Australia and China in the Age of US-China Hegemonic Competition

YIKUS Issue Brief No. 148

Choi Jae Deok (Senior Researcher, Institute for Unification Studies, Yonsei University / Director,

Institute for Korea-China Political and Diplomatic Studies, Wonkwang University)

Australia has taken the lead in the second act of the US-China hegemony competition that began with the inauguration of the Biden administration. As China retaliated economically against Australia for strongly urging an investigation into the origins of the COVID-19 pandemic, the conflict between the two countries is growing uncontrollably. The argument that China is responsible for the spread of COVID-19 raises fundamental questions not only about the crisis management capabilities of the Chinese system but also about transparency and openness, so for China to acknowledge this is no different from acknowledging the vulnerability of the Chinese system. It is unacceptable for the Chinese leadership, which has been promoting patriotism by propagandizing that the reason China quickly overcame the COVID-19 pandemic was because of the “superiority of the system.” In early May, China’s National Development and Reform Commission announced in a statement that the Chinese government would indefinitely suspend the strategic economic dialogue with Australia, effectively eliminating the official dialogue channel between the two countries.

As expected, President Biden has been strengthening solidarity and unity with democratic countries through the G7 summit, NATO meeting, US-EU summit, and Quad summit since his inauguration, and is quickly forming a consensus that they should respond to the threat from China together. After the G7 summit, Australian Prime Minister Morrison stated that the G7 countries support Australia's position on China, and French President Macron publicly expressed his support for Australia. The second act of the US-China hegemony competition is characterized by the deepening ideological conflict between democracy and socialism and the strategic competition in all areas including technology, economy, and military, which is reduced to a security issue related to the survival of the nation. The conflict between Australia and China is closely related to this aspect of the US-China hegemony competition, and Korea also needs to closely monitor the dynamics of the relationship between these countries.

The full-scale conflict between China and Australia began in 2018, when Australia actively participated in the US Indo-Pacific strategy, conducted military exercises in the South China Sea, and excluded Huawei from the construction of 5G mobile communications infrastructure. China was dissatisfied with Australia's attitude, and when Australia joined the joint statement opposing the Hong Kong national security law and agreed with the US claim that China was responsible for the COVID-19 pandemic, China continued to take retaliatory measures, such as imposing an 80.5% anti-dumping and anti-subsidy tariff on Australian barley in May 2020, partially or completely suspending imports of Australian beef, coal, lobster, wine, and cotton, and blocking personnel exchanges by issuing a "student caution alert."

China and Australia have very close economic cooperation. The two countries are comprehensive strategic partners, and Australia's total exports to China were about AUD 158 billion in 2019 and AUD 154 billion in 2020. Australia's exports to China account for about 38.2% of Australia's total exports, and imports from China account for 25.8% of Australia's total imports. Bilateral trade accounts for about 11% of Australia's GDP, and China is Australia's largest export market and largest surplus country. China is Australia's largest export market in coal, iron ore, wine, beef, tourism, and education.

However, despite the rapid development of economic cooperation between the two countries, the gap in their core interests has not narrowed. For security reasons, Australia has restricted Chinese investment in key industries and has expressed concerns about China's establishment of an air defense identification zone and militarization in the South China Sea. In the 'Australian Foreign Policy White Paper' published in November 2017, Australia raised the need to strengthen its strategic alliance with the United States due to concerns about China's expansion of influence in the South China Sea, and in July 2019, the United States announced that it would build a new naval base worth 211 million dollars in Darwin, Australia. In the '2020 Defense Strategy Update' announced in July 2020, Australia announced that it would invest approximately 225 trillion won over 10 years to expand long-range strike capabilities and cyber power.

Ultimately, the long-standing conflict between the two countries led to economic retaliation after Australia demanded an international investigation into the origins of the COVID-19 virus. China is confident in its strategic competition with the United States, but it is also facing many difficulties at home and abroad, including the responsibility for the spread of the COVID-19 virus, and is paying keen attention to the Biden administration's construction of a blockade against China. At this time, China will not tolerate Australia, which has close economic ties with China, siding with the United States and undermining China's core interests. In addition, if Australia is allowed to try to decouple from China, more countries may join the US blockade strategy, which will gradually isolate China, so it is making Australia an example and dealing a greater economic blow.

However, China's economic retaliation has also added considerable burden to China. In October 2020, Australian coal imports plummeted, causing power outages in some cities due to a shortage of winter coal, and fuel coal prices soared. As the conflict between China, the largest importer of iron ore, and Australia, the largest exporter of iron ore, deepens, iron ore prices continue to rise, causing pain to the Chinese steel industry. China, which is absolutely dependent on Australian iron ore, imported 713 million tons of iron ore from Australia in 2020 (about 60% of total iron ore imports). China has also imposed high tariffs on Australian barley, causing difficulties for the Chinese brewing industry. In response to China's economic retaliation, Australia restricted hay exports to China in March 2021, and in April 2021, the Australian federal government canceled the Belt and Road cooperation agreements between the Victorian state government and China. Additionally, we have formally filed a complaint with the WTO against China's tariffs on Australian barley and wine.

