisation in China lest it erode Communist Party power. NG HAN GUAN
Rather than be cowed by Beijing's retaliation, the Canadian play has been to make China's behaviour a global issue.
"Our government has been energetically reaching out to our allies and explaining that the arbitrary detentions of Canadians are not just about Canada. They represent a way of behaving which is a threat to all countries," Foreign Minister Chrystia Freeland said this week.
This "way of behaviour", or China's so called "sharp power", has been the focus of calling out Beijing, which has now extended to its long-standing policy of cyber theft.
While the US has called China's state-sponsored hacking programs "outright cheating and theft", Australia has found its voice at a lower level.
In December, along with other US allies, it named China for the first time as the source of industrial-scale hacking against Australian interests.
"Australia calls on all countries – including China – to uphold commitments to refrain from cyber-enabled theft of intellectual property, trade secrets and confidential business information with the intent of obtaining a competitive advantage," Foreign Minister Marise Payne and Home Affairs Minister Peter Dutton said in a joint statement.
Only six months ago even such a mild public rebuke was not part of Australia's strategy for dealing with China. It can be seen as part of a gradual realisation that the world badly misjudged Xi.
Before assuming power Xi presided over a study of Singapore's model of democracy light, prompting some observers to tip this as a likely future direction. But it now appears a better guide to Xi was another study the Communist Party commissioned on the fall of the Soviet Union.
It broadly found a loosening of Communist Party control, a flirtation with Western liberalism and the introduction of economic reforms were a major factor in the Soviet collapse.
Not wanting to be the next Mikhail Gorbachev, Xi remains hostile to all such reforms.

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