Austral ia and China: Chal lenges Mitigate Opportunit ies for

Cooperation CarlyleA.Thayer

PresentationtoChina-AustraliaCooperationForum:

PromotingCooperationintheAsia-PacificRegionorganizedbytheNationalInstituteforGlobalStrategy,Chinese

AcademyofSocialSciences;GriffithAsiaInstitute,GriffithUniversityandFuzhouUniversityJinjiang,FujianProvince,China

May11-12,2018

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Austral ia and China:

Chal lenges Mitigate Opportunit ies for Cooperation

Carlyle A. Thayer *

Introduction

The theme of this session is ‘Asia-Pacific: New Situations, New Opportunities, and NewChallenges.’ThispaperidentifiestherecentdownturninAustralia-Chinabilateralrelationsasa‘newsituation’thathasbeencharacterizedasa‘tippingpoint’bytheformerLaborpremierofVictoria.1 It is common for Chinese officials and state-ownedmedia to issue not only criticalcomments about developments in Australia but to lace these comments with impliedsanctions.2Atthesametime,novisashavebeenissuedthisyearforAustralianministerialvisitstoChina.3

This paper is divided into four parts. Part 1 provides a broad overview of Australia-Chinarelations. Part 2 explores the opportunities for cooperation. Part 3 examines the majorchallengestocooperation.Part4,theconclusion,arguesthatthecurrentchallengesmitigate–orlessen–theopportunitiestocooperation.

Part 1 Austral ia-China Relations

AccordingtotheAustralianDepartmentofForeignAffairsandTrade:

The Australia-China bilateral relationship is based on strong economic and tradecomplementarities, a comprehensive program of high-level visits and wide-rangingcooperation. In 2014, the Australian Prime Minister and Chinese President agreed todescribetherelationshipasa“comprehensivestrategicpartnership.”4

*EmeritusProfessor,TheUniversityofNewSouthWalesCanberraattheAustralianDefenceForceAcademyandDirector,ThayerConsultancy.1JoeKelly,“Chinatiesat‘tippingpoint’,”TheAustralian,December11,2017andJohnKehoe,“Chinarelationshipona‘knifeedge’,”TheAustralianFinancialReview,March6,2018.2PrimroseRiordan,SimonBensonandRowanCallick,“Chinafiresupdiplomaticrow,”TheAustralian,December7,2017;AndrewTillett,“Chinalashesoutatforeigncrackdown,”TheAustralianFinancialReview,December7,2017;AngusGrigg, “AngryChinablastsAustralianmedia,”TheAustralianFinancialReview,December 12, 2018;MarkSaunokonoko,“’Biogoted’AustraliafacestradewaroverSouthChinaSea,paperwarns,”9News,January2,2018;RichardWood, “Turnbull branded ‘anti-China pioneer’ by statemedia,” 9News, February 27, 2018 and GlendaKorporaal,“Chinadeliverstradewarningamidstrainonties,”TheAustralian,April19,2018.3 Dennis Shanahan and Primrose Riordan, “Cold war: China’s freeze on ties,” The Australian, March 1, 2018;PrimroseRiordanandRachelBaxendale,“DFATboss’sChinatripsdeferred,”TheAustralian,March2,2018;andJenniferHewett,MichaelSmithandPhillipCoorey,‘China’sbigsnubtoAustralia,”TheAustralianFinancialReview,April12,2018.4 Department of Foreign Affairs and Trade, China Country Brief, http://dfat.gov.au/geo/china/pages/china-country-brief.aspx.

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Austral ia-China Free Trade Agreement

ApproximatelythirtypercentofAustralia’smerchandiseandsixteenpercentofservicesexportsgotoChina.Merchandiseexportsareconcentratedinafewkeysectors.Forexample,ironorecomprises half ofmerchandise exports,with gold, coal andwool comprising fifteen percent.Chinaimportstwo-thirdsofitsironoreofwhichAustraliasuppliessixtypercent.

On 20 December 2015, Australia and China signed a Free Trade Agreement (ChAFTA). Thecomplementarities of this agreement are illustrated in Table 1 that shows what each partysoughttoobtainfromtheagreement.

Bilateraltwo-waytradereachedU.S.$151billionin2015-16withAustraliaenjoyingasurplusofU.S.$51billion.Two-waytradeingoodsandserviceswasvaluedatmorethan$155billionin2016-17.

OneyearafterChAFTAcameintoforce,overeighty-fivepercentofAustraliangoodsbyvalueinexported to China entered duty free or at preferential rates. Australian exports of wine,pharmaceuticals and skin-care products shot up dramatically. By 2019, ChAFTA will coverninety-fourpercentofAustraliangoodsbyvalueexportedtoChinaandrisetoninety-sixpercentby2029whenChAFTAwillbefullyimplemented.

Table1–AustralianandChineseChAFTAObjectives

WhatAustraliaWanted WhatChinaWanted

Lowertariffsonagriculturalgoods Greater access to markets for direct andindirectinvestments

Removal of regulatory barriers on financialandlegalservices

Higher threshold for investment in Australianassetsbeforetriggeringagovernmentreview

Fewerlimitsoncashtransactions Greateruseofyuanastransactioncurrencyofchoice

OnemajorchallengeforAustraliaistogetChinatoremovenon-tradebarriersoverquarantineand safety standards. This issue featured at the fifteenth meeting of the Joint MinisterialEconomicCommissionandStrategicandEconomicDialogueheldinChinainSeptember2017.

Investment

In2016,ChineseinvestmentinAustraliareachedU.S.$11.49billionthehighestlevelsince2008apeakyearwithrecordinvestmentgoingtoagricultureandinfrastructure.