The economic retaliation that China uses as a means of aggressive diplomacy will ultimately act as a factor that hinders China’s development for the following reasons. First, as other countries watch China’s repeated economic retaliation, they will learn that if they go against China’s rise to power, they too can become targets of economic retaliation at any time, and that the greater their economic dependence on China, the greater the risk of economic retaliation. The case of China’s economic retaliation against Australia’s decoupling attempt during the US-China hegemony competition will promote efforts to diversify economic partnerships among countries that fear Chinese pressure due to their high economic dependence on China. Second, it will be difficult to completely resolve the issue of economic retaliation, but even if it is resolved, it will be difficult for the relationship between the two countries to return to the way it was before, and it will take a considerable amount of time to reset the relationship. China is not responding to talks with Australia right now, but when things calm down, the two countries will attempt to restore the relationship. However, the result will be a reset of the relationship, not a restoration of the previous state. Third, there will be hostility among the people toward the other country. Due to the THAAD incident, not only has trust in the South Korea-China relationship been damaged at the national level, but the anti-China and anti-Korean sentiments that have spread throughout society have also heightened the wall of mutual distrust between the people of the two countries.

It is natural for anti-Chinese sentiment to intensify from the perspective of a target country that is subject to economic retaliation, but the Chinese people also see the target country as a country that has betrayed China’s trust and betrayed China. Finally, industries that have been hit hard by economic retaliation are undergoing restructuring and diversifying their import and export countries, which ultimately reduces the interdependence between the two countries. Countries that have suffered economic retaliation are trying to restore relations on the surface, but in reality, they are trying to overcome short-term difficulties and reduce their dependence on imports from China by diversifying their import countries in the long term. When China restricted rare earth exports to Japan due to the Senkaku Islands (Chinese name: Diaoyu Islands) dispute in 2010, many countries around the world came to realize that China could weaponize rare earths at any time. Since then, Japan's diversification of rare earth importers has led to the growth of major rare earth companies such as Australia's Lynas, which produces 20,000 metric tons of rare earths annually. Contrary to expectations that China's economic retaliation would have a major economic impact, Australia's economy rebounded strongly in the first quarter of 2021. Australia has actively explored new alternative markets such as Korea, Japan, Southeast Asia, India, the United Arab Emirates, and the Netherlands, which has significantly reduced the risks of Chinese sanctions.

In conclusion, it is highly likely that China's belligerent diplomatic strategy and economic retaliation will boomerang again and have a negative impact on China. Many countries fear and are wary of China even if they expand economic cooperation with China for economic gain. In a situation where the United States is seeking solidarity with democratic allies, China's economic retaliation will further justify the logic of the United States defining China as a revisionist state, and will further accelerate the reorganization of the global value chain excluding China. Therefore, the number of countries unfriendly to China will increase. Australia's hard-line policy toward China is based on the awareness that 'Australia should no longer rely on China'. In January and February 2020, when China shut down due to the COVID-19 pandemic, the Australian economy, which had been dependent on China, faced great difficulties, and concerns about China's expanding influence not only in the economic sector but also in Australia's domestic politics and society as a whole grew. The fact that Australia now appears to be at the forefront of countering China is not because it represents the interests of the United States or democratic countries, but rather because it is a superficial attempt at decoupling for Australia's national interests. However, what is certain is that Australia's attempt is being interpreted within the US-China hegemony competition and is gaining support from many countries.

As the US-China hegemony competition intensifies, Korea’s diplomatic strategy of maintaining friendly relations with the US and China has become more important. Although a hard-line policy toward China is Australia’s strategy for self-reliance, an attempt at abrupt decoupling from China, depending on the country’s situation, could actually put the country in greater trouble. In the face of the challenging task of the US-China hegemony competition, Korea should manage risk factors that seriously hinder national development, such as security instability due to the deepening of the Cold War structure on the Korean Peninsula and economic retaliation due to China’s violation of its core interests, while seeking mutual growth as an attractive country that will lead the 4th industrial revolution and future industries to both the US and China. In addition, it should lower security instability by strengthening the ROK-US alliance, but ensure that the strengthening of the ROK-US alliance leads to improved North Korea-US relations and inter-Korean relations. In addition, it should expand economic and diplomatic cooperation with the New Northern and New Southern countries and pursue a strategy of prioritizing national interests on a case-by-case basis from a long-term perspective, thereby overcoming the limitations of strategic ambiguity and the dilemma of choosing between the US and China.

By Choi Jae Deok (Senior Researcher, Institute for Unification Studies, Yonsei University / Director,

Institute for Korea-China Political and Diplomatic Studies, Wonkwang University)

● The Issue Brief is written based on the author’s views and has no relation to the official position of the Yonsei University Institute for Unification Studies or North Korean Review.