AUSTRALIA : WE TOLD YOU SO!

China's stumble spells the end of complacency

Australians have used the easy prosperity delivered by China for the past few decades to indulge in the economic equivalents of First World problems.

Mar 6, 2020 — 12.00am

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A deadly new virus appearing in one provincial Chinese city has within two months triggered global talk of downturn and even recession. Few things better underscore 21st-century interconnectedness.

The Middle Kingdom is at the centre of criss-crossing global supply chains that provide the world with inventories of just about everything that keeps it going. A third of all international freight container traffic passes through Chinese ports that barely figured until the 1990s China outsourcing revolution made them the biggest by far. And it's an industrial revolution forged from Australian raw materials that has helped keep this economy recession-free for three decades.

China became the centre of the world's manufacturing supply chains.  AP

Now the world’s factory has been off sick since January. It may have contained the COVID-19 outbreak and be slowly returning to work. But, as the virus snowballs through economic confidence everywhere else, it’s left Australians questioning our reliance on China.

Yet how many would hand back the prosperity that has come with it: the bounty from our massive iron ore exports, or a huge new industry of educating young Chinese?

Along with the internet, China’s rise has been the world-changing event of the late 20th and early 21st centuries, but the early optimism has become a more complicated reality. The world assumed that China would reciprocate its welcome back into the global economy after 1979 by liberalising its policies and unleashing its consumers much more than it has.

Instead it has stuck to a mercantilist model, swamping the world with its immense production capacity and cornering global markets rather than importing from them. It recycled its huge trade surpluses into a flood of easy capital for a haphazardly regulated Wall Street that finally blew up under the weight of complex financial leverage in the 2008 global financial crisis.

And as America stumbled, China strode out politically as a new authoritarian superpower exerting its strength at home and abroad.

The dependence exists only because of a genuine competitive advantage.

But if the West miscalculated, so did China. Beijing didn’t foresee the equally mercantile Donald Trump and his fellow populists emerging from the devastated old factory belts of the West.

Mr Trump is willing to fight old-fashioned tariff wars to force open China’s markets, and some of his courtiers even want to cut off China from the Western technology it still needs to avoid falling into a middle-income trap.

It’s left Australia in an awkward straddle between prosperity with China, and security alongside Beijing’s new cold war rival in Washington. That’s forced Australia to spend some of that new wealth on defence, and to strengthen our regional diplomatic ties to counterbalance the power of Beijing, and hedge against an unpredictable American partner.

  

This virus is more than an economic threat

And now a tiny viral bug has changed everything again. The contagion has exposed a hollowness to China’s power. Behind the massive edifices of modernity, even more basic infrastructure like healthcare and hygiene is still backward, and everything – including unwelcome news of a mysterious infection – is controlled by state apparatchiks who shoot the messenger, but cannot be everywhere either.

There is clearly a cost to Australian dependence on China. In 2003, when China was slowed by the SARS outbreak, it took 8 per cent of Australia’s exports. Now China buys 38 per cent of what Australia sells abroad.

But the dependence exists only because of a genuine competitive advantage in efficiently supplying raw materials and the education services, and increasingly the health and financial services, that affluent Chinese want.

Australia’s modern prosperity has come from specialising in what its economy can produce for greatest return. That in turn allows it to buy and consume more of what the rest of the world produces. That puts many of Australia’s eggs in the China basket.

Coronavirus a tipping point for tech to reflect on China reliance

To manage this concentration risk, Australia needs to be alert to other global prospects, especially if a so-called China decoupling takes hold in the world economy for a while.

More fundamentally, Australia needs to be flexible and resilient in its politics and economic management. Instead, Australians have used the easy prosperity delivered by China for the past few decades to indulge in the economic equivalents of First World problems. These have been the faux debates about unfairness and redistribution, silly populist wars on wealth creators, and thwarting of all-round reforms with unworkable "no one loses" rules.

They have taken the place of a proper grasp of Australia’s place in a competitive world.

With China less the world’s engine and more in danger of pulling it into recession instead, Australia also faces a tricky few months ahead. China’s stumble means it’s time to end the complacency and the trivia that comes with it. stumble spells the end of complacency

Australians have used the easy prosperity delivered by China for the past few decades to indulge in the economic equivalents of First World problems.

To manage this concentration risk, Australia needs to be alert to other global prospects, especially if a so-called China decoupling takes hold in the world economy for a while.

More fundamentally, Australia needs to be flexible and resilient in its politics and economic management. Instead, Australians have used the easy prosperity delivered by China for the past few decades to indulge in the economic equivalents of First World problems. These have been the faux debates about unfairness and redistribution, silly populist wars on wealth creators, and thwarting of all-round reforms with unworkable "no one loses" rules.

They have taken the place of a proper grasp of Australia’s place in a competitive world.

With China less the world’s engine and more in danger of pulling it into recession instead, Australia also faces a tricky few months ahead. China’s stumble means it’s time to end the complacency and the trivia that comes with it.