Asian Infrastructure Investment Bank

In2014,Australia initiallydeclinedto joinChina’sAsian Infrastructure InvestmentBank (AIIB)underpressurefromtheUnitedStatesandJapan.However,whenFrance,Germany,ItalyandtheUnitedKingdomjoinedinMarch2015,AustraliareversedcourseandbecameamemberinJune2015.AustraliacontributedU.S.$930million.

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Part 2 Opportunities for Cooperation

As themapon thecoverof thispaper illustrates,Australia’sparticipation inChina’sBeltandRoadInitiative(BRI)isamajoropportunitytocooperatewithChinatoassistwithinfrastructuredevelopmentnotonlyinChinaandEurasiabutnorthernAustraliaandtheSouthPacificaswell.This section discusses the opportunities for Australia in linking the CommonwealthGovernment’sNorthernAustraliaInfrastructureFund(NAIF)withtheBRI.

Austral ia and China’s One Belt , One Road Init iat ive

InSeptember-October2013,PresidentXi Jinpingproposed theSilkRoadEconomicBeltwhilevisiting Kazakhstan and the 21st Century Maritime Silk Road while visiting Indonesia. InNovember 2013, the Chinese Communist Party (CCP) Central Committee approved theseinitiatives under the banner of One Belt, One Road (later referred to as the Belt and RoadInitiative).

AustraliadidnotfeatureonmapsillustratingtheOneBelt,OneRoadissuedatthistime.ThiswaspuzzlingbecauseoftheproximityofnorthernAustraliatoIndonesiaandthesignificancetoChinaofAustralianexportsofresourcesfromWesternAustraliaandQueensland.

These factorswere certainly known toXi JinpingwhoasVicePresidentpaid several visits toAustralia. In June 2010, for example, Xi travelled by car across the Northern Territory fromDarwintotheKakaduNationalPark.InNovember2014,PresidentXiaddressedtheAustralianParliamentandstated:

Oceania is a natural extension of the ancient maritime Silk Road, and China welcomesAustralia's participation in the 21st centurymaritime Silk Road.Our two countries shouldenhancecooperationinhumanitariandisasterrelief,counter-terrorismandmaritimesafetytojointlymeetvarioussecuritychallengestoourregion.5

Xi is reported to have suggested privately that Darwin might serve as a hub to service theMaritimeSilkRoad.

InOctober 2015, theNorthern Territory governmentmade the decision to lease the Port ofDarwin to the Chinese Landbridge Group for ninety-nine years, in part to position itself tosecureaplaceonChina’sMaritimeSilkRoadtraderoute.Thatsamemonth,ChinaandAustraliabegan discussions on aligning the BRI with the Northern Australia Development Initiativediscussedbelow.

In February 2016, China’s ForeignMinisterWang Yi hosted Australia’s ForeignMinister JulieBishopatthethirdroundoftheChina-AustraliaForeignandStrategicDialogueheldinBeijing.Atajointpressconferenceheldafterthedialogue,MinisterWangYiannouncedthat“thetwosides have established a working group to pair up China’s belt and road initiative and the

5FulltextofChinesePresidentXiJinping'saddresstoAustralia'sParliament,TheStraitsTimes,November19,2018.https://www.straitstimes.com/asia/australianz/full-text-of-chinese-president-xi-jinpings-address-to-australias-parliament

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northernAustraliainitiative.”6InApril2016,PresidentXicalledonAustraliatoaligntheBRIandNorthernTerritorydevelopment.

Austral ia-China Belt and Road Init iat ive

On27May2016,theAustraliangovernmentlaunchedtheAustralia-ChinaBelt&RoadInitiative(ACBRI).7 ACBRI came under the auspices of the Australia-China Council funded by theDepartment of ForeignAffairs and Trade. The formerMinister for Trade, AndrewRobb,wasappointedchairman.

AtitslaunchACBRIissueditsinauguralreport,China'sOneBeltOneRoad.ACBRI’sremitwastopromoteinfrastructuredevelopment,engagementwithChina,andpubliceducationontheBRI.For example, ACBRI assembled a Senior Executive Delegation to engage with Chinesecounterparts on an annual basis. Also, ACBRI formulated a strategy to promote Australia’sinvolvement with the BRI such as identifying Chinese priority projects and determiningAustralian capability. ACBRI sought to build awareness through boardroom briefings held inSydney,Melbourne,Canberra,BrisbaneandPerthfromMaytoAugust2016.ACBRInegotiateda formal advisory rolewith Victorian government. ACBRI led a cluster of agriculture-focusedcompaniesandadelegationofAustralianbanksandservicescompaniestoBeijinginSeptemberandOctober,respectivelytoexploreBRIopportunities.

It was also in October 2016 that Australia and China commenced discussions on asMemorandumofUnderstandingontheBeltandRoadInitiative.

Finally,AustraliabecameanunofficialOneBelt,OneRoadpartnerin2016withthelaunchingofthe public-private non-governmental organisation the Australia-China OBOR Initiative(ASOBORI).8

Northern Austral ia Infrastructure Faci l i ty (NAIF)

In May 2015, the Treasurer, Joe Hockey, announced the Northern Australia InfrastructureFacility(NAIF) inhisbudgetspeechfor2015-16.9HockeyoutlinedfundingfortheNAIF infiveareas:AUD$5billion inconcessional loans forprivatesector investment;AUD$101.3millionover fouryear forcattlesupplychains (roads);AUD$15.3million for tropicalhealthresearchinto threats from exotic diseases; AUD $3.7 million to draw up an Infrastructure projectspipelineprioritylist;andAUD$2.1milliontofundataskforceintoinsurancepremiumreductionmeasures. Later the government issued Our North, Our Future White Paper on Developing

6 “JointMediaConferencewith ForeignMinisterWangYi - Beijing, China,”Ministerof ForeignAffairs, TheHonJulieBishopMP,February17,2016;https://foreignminister.gov.au/transcripts/Pages/2016/jb_tr_160217a.aspx.7ACBRIhomepagemaybefoundathttp://www.acbri.org.au8 ASOBORI issued China's One Belt One Road: Opportunities for Australian Industries,http://www.acbri.org.au/report/ACBRI_Report-Final1-1054-56.pdfand“AustraliarisksmissingoutonChina’sOneBelt OneRoad,” The Conversation, May 16, 2016; http://theconversation.com/australia-risks-missing-out-on-chinas-one-belt-one-road-77704.9TheHonourableJ.B.HockeyMP,TreasureroftheCommonwealthofAustralia,BudgetSpeech2015,deliveredon12May2015;http://www.budget.gov.au/2015-16/content/speech/html/speech.htm.

