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Mixed signals for trade: The US, Europe and the Australian defence strategy

The signals on trade and future engagement with China that came out of various Western capitals during the last week paint a very mixed picture. Washington, Berlin and Canberra presented their own take on China in various forms of engagements and new strategies.

The message from Washington has, as we have seen for a while now, been rather stark. Even though American foreign minister Anthony Blinken is expected to travel to Beijing next week, there has been very harsh rhetoric coming out of Washington. In comments to the press yesterday, Mike Johnson, speaker of the House of Representatives, tied Iran, Vladimir Putin and Xi Jinping together in an “axis of evil”. Taking into consideration when and how these words were used in the past, this does not bode well for American willingness to cooperate with China both economically and on geopolitical issues.

On top of this, the US is also further hardening its engagement with China in multiple other areas. The US is going to undertake military exercises together with the Philippines very soon and these are planned to also take place outside of the 12-mile nautical zone of the Philippines in the open sea that forms part of China’s territorial claims in the South China Sea. This will very likely lead to further increased tensions with China and rising risks to supply chains going through the region.

Furthermore, there are a number of economic issues that are increasingly building up. There are several US Trade representative investigations ongoing, including into China’s role in providing port equipment containing devices of unknown purpose to US harbours (see newsletter March 8, 2024). Additionally, the bill supposed to force Chinese company Bytedance to divest from its video platform TikTok might pass the House of Representatives this week, potentially sparking further trouble in commercial engagement with China.

The message coming from Canberra this week was also rather defence-focussed. The Albanese government unveiled its new defence strategy. The strategy identifies the strategic competition between the US and China as the “primary feature of Australia’s security environment”. In line with this, Australia re-emphasised the importance of AUKUS.

While the message coming from Canberra is not quite as hard and loaded as the one coming from Washington and the Albanese government is actively trying to improve relations with China, there is still an increasing securitisation of the relationship. For Australian businesses, this can potentially be problematic because it hardens the geo-political competition in the Indo-Pacific, also involving other states as well. Australia and China are both competing for influence among partner states in the region (also see below). The worst outcome for business engagement on all sides would be a strongly securitised relationship that forces countries to choose which camp they want to be in, both geo-politically and economically.

The message coming from Berlin is slightly more ambiguous, yet bears similar problems. On a three-day visit to China, German chancellor Olaf Scholz spent two days engaging with German businesses in China and discussing the issues and concerns they have about their China activities. He then spent a third day in Beijing meeting Chinese president Xi Jinping and premier Li Qiang. Within Germany, Scholz was criticised for these priorities and was accused of putting too much emphasis on economic engagement and not enough on discussing political differences.

After the visit, the general view on the results of the visit was varied. Particularly the German delegation emphasised the fact that there was a one-to-one encounter between Xi and Scholz that lasted for 45 minutes, much longer than anticipated. At the same time, the mood in the media was more subdued due to the fact that actual tangible outcomes of the visit, especially regarding geopolitical issues, were limited.

At the same time, overseas media in China and Hong Kong saw the visit as evidence of Scholz acting differently from his EU counterparts. For example, the South China Morning Post identified divisions between Germany and the EU on issues of trade measures in the field of electric vehicles and also on how to engage with China regarding the conflict in Ukraine.

While these divisions with regional partners might be exaggerated, this is a topic to pay attention to for businesses in both Germany and Australia. Considering the importance of broad and diverse regional business engagement for both countries, they should closely watch the political space as well as evaluate their own engagements within their respective regions. This is particularly important for Australian businesses because their regional economic engagement is less institutionalised than it is for German businesses in the framework of the European Union. The moment political relations are securitised and rifts (real or perceived) might appear between different regional partners at the political level, the space also for business engagement can become tighter. In other words, if political competition between China and others increasingly hardens from competition to confrontation and players are slowly being forced to choose sides, this can limit the options for strong and fruitful economic engagement. Due to lower levels of institutionalisation of economic relations, especially Australian businesses are well advised to evaluate the breadth and depth of their engagements across the region and to closely watch the political space that appears to be closing in. While rifts between regional partners over their China engagement are in nobody’s interest, there seems to be an increasing danger of them appearing.

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China’s engagement with ASEAN

While news in the Western world on the China engagement front are mixed, China itself has been actively reaching out to states in the Indo-Pacific and working on forming new bonds of engagement and strengthening existing ones. This week, Chinese foreign minister Wang Yi is on an international tour through Southeast Asia and the Pacific, visiting Indonesia, Cambodia and Papua New Guinea. Wang first arrived in Indonesia to speak with president Joko Widodo and president-elect Prabowo Subianto. During the visit, the Indonesian side requested Chinese support with several major infrastructure project including the construction of Indonesia’s new capital Nusantara. Additionally, Wang Yi also announced the establishment of new ministerial dialogues to deepen diplomatic and defence ties between the two countries.

Indonesia is an important partner for China in the Asia-Pacific region. During the visit, Wang emphasised that China is committed to “elevating their [Indonesia’s and China’s] comprehensive strategic partnership to new heights”. At the same time, it can be expected that under the new Indonesian president, there will be strong business and political engagements with China, considering that his first official visit as president-elect led him to Beijing.

For Australian businesses, this renewed Chinese charm offensive in the Indo-Pacific means that they need to be aware of the political space that offers or precludes business options as geopolitical tensions rise. Because it looks like the US will be increasingly wary of business interactions with China, it will mid- to longer term probably pay off to be aware of the political and economic ties that are made and broken in the Asia-Pacific region.

Additionally, as they go out to seek business opportunities in countries in Southeast Asia, Australian businesses also need to increasingly be aware of Chinese companies not only as partners but also as competitors. For all of the above, it is more important than ever for businesses to do their geopolitical homework and make sure that they are aware of what is going on and have contingency plans in the drawer to react quickly if the circumstances change.

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