Opinion: U.S. Protectionism Shouldn’t Be Allowed to Hurt Australia-China Ties

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 trading 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 percent of Australian goods exported to China now enter duty-free. This should rise to 94 percent by 2019 and 96 percent by 2029. Australia will also reduce or remove its tariffs on Chinese imports. More Chinese tourists, students and workers will come to Australia.

But a wrench has been thrown into the works. With Donald Trump as the new U.S. 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 U.S. wants and what it will do. Trump has threatened to 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 yuan from falling. Does Trump really want China to stop these interventions and allow the yuan to depreciate further?

Trump also criticized the trade imbalance between China and the U.S. It is a problem, but it is the result of a more fundamental macroeconomic imbalance. And what kind of feasible solution can the U.S. provide?

Australians are also confused. During his conversation with Australian Prime Minister Malcolm Turnbull, Trump reportedly called Australia’s refugee settlement agreement with the U.S. “the worst deal ever.” It was a wake-up call and has raised concerns about the alliance relationship between the U.S. and Australia.

On his first day in the White House, 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 U.S., where is the international trade regime going?

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 U.S. 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 U.S. is the third-biggest trading partner of Australia. But Australia-U.S. trade is only 30 per cent of Australia’s trade with China, and Australia has a large trade deficit with the U.S.

China has no interest in changing the U.S.-Australia political and defense alliance since it sees no potential threat 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 liberalize its services sector, inviting more investment — both domestic and foreign capital — to health care, education, logistics, finance and insurance, it can stimulate consumption and greatly improve the living standards of more than 1 billion Chinese people. China has the rare opportunity to 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 globalization work. Compared with their peers in the U.S. and Europe, policymakers and the general populace in both Australia and China tend to have more favorable opinions of globalization.

China is very concerned about rising protectionism in the U.S. 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.

He Fan is a professor of economics at the HSBC Business School of Peking University.