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Northern Australia Overview that outlined funding of AUD $916.3 million over four yearsincludingAUD$600monaroadsprogram.10

Hockey’s initiative was enshrined in law with the passage of the Northern AustraliaInfrastructure Facility Act on 3May 2016.11 This act established an independent board thatestablished itsheadquarters inCairns in July2016. Infrastructurepriorities included:airports,communications,energy,ports,railandwater.

NAIRisaninitiativeofthefederalgovernment.Butmanyofthekeyprojectdevelopmentsarethe prerogatives of the Western Australia, Northern Territory and Queensland stategovernments. For example, in 2017Queensland Deputy Premier andMinister for Trade andInvestment, Jackie Trad, visited China to explore investing opportunities arising fromChina’sBRIandtheAnnastaciaPalaszczuk’sgovernment’sNorthQueenslanddevelopmentpriorities.

A year after the passage of the Northern Australia Infrastructure Facility Act the initiativeachievedscantprogressduetolackofinterest,complexinvestmentbarriers,andthedearthofinfrastructure projects that would generate ongoing financial returns. In fact, more moneyspentonsalariesforboardmembersthanonactualprojects.12

Austral ia Decl ines to L ink BRI and NAIF

In 2017, Australia and China exchanged several high-level visits. China sought Australia’sinvolvement in the BRI and linkage with development in northern Australia. TheCommonwealthgovernmentrepeatedlysidesteppedtheissue.

In February 2017, Australia hosted the fourth round of the China-Australia Diplomatic andStrategic Dialogue in Canberra. At a joint press conference ForeignMinisterWang Yi stated,“Wearewillingtoalignthe‘BeltandRoad’initiativewiththe‘NorthernDevelopment’planofAustralia.”13JulieBishopnoted:

Wetalkedabout theneed forgreater infrastructure,both regionallyand inour respectivecountries–China’sOneBeltOneRoad initiative,Australia'sDevelopingNorthernAustraliainitiative–andwecommittotheprinciplesoftransparency,privatesectorengagementand

10 This document may be located at http://northernaustralia.gov.au/sites/prod.office-northern-australia.gov.au/files/files/WhitePaperSummary.pdf.11 Federal Register of Legislation, Northern Australia Infrastructure Facility Act 2016, No. 41, 2016;https://www.legislation.gov.au/Details/C2016A00041.12PhilipWenandBenBlanchard(Reuters),“ChinatotalknewSilkRoad inAustralia,nodealexpectedyet,”TheSydney Morning Herald, March 20, 2017; https://www.reuters.com/article/us-china-australia-idUSKBN16S0DX?il=0.13Ministry of Foreign Affairs of the People’s Republic of China, “Wang Yi and ForeignMinister Julie Bishop ofAustralia Jointly Meet the Press,” February 9, 2017;http://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1437164.shtml.

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ensuring that infrastructure investment leads to strong development outcomes (emphasisadded).14

InMarch2017,ontheeveofPremierLiKeqiang’sofficialvisittoAustralia,China’sViceMinisterZheng Zeguang observed that there are “many opportunities and space for cooperation”betweenChinaandAustraliaon theBRI and thatPremier Liwould raise thisduringhis visit.Australia’s trade Minister Steve Ciobo opined, “Obviously Australia has a high degree ofexpertise both in relation to execution but also financing of infrastructure. So there will bescope forAustralianbusinesses in the future tobe involved inbelt-road initiativeprojects.”15ThemediaquotedananonymousAustralianofficial,“Noformalmemorandumonthisissuewillbesignedduringthevisit.”16

PremierLiKeqiangvisitedCanberrafrom24-28Marchtoattendthehigh-leveldialogueundertheComprehensiveStrategicPartnership.AustraliadeclinedtolinktheBRIwiththeNAIF.

The followingmonth PrimeMinisterMalcolm Turnbull flew to Beijing tomeet President Xi.They each talked at cross-purposes. Turnbull focused on innovation, science and education,whileXidiscussedtheOneBelt,OneRoadandlinkagetonorthernAustralia.This linkagewaspromoted by the Australia-China Senior Business Leaders‘ Forum that included participantsfrom Xi’s Central Leading Group on Economics and Finance. The Forum encouraged ChineseparticipationinmajorwaterconservationprojectsinnorthernAustralia.

WhenXimetTurnbullheincludedAustraliaforthefirsttimeinthesinglemostimportantpolicypriorityofhispresidency;insodoingXigavehisimprimaturtoChineseinvestmentinnorthernAustralia's infrastructure. Chinesemedia coverage highlighted Xi's call for the "alignment ofChina's Belt and Road initiative with Australia's northern development plan” and virtuallypassedoverTurnbull’sstressoninnovation.17

IftheOneBelt,OneRoadinitiativeandthenorthernAustraliainfrastructuredevelopmentwerelinked, this likely would spark greater interest from potential Chinese investors. If ChineseinvestorscouldlinkOBORwithanorthernAustraliaprojectitwouldimprovethelikelihoodofbeingapprovedforofficialfunding.

Inhindsight, theTurnbull-Ximeetingmaybe viewedas amajor turningpoint andperhaps amissedopportunityofmajorconsequence.

