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Professor He Fan : Australia–China Ties Need to Make Globalisation Work

Time:2017-04-14 09:25:10  Hits:[]
By He Fan, Peking University HSBC Business School
 

On the surface, all seems well in the Australia–China relationship. China is growing rapidly and Australia continues to benefit heavily from China’s rise. China is already Australia’s largest trade partner. Australia is the second most popular location for China’s overseas direct investment. And as China’s economy continues to expand and hundreds of millions of its middle class consumers are eager to spend, more opportunities are opening for bilateral trade and investment. 
 
The governments of both countries appear to be working hard to build an extensive and strong relationship. The Australia–China Free Trade Agreement has been in force since December 2015. More than 86 per cent of Australian goods exports to China now enter duty free. This should rise to 94 per cent by 2019 and 96 per cent by 2029. Australia will also reduce or remove its tariffs on Chinese imports. More Chinese tourists, students and workers will come to Australia and travel the other way. 
 
But a spanner has been thrown into the works. With Donald Trump as the new US President, the United States is acting as if it wants to challenge the international political and economic order it helped to build. 
 
Many Chinese are confused about what the United States wants and what it will do. President Trump threatened he would label China as a currency manipulator. Yes, the Chinese government has intervened in the foreign exchange market, but the purpose of this was to prevent the value of the renminbi (RMB) from falling. Does Trump really want China to stop these interventions and allow the RMB to depreciate further? 
 
Trump also criticised the trade imbalance between China and the United States. It is a problem, but it is the result of a more fundamental macroeconomic imbalance. And what kind of feasible solution can the United States provide? 
 
Australians are also confused. During his conversation with Australian Prime Minister Malcolm Turnbull, Trump reportedly called Australia’s refugee settlement agreement with the United States ‘the worst deal ever’. It was a wake up call and has raised concerns about the alliance relationship  between the United States and Australia.  
 
On his first day in the White House, President Trump quit the Trans-Pacific Partnership (TPP).  The TPP was supposed to deliver high standard international trade rules to deepen economic ties. With the exit of the United States, where is the international trade regime going?

Keeping trade ties
 
The best option now for Australia is to further develop its economic relationship with China while at the same time maintaining its traditional political and economic ties with the United States. China will take a more important role in the world economy and Australia’s economic fortunes will be more connected to China in the future. The United States is the third biggest trading partner of Australia. But Australia–US trade is only 30 per cent of Australia’s trade with China, and Australia has a large trade deficit with the United States. 
 
China has no interest in changing the US–Australia political and defence alliance, since it sees no potential threats from Australia. Neither Australia nor China wants drastic change. The trees want to be still, but the wind is blowing. Australia and China need to change their domestic and international policies to be prepared for whatever contingency. 
 
Domestically, both countries must speed up much-needed structural reform. China can no longer be an exporter of cheap products, and Australia seeks to reduce its dependency on the export of raw materials. If China can liberalise its services sector, inviting more investment — both domestic and foreign capital — to healthcare, education, logistics, finance and insurance, it can stimulate consumption and greatly improve the living standards of more than one billion Chinese people. China has the rare opportunity kill several birds with one stone. 
 
And if Australia can increase its competitiveness in the services sector, many Australian companies may find profit in the expanding Chinese market. This should be the co-evolution of the Australian and Chinese economies. 
 
Internationally, both countries need to work together to make globalisation work. Compared with their peers in the United States and Europe, policymakers and the general populace in both Australia and China tend to have more favourable opinions of globalisation. 
 
China is very concerned about rising protectionism in the United States and the fallout from Brexit, and is willing to cooperate with other countries to maintain a liberal international economic order. But China itself may not have the diplomatic skills and capacity to assume global leadership, nor does it have the ambition. Even worse, some signals in China show that its ‘opening up’ policy is slowing down. 
 
The worst-case scenario is that countries like Australia and China finally turn inward and close their doors. Then there would be walls everywhere and the world would be split into belligerent trading blocs. Only when countries in this region work together can we deliver a more promising future.
 
As the Red Queen told Alice, ‘it takes all the running you can do to keep in the same place’. Welcome to the Looking-Glass World. 

From Financial Review


He Fan is Professor of Economics at the HSBC Business School, Peking University. 
 
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