14“Australia-ChinaForeignandStrategicDialogue-jointpressconferencewithChineseForeignMinisterWangYi,”Minister of Foreign Affairs The Hon Julie Bishop MP, Parliament House, Canberra, 7 February 2017;https://foreignminister.gov.au/transcripts/Pages/2017/jb_tr_170207.aspx.15StephenDziedzic,“LiKeqiangvisit:ChinesePremierarrives inAustralia for five-day tour,” ABCNews,March23,2017;http://www.abc.net.au/news/2017-03-23/chinese-premier-li-keqiang-in-canberra-for-five-day-visit/8378146.16 Jamie Smyth, “Australia rejects China push on Silk Road strategy,” The Financial Times, March 22, 2017;https://www.ft.com/content/e30f3122-0eae-11e7-b030-768954394623.17 Xinhua, “China, Australia seek to make bigger ‘cake’ of shared interest,” April 15, 2016;http://www.xinhuanet.com/english/2016-04/15/c_135283169.htm.

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Belt and Road Forum for International Cooperation, Bei j ing

On14May2017,Chinahosted theBRIForum inBeijing.Australiawas representedbyTradeMinister Steve Ciobo, AndrewRobb (formerMinister for Trade and Investment), Kevin Rudd(former PrimeMinister and ForeignMinister) and Daniel Andrews (Premier of Victoria). NoAustraliancompanieswereinvited.

Australiasupportedthe“InitiativeonPromotingUnimpededTradeCooperationalongtheBeltandRoad”statementissuedattheendofthetradesessiondespiteEuropeanprotestsoverlackofclausesontransparencyandtenderingstandards.

Trade Minister Ciobo clearly spelled out Australia’s reservations about linking the BRI withnorthernAustraliadevelopment.Ciobonotedthat:

Australian participation is to put further meat on the bone for BRI. Given the strongrelationship between Australia and China, it is important for Australia is there to learnmore… [Australia has experience in] financing, designing and the construction of majorinfrastructure…TherearecomplementaritiesbetweennorthernAustraliaandBeltandRoad,but they are separate initiatives… We’ve seen much merit in the BRI Initiative. We seeopportunities for collaboration. Butwe takedecisions about initiatives inAustralia on thebasisofwhat’sinAustralia’snationalinterestandIthinkwedon’tneedtovieweverythingthroughonelense.18

AndrewRobbsuggestedthattherearejointventureopportunitiesforAustralianbusinessestobuildhospitals,schoolsandagedcareservicesalongtheBRItraderoute.

BRI Summit, Bei j ing

FollowingtheBRIForum,ChinahostedtheBRISummitinBeijing,on15May2018.Thissummitwas attended by twenty-nine heads of government and representatives from seventy othercountries, theUnitedNations,WorldBank and InternationalMonetary Fund.At the summit,President Xi announced a further US $124 billion for BRI initiatives. Australia was notrepresented.

Part 3 Challenges to Cooperation

After theelectionofDonald Trumpaspresidentof theUnited States, his pursuit ofAmericaFirst andMake America Great Again resulted in theU.S.withdrawing from the Trans-PacificPartnershipandtheParisAccordonClimateChange.Trump’sactionsreinforcedthecommoncommitmentofAustraliaandChinatoopposeprotectionismandtosupportpoliciesdesignedtomitigateclimatechange.

Australia-Chinaeconomictiesaresubstantial.ChinaisAustralia’slargesttradingpartnerand,asnotedabove,theireconomiesarecomplimentary.Australiajoined–ifbelatedly-China’sAIIB.

18QuotedbyKirstyNeedham,“NewSilkRoad:Chinainvitesworldleaderstohookupto'OneBeltOneRoad',”TheSydney Morning Herald, May 12, 2017; https://www.smh.com.au/world/new-silk-road-china-invites-world-leaders-to-decipher-one-belt-one-road-20170512-gw3ge0.html.

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ChinaprovidesthelargestnumberofforeignstudentsattendingAustralianuniversitiesandtheincometheygenerateisimportantfortheirhosts.19Chinesetourisminontheincrease.

How then dowe explain Australia’s reluctance to join the BRI and the downturn in bilateralrelations?Thissectionfocusesonfourmajorchallengestocooperationthatmustbeaddressed.

Chinese Ownership of Critical Infrastructure

The decision by the Northern Territory government to lease the Port of Darwin to China’sLandbridgeGroupin2015provokedproteststotheAustraliangovernmentbyPresidentObamaandotherU.S.officialsbecauseU.S.navalvesselsregularlyusetheseportfacilities.Itwaslaterrevealed that the Chinese lease was only reviewed at the lowest levels of Department ofDefence and focused mainly around operational aspects of the transaction rather than anylargerstrategicimplications.

Apublicdebateerupted inAustraliaabout thesecurity implicationsofaChinesepresence insuch a sensitive area. It is commonly assumed that Chinese businesses, private and state-owned, are used by China’s security apparatus for intelligence purposes that feed into warplanning.

Security concerns raised by the lease of the Port of Darwin immediately led to a review offoreign investment in critical infrastructure. The Foreign InvestmentReviewBoard (FIRB)hasdirectedthatAustralianstatesandterritoriesmustnowreceiveGovernmentapprovalbeforesellingcriticalinfrastructuretooffshorebuyers.DavidIrvine,formerheadofAustralianSecurityIntelligenceOrganisation(ASIO)andformerAmbassadortoChina,wasappointedtotheFIRBtoensure that security implications were factored into foreign investment and ownership ofcritical infrastructure such as electric power grids and telecommunicstions. The DefenceDepartmenthasplacedbansonphonesproducedbyHuaweiandtheWeChatApp.20

Chinese interference in its domestic affairs

The Australian Security Intelligence Organisation stated in its 2016-17 annual report, “Weidentified foreign powers clandestinely seeking to shape the opinions of members of theAustralian public, media organisations and government officials in order to advance theircountry’sownpoliticalobjectives.Ethnicandreligiouscommunities inAustraliawerealsothesubject of covert influence operations designed to diminish their criticism of foreigngovernments.”21 In addition, China’sMinistry of State Security is alleged to have conductedcovert operations in Australia against Chinese citizens without conducting liaison with theAustralianFederalPolice.

19TimDodd,“TopbrassonamissiontoeaseChinatensions,”TheAustralian,April11,2018;TimDodd,“ChinesedefywarningsandflocktoAussieunis,”TheAustralian,April18,2018andCameronStewart,“’BeholdenunisfearoffendingChinese’,”TheAustralianFinancialReview,April27,2018.20AngusGrigg,“DefencebansWeChatapp,”TheAustralianFinancialReview,March12,2018.21AustralianGovernment,AustralianSecurityIntelligenceOrganisation,ASIOAnnualReport2016-17,4,23and54;https://www.asio.gov.au/sites/default/files/Annual%20Report%202016-17.pdf.

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InMay2017,DennisRichardson,themostseniorAustralianDefenceofficialandtheSecretaryoftheDefenceDepartmentsaidonhisretirementthatChinaisconductingextensiveespionageagainstAustraliaandexertingunreasonableinfluenceoverChinesecommunitiesandmedia.22In2016,FormerChinesediplomatChenYonglinwarnedthatthenumberofChinesespiesandagentsworkinginAustraliawasgrowing.

AlthoughChinawasnotexplicitlynamed it iswidelyheld thatChina,RussiaandNorthKoreaare the main but not only foreign powers interfering in Australia’s internal affairs. In lateJanuary2018,itwasreportedthatASIOlistedChinaasanextremethreatonasecretcountry-by-countrycounter-intelligenceindex,thehighestlevel.Chineseentitieshavebeenimplicatedin hacking defence contractors, hacking industries and hacking the Commonwealth ScientificIndustrialResearchOrganisation(CSIRO).23

ASIO’s assessmentwas backed bywidespread Australianmedia reports of Chinese influenceoperations in Australia primarily directed by the CCP’s United Front Work Department.24Chinesebusinessmenwereidentifiedasagentsof influenceinactivitiesdesignedto influenceAustralianpoliticians,theChinesecommunity includingChinesestudentsstudying inAustraliaand theChinese-languagemedia.25 Inaddition, therehavebeenseveral caseswhereChinesediplomats have instigated and/or supported Chinese students involved in the disruption ofuniversitylectureswhentheydisagreewiththelecturer’spointofviewonanissuerelatedtoChina.26

In2017,inahigh-profilecase,aLaborPartyfrontbencher,SenatorSamDastyari,resignedfromParliament after it was revealed he accepted cash donations from a Chinese businessmanreportedly in return for supportingChina’s territorial claims in the SouthChina Sea and thatDastyariwarnedaChinesebusinessassociatethatAustraliansecurityofficialsweretappinghisphone.27

22 Reuters, “China conducting extensive espionage against Australia: defense official,” May 12, 2017;https://www.reuters.com/article/us-australia-china-idUSKBN1880ZB.23AngusGrigg,BenPotterandNickMcKenzie,“ChinesedatabreachriledCSIRO,”TheAustralianFinancialReview,April4,2018andAngusGrigg,BenPotterandNickMcKenzie,“Itwasa‘wake-upcall’:CSIROspentmillionsafterChinesedatabreach,”TheAustralianFinancialReview,April4,2018.24 LisaMurray, “Chinacallson ‘friends’over territory issue,”TheAustralianFinancialReview,October23,2017;KirstyNeedham, “United Front, China’s important ‘magicweapon’,”The SydneyMorningHerald,November29,2017 and JohnDotson, “TheUnited FrontWorkDepartment in ActionAbroad: A Profile of The Council for thePromotionofPeacefulReunificationofChina,”ChinaBrief,18(2).February13,2018.25PaulMaleyandNicolaBerkovic,“ASIOflagsManchuriancandidates,”TheWeekendAustralian,December9-10,2017;AAP,“ASIOalerttoforeignheatoncampuses,”TheAustralian,October25,2017andJohnGarnaut,“HowChinaInterferesinAustralia,”ForeignAffairs,March9,2018,https://www.foreignaffairs.com/articles/china/2018-03-09/how-china-interferes-australia.26 For an overview of Chinese influence operations in Australia see: Clive Hamilton, Silent Invasion: China’sInfluenceinAustralia(Richmond:HardieGrantBooks,2018).27 Nick McKenzie, James Massola and Richard Baker, “Dastyari’s Failure to Explain,” The Australian FinancialReview,November30,2017;PrimroseRiordanandGregBrown,“Dastyariunderpressuretoquit,”TheAustralian,

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Rules-based International Order

On23November2017,theAustraliangovernmentreleaseditsForeignPolicyWhitePaper.Theoverview to this document stated unequivocally “[t]oday China is challenging America’sposition.” In chapter 2, A contested world, the White Paper asserted “[t]he United Statesremainsthemostpowerfulcountrybut its longdominanceoftheinternationalorderisbeingchallenged by other powers” that openly contest the principles and values on whichinternationalorderisbased.28Earlierintheyear,ForeignMinisterJulieBishopmadeclearthat

Theimportanceofliberalvaluesandinstitutionsshouldnotbeunderestimatedorignored.

Whilenon-democraciessuchasChinacanthrivewhenparticipating inthepresentsystem,anessentialpillarofourpreferredorderisdemocraticcommunity.

Domestic democratic habits of negotiating and compromise are essential to powerfulcountriesresolvingtheirdisagreementsaccordingtointernationallawandrules.

Historyalso showsdemocracyanddemocratic institutionsareessential fornations if theyaretoreachtheireconomicpotential.29

AustraliaisparticularlyconcernedthatChina,asignatorytotheUnitedNationsConventiononthe Law of the Sea (UNCLOS), chose to adopt a policy of three no’s - non-recognition, non-participation,andnon-compliance-towardstheArbitralTribunal’sAward.30

UNCLOSiswidelyreferredtobylegalspecialistsastheConstitutionoftheWorldOceans.Thedecision of theArbitral Tribunal is nowpart of international case law. China’s actions in theSouthChinaSeaare likelytoput itonacollisioncoursewiththemajormaritimepowers if itattemptsto interferewiththepassageandoverflightbyforeignmilitaryshipsandaircraft intheSouthChinaSeagenerally,andthewatersaroundtheSpratlyarchipelagoinparticular.

Strategic Chal lenges

Australia’s 2017 Foreign Policy White Paper assessed that China’s power and influence willgrow tomatch“and in somecasesexceed” thatof theUnitedStates in the Indo-Pacific.TheWhitePaperdepictedterritorialdisputes intheSouthChinaSeaasa“majorfault line” intheregion andnoted thatAustraliawas “particularly concernedby theunprecedentedpace andscaleofChina’sactivities…(and)opposestheuseofdisputedfeaturesandartificialstructuresinthe South China Sea formilitary purposes.”31 Reports that China has now installed anti-ship

November30,2017;andNickMcKenzie,RichardBakerandPhillipCoorey,“ExplosivetapedamnsDastyari,”TheAustralianFinancialReview,November30,2018.28AustralianGovernment,2017ForeignPolicyWhitePaper,pp.1and21.29“ChangeanduncertaintyintheIndo-Pacific:Strategicchallengesandopportunities,”MinisterofForeignAffairsThe Hon Julie Bishop MP, 28th IISS Fullerton Lecture, Singapore, March 13, 2017,https://foreignminister.gov.au/speeches/Pages/2017/jb_sp_170313a.aspx.30 Jin Yongming, “Ruling won't calm disputes in South China Sea,” China Daily, June 7, 2016;http://europe.chinadaily.com.cn/opinion/2016-06/07/content_25632134.htm.31AustralianGovernment,2017ForeignPolicyWhitePaper,pp.25,46-47.

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cruisemissilesandsurfacetoairmissilesisviewedasamajorprovocation.32

TheWhite Paper stressed the importance of U.S. leadership of and participation in a rules-based international order. At a time of growing strategic uncertainty caused by PresidentTrump, Australia has picked up the strategic slack and engaged more with like-mindeddemocraciessuchasJapan,33 India,34France35andtheUnitedKingdom36topushbackagainstChinese political andmilitary influence. The Quadrilateral Security Dialogue (Australia, India,Japan and the United States) is considering a Japanese proposal tomobilize funds from theWorldBanktoprovidealternatefundingtoChina’sBRIforinfrastructuredevelopment.37

In 2018, Chinese investment and influence peddling in the South Pacific (PapuaNewGuinea

32AmandaMacias,“ChinaquietlyinstalleddefensivemissilesystemsonstrategicSpratlyislandsinhotlycontestedSouth China Sea,” CNBC, May 2, 2018, https://www.cnbc.com/2018/05/02/china-added-missile-systems-on-spratly-islands-in-south-china-sea.htmlandRachelBaxendaleandRoryCallinan,“WarningforChinaonMissiles,”TheWeekendAustralian,May5-6,2018.33LisaMurrayandAngusGrigg,“JapantapsAustraliaforChinabulwark,”TheAustralianFinancialReview,October27,2017;PhjillipCoorey,“Australia,alliesfaceuptoChina,NKorea,”TheAustralianFinancialReview,November14,2017;PrimroseRiordan,“Japan,Australiamullagreementonclosermilitary ties,”TheAustralian,December27, 2017; Primrose Riordan, “Japan deal to counter China rise,”TheWeekend Australian, January 13-14, 2018;AndrewTillett,“Turnbull’s Japanvisit to focusondefencedeal,”TheAustralianFinancialReview, January13-14,2018;AndrewTillett,“Aust-JapandealondefencelikelytoangerChina,”TheAustralianFinancialReview,January15, 2018; Primerose Riordan, “PM deepens Japan defence ties,” The Australian, January 19, 2018; MichaelStutchbury and Angus Grigg, “All the Way With Abe,” The Australian Financial Review, January 20-21, 2018;PrimroseRiordan,“TokyoeyesourhelptodefyChina,”TheAustralian,January25,2018.34RoryMetcalf,“IndiamovestolockintheQuad,”TheAustralianFinancialReview,January25-28,2018andGregSheridan,“QuadDialogueisourPassagetoIndia,”TheAustralian,January25,2018.35 BenPackham, “ChinahighonMacronagenda,”TheAustralian, April 30, 2018;AndrewTillett, “Macron vows‘Indo-Pacificaxis’withAustralia,”TheAustralianFinancialReview,May3,2018andEanHiggins,“MacrontacklesflashpointsasParisburns,”TheAustralian,May3,2018.36BenPackham,“BishopurgesUKtoupitsroleinIndo-Pacific,”TheAustralian,February20,2018;AndrewTillett,“Bishop taps UK for Indo-Pacific rules oversight,” The Australian Financial Review, February 20, 2018; DennisShanahan,“TurnbullwelcomesBritain’sPacificpush,”TheAustralian,April21-22,2018;PhillipCoorey,“UKbidtojoinTPPmayhelpcounterChina,”TheAustralianFinancialReview,April21-22,2018;DennisShanahan,“Turnbulltradepitch tocounter riseofChina,”TheAustralian,April23,2018andGregSheridan,“UK ‘willdRawcloser indefence’,”TheAustralian,May7,2018.37PrimroseRiordan,“TurnbulllooktostrengthensecuritytieswithAsia,”TheAustralian,November7,2017;PhillipCoorey,“Australiabacksrevivalof‘anti-China’securitygroup,”TheAustralianFinancialReview,November8,2017;RoryMedcallf,“AnIndo-PacificquadistherightresponsetoBeijing,”TheAustralianFinancialReview,November9, 2017; Richard Fontaine, “WhyWashington and Australia urgently need the Quad,” The Australian FinancialReview,November11-12,2017;RowanCallick,“RenewedtalksrockBeijing’sboat,”TheAustralian,November15,2017;JohnKehoe,“Navy‘quad’chiefsslamdisruptiveChina,”TheAustralianFinancialReview.January22,2018;JohnKehoe,“’Quad’navalchiefstakeaimatChina,”TheAustralianFinancialReview,January22,2018;GregEarl,“Abe’smisfiringQuadfinallydiscoversastrongbase,”TheAustralianFinancialReview,January22,2018;CarlyleA.Thayer,“Worldpowersarescrambling for influenceoverAsianmaritimeroutes,”SecurityTimes [specialeditionfor Munich Security Conference], February 2018, http://www.the-security-times.com/world-powers-are-scrambling-for-influence-over-asian-maritime-routes/andLisaMurray,“LaborbackstheQuadinIndo-Pacific,”TheAustralianFinancialReview,March16,2018.

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and Solomon Islands)38 became a subject contention between Australia and China whenAustralia’sMinisterforInternationalDevelopmentConcetaFierravanti-WellsaccusedChinaoflendingfundstoPacificnationsonunfavourabletermsandconstructing“uselessbuildings…androads to nowhere.”39 Greater concern was aroused in Australia when the media publishedunverified reports that China was seeking to establish a naval base in Vanuatu.40 This ledAustralia and France to confer on cooperation in the South Pacific to protect their nationalinterests.

Part 4 Conclusion

Australia andChina face serious challenges thatmustbeovercome if theyare toembarkonnew cooperative activities. The present hiatus in bilateral relations is unlikely to lastpermanentlyandtheinitiativeforchangerestsmainlyinChina’shands.

In the meantime Australians will continue to debate the merits of pursuing economicopportunitieswithChinaagainstthecoststoAustralia’snationalinterestsarisingfromthefourmainchallengesidentifiedinpartfourabove.

Generally, the debate within Australia has seen the business community, especially thoseinvolved in tradewith China, and state leaders in theNorthern Territory andVictoria, arguethat the Coalition Government should temper its critical comments about China and get onwiththejobofpromotingtrade.

Thedefenceandsecuritycommunity,ontheotherhand,isveryconcernedwiththethreatstoAustralia’s sovereigntybyChinese interference inAustralia’s internal affairs.41 Peter JenningsandMalcolmDavisoftheDefenceDepartment-fundedAustralianStrategicPolicyInstitutearemostvocalinthisrespect.TheyarecounteredbyBobCarr,formerMinisterforForeignAffairsand now head of the Australia-China Relations Instituteat the University of Technology,Sydney. But there are also dissenting voices among defence analysts. HughWhite and PaulDibb,twoformerdeputysecretariesintheDepartmentofDefence,havesquaredoffinapublicdebateabouttheprosandconsofeconomicengagementwithChinaversusnationalsecurity.

Those in favour of associating Australia with China’s BRI make the following argument: bysigningupearlyAustraliacanhelpshapetheBRI.AndtheBRIwill

• AttractChinesepartnersinAustralianbasedprojects

• AllowAustralianbusinessestopartnerwithChinesebusinessbeyondAustraliainChinaandtheBeltandRoadcountries

38BenPackham,“ChinagifttriggersmoreaidforPNG,”TheAustralian,March8,2018andPrimroseRiordanandRowanCallick,“China’spushinSolomonIslands,”TheAustralian,May1,2018.39PrimroseRiordan,“AttackonChinaoverPacificaid,”TheAustralian,January10,2018andPrimroseRiordanandRowanCallick,“BishopsrapsministerforChinaspray,”TheAustralian,January12,2018.40DavidWroe,“ChinaeyesVanuatumilitarybaseinplanwithglobalramifications,”TheSydneyMorningHerald,April9,2018.41AndrewClark,“ChinaDovesandHawksGoToWar,”TheAustralianFinancialReview,May5-6,2018.

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• Provided opportunities for Australia business to contribute their skills in thedevelopment of infrastructure, banking, finance, resources, tourism, education, andhealthcareprofessionalservices

• Create opportunities for joint partnerships to develop roads, bridges, schools andhospitals

• Contributeto improvedconnectivityandmarketaccessand integrationacrosstheBRInetwork

• Provide opportunities for Australia’s public-private partnership developmentexperience; and expertise in legal services, professional management consulting,technicaltrade-relatedbusinesses,agriculture,engineering,andenergy

• More regional infrastructure under the BRI umbrella will result in more demand forAustralianironoreandcoal

• Participation in the BRI will enhance policy coordination, financial integration,infrastructureconnectivity,unimpededtrade,andpeople-to-peoplenetworks

• BoostAustralia’sstandingandinfluenceinregion

ThosewhoopposeorhavereservationsaboutassociatingAustraliawithChina’sBRImakethefollowingarguments:

• TheBRI is so unprecedented in scope there is a real question about the feasibility ofmanyprojects

• Since most BRI target countries have a poor sovereign risk rating there are majorinvestmentrisks

• ThereisalackofChinesereciprocityininvestmentaccess

• TheBRIwillgivepreferencetoChinesecompanies

• TheBRIlacksareciprocaltwowaytradeflow

• TheBRIwillhaveanadverseimpactonhumanrightsandtheenvironment

• North Korea, which attended the May 2017 BRI Forum and Summit, should not beincludedintheBRIuntilitcomplieswithUNsanctions

• Foreignownershipofcriticalinfrastructure(ports,powergrids,roadsetc.)isapotentialthreattonationalsecurityinhostcountries

• The BRI will enhance China’s strategic and economic domination over Eurasia andbeyond

• The BRI will undermine the U.S. leadership role in the region by extending ChineseinfluenceatexpenseoftheU.S.

• ChinawillusejointBRIprojectsaseconomicleveragetoinfluenceAustralia’sdecision-making

• TheBRIwillweakentheBrettonWoodsfinancialinstitutions

15

• Chinawantsformalstate-to-stateMOUsonBRICooperation

PerhapsthebestsummaryofthestateofplayinAustraliawasmadebytherespectedveteranpoliticalcommentatorPaulKelly:

It isabsurd tosayAustraliacannotbe involved [in theBRI] for strategic reasonsandequallyabsurdtosayweshouldblindlysignanymemorandumChinawants,regardlessofitsabuseofeconomic principles. Both the anti-China nay-sayers and pro-China gladhanders are wrong.Australia isbiding itstimeonBeltandRoad,andthat issensible…it is farbetterthatChina’sinvestmentproposalsforAustraliabeassessedonmeritalone,andnotbebrandedaspartofagrand scheme to enhance China’s regional interests. Such branding would only be counter-productive.42

Change of Government, Change of Pol icy?

The deadline for the next election for the House of Representatives is 2 November 2019.Because Australia is a liberal multiparty democracy national elections may be called by thePrimeMinisteratanytime.

The opposition Australian Labor Party has put on record that it would review Australia’sparticipationintheBRIandalsoexamineanylinkagebetweentheBRIandNAIF.InMay2017,PennyWong,Oppositionspokespersononforeignaffairs,visitedChinaandwroteanopinion-editorial urging support for the BRI at a time of protectionism and global uncertainty. Sheargued, “Weneed todisplaymuchgreater confidence inharnessing theopportunitiesof the(BRI).”43

Laterintheyear,ChrisBowen,theShadowTreasurerwrote:

WewillcometoofficeifwewinthenextelectionwithanopenmindastohowAustraliaandChinacanbestcollaborateontheBeltandRoadInitiativewithacleareyedapproachtoourrespectivenationalinterests…

Wewillexamineproposalsonacase-by-casebasisincludingconsideringhowtheNorthernAustralia InfrastructureFacilityandtheBeltandRoadInitiativecanbestcomplementeachother.44

So,inassessingopportunitiesandchallenges,onemustfactorinthepossibilityofachangeofgovernmentinAustraliaatthenextfederalelection.

42 Paul Kelly, “One Belt, One Road: Australia needs to bide its time,”TheAustralian,May24,2017,43PennyWong,“ThisisHardlytheTimetobeTimidinourRegion,”TheAustralian,May2,2017.44ChrisBowen,“FutureAsia:Labor’sDeeperAsianEngagementPolicy,”September29,2017.

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SelectedPapers

Thayer, Carlyle A., 2016a. “Geopolitics and Maritime Security in the Straits of Malacca:Implications of China’s Maritime Silk Road and Indonesia’s Global Maritime Fulcrum,”Presentation to the 8th MIMA International Conference on the Straits of Malacca ResolvingRegional Issues and Their Impact on the Straits of Malacca, Session 1, Paper 1, MalaysianInstitute for Maritime Affairs, Istana Hotel, Kuala Lumpur, April 25, 2016.http://www.c3sindia.org/pakistan/5592andhttp://www.caschennai.org/?p=376.

_____,2017b.“GeopoliticsandMaritimeSecurity:ImplicationsofChina’sOneBelt,OneRoadandMaritime Silk Road,” Background Briefing Paper presented toHASS-CASS Roundtable on‘OneBelt,OneRoad’ InitiativeandAustralia-ChinaRelations,SchoolofHumanitiesandSocialSciencesandChineseAcademyof Social Sciences, TheUniversityofNewSouthWales at theAustralianDefenceForceAcademy,Canberra,November28,2016.

_____,2017a.“AustraliaandChina’sBeltandRoadInitiative:EconomicOpportunitiesandGeo-Strategic Concerns,” Presentation to Conference on China’s Belt and Road Initiative, co-sponsored by Vietnam National University, University of Social Sciences and the KonradAdenauer Stiftung, Hilton Hotel Opera, Hanoi, October 6, 2017.https://www.scribd.com/presentation/360917170/Thayer-Australia-China-s-Belt-and-Road-Initiative-Economic-Opportunities-and-Geo-Strategic-Concerns.

_____,2017b.“AustraliaandChina’sBeltandRoadInitiative:EconomicOpportunitiesandGeo-StrategicConcerns,”inKỷyếuhộithảokhoahọcquốctế:SángkiếnvànhđaivàconđườngcủaTrungQuốc: Cơhội và thách thức [Proceedingsof the International Conference: China’sBeltand Road Initiative: Opportunities and Challenges], Hanoi: University of Social Sciences andHumanitiesVietnamNationalUniversityandKonradAdenauerStiftung,October2017,1-15.

_____,2017c.“Australia’sNorthernAustralia InfrastructureFacilityandChina’sBeltandRoadInitiative: Squaring Commercial Opportunities with National Security,” Presentation toInternational Panel Looking North: A Two-Way Perspective, 5th Annual Northern AustraliaDefence Summit, co-sponsored by Australian Defence Magazine and Northern TerritoryGovernment, Darwin Convention Centre, Darwin, Northern Territory, October 25-26, 2017.https://www.scribd.com/document/362645204/Thayer-Australia-s-Northern-Australia-Infrastructure-Fund-and-China-s-Belt-and-Road.

_____,2018.“WorldpowersarescramblingforinfluenceoverAsianmaritimeroutes,”SecurityTimes [special edition for Munich Security Conference], February 2018. http://www.the-security-times.com/world-powers-are-scrambling-for-influence-over-asian-maritime-routes/