Bookshelf: ‘Vampire state: The rise and fall of the Chinese economy’

After three decades of record-breaking growth, at about the same time as Xi Jinping rose to power in 2012, China’s economy started the long decline to its current state of stagnation. The Chinese Communist Party would like us to believe that the country’s massive problems are under control and that the economy can easily be kickstarted. But few analysts are convinced.

Ian Williams was a long-time foreign correspondent for Channel 4 News and NBC, based in Moscow, Hong Kong, Bangkok and Beijing, and has written extensively about China. In his latest book, Vampire State: The rise and fall of the Chinese economy, he takes a particularly tough view, suggesting that China’s economic miracle was just a mirage all along.

As Williams sees it, China’s economic reforms were half-hearted from day one and designed first and foremost to ensure that the CCP would remain in power. The West expected economic reform to be followed by political reform and US president Bill Clinton even used this argument with Congress to justify China’s accession to the World Trade Organization in 2001. But political change was never on the CCP’s agenda. Rather, China’s ‘socialist market economy’ was intended to bend economics and business to the party’s will and keep the CCP firmly in the driver’s seat.

With China’s economy now in deep trouble, Williams argues that the party-state is the problem rather than the solution. Like a vampire, the party-driven control structures are draining the life-blood out of the economy. Not satisfied to control the country’s huge state-owned enterprises, in recent years the CCP has tightened its centralised mechanisms and expanded its presence into the boardrooms of private companies.

Williams’s analysis starts from the domestic economy, where an enormous property bubble has deprived local governments of income from the sale of land rights, creating huge industrial surpluses and driving youth unemployment up and consumer prices down.

With limited options for addressing this deflationary spiral, China has resorted to exporting its problems. Casting a wide net, Williams reviews the global reach of China’s economic operators, from the expansive infrastructure lending of state-owned policy banks throughout Africa, Asia and Latin America to Chinese racketeers in the border regions of Laos, Myanmar and Thailand.

For all Beijing’s talk of borrower-friendly policies and no-strings-attached lending, China is an unforgiving creditor. When its massive infrastructure projects run into trouble, it prefers providing rescue loans that tighten its control over the assets it has created to writing down debt, squeezing the poorest borrowers in the process.

Williams takes a particularly dim view of China’s business and investment environment, citing numerous examples of a business-unfriendly public sector, biased legal system and unreliable private partners. The fine line between the voluntary transfer of know-how and technological theft is a major danger zone. Many foreign investors have been trapped into ‘voluntarily’ handing over business secrets only to find themselves edged out by their Chinese partners. Investors have also learned the hard way that the Chinese court system rarely works in their favour.

Overseas cooperation between China’s public sector and its state-owned and private enterprises is exceptionally tight, whether in trade policy, research and development, the ‘borrowing’ of technology or development of human resources. The Chinese army, for example, describes sending scientists to study in Britain as ‘picking flowers in foreign lands to make honey in China’.

Williams has researched his book thoroughly, travelling the length and breadth of China to study local-level problems first-hand. He also visited countries throughout Asia and elsewhere impacted by China’s economic policies. His research included wide-ranging interviews, from the foreign minister of Lithuania and other government leaders, business executives and human rights activists to the manager of a massage parlour operating on the border between Laos and Thailand.

Can China bounce back, or is the miracle over? According to Williams, Xi is not able to implement the reforms needed to get the economy back on track simply because they would threaten the CCP’s grip on power. As a result, the Party is ‘frozen in the headlights’. The cautious balance between stimulating the economy and ensuring stability struck this month by the National People’s Congress is consistent with this diagnosis.

Williams analyses China with his eyes wide open. His refreshing book is a must read for anyone dealing with China’s economy, from public sector trade negotiators to private businesspeople and investors.

It’s time to imagine how China would act as regional hegemon

Regional hegemons come in different shapes and sizes. Australia needs to think about what kind of hegemon China would be, and become, should it succeed in displacing the United States in Asia.

It’s time to think about this awful prospect because under President Donald Trump the US’s commitment to alliances is suddenly looking shaky. And there’s also the risk that even a fully committed US could try and fail to restrain China militarily—for example, in the crucial scenario of defending Taiwan.

Regardless of whether overt military force had been needed to supplant the US in Asia, leaders of a newly hegemonic China would likely initially try to portray the country as a much less aggressive and far more tolerable alternative keeper of the regional peace than the sceptics had thought.

With the region cowered and everyone else anxiously looking on, it would make great sense for a triumphant and unchallenged China to project a strong but benign image of itself to the world. Such a phase could last years and even decades, but it would not last forever.

Ideally, China’s leaders want China to be a regional hegemon that has tremendous military capabilities that it rarely, if ever, needs to use to get what it wants, principally because it is unmatched.

The prospect of the use of overwhelming military force combined with the usual economic carrots and means of political and social control across the region would, they’d hope, ensure that a hegemonic China’s interests automatically featured in the decision making of all regional countries.

That would be plan A.

China’s problem and ours is that most regional countries and the people that live in them would eventually tire of that dynamic and start pushing back.

That is problematic mainly because deference lies at the heart of Beijing’s conceptions of the virtues of a historically China-led regional order, making anything short of absolute submission difficult to tolerate.

China’s leaders are not looking to break new ground by seeking regional hegemony. Rather, they are trying to return China to a position of dominance that enables it to control what those in its orbit think, say and do.

Many of China’s coercive and technological means and methods to secure that high degree of external influence and control are new. Its desire to have them is not.

Working from the assumption that China won’t compromise on the deference front, Canberra and other regional capitals need to think about how much direction from Beijing they could stomach and how push-back might manifest itself.

This is where it starts to get messy.

The less China is challenged by a regional peer competitor, the more unacceptable even the smallest external acts of defiance will seem to a domestic Chinese audience. This means that for reasons of domestic political legitimacy alone, leaders of a hegemonic China will want to deal with any afront in a way that is seen to effectively deter others.

With internal pressure to act like a proper hegemon and no credible external checks and balances on its behaviour, it is not hard to imagine China’s leaders pursuing increasingly overt and punitive methods to compel obedience and engineer thought beyond its borders.

It is also not difficult to imagine that effort backfiring on Beijing sooner than it expected, leaving it with no apparent choice other than to use military force to achieve outcomes.

A hegemonic China would eventually overstep, eliciting a collective regional reaction that from Beijing’s perspective will need to be quashed. This would provide a pretext for China to become the expansionist and authoritarian power that it would say it never intended to become but now must to preserve regional stability.

Thinking about how far the leaders of a hegemonic China would want to go to avoid reaching that conclusion, and exactly what they would do when they reach it is anxiety inducing and unpleasant.  But it’s a task policy planners need to take on instead of wilfully avoid.

China is clearly committed to its objective of kicking the US out of Asia and assuming what it feels is China’s rightful place in the region. But it is important to remember that China’s leaders too would be unsure and anxious about how an outcome in China’s favour would play out.

For us, facing the challenges posed by the potential emergence of a hegemonic China means thinking ahead and imagining ways to move forward in different circumstances without getting stuck.

Luck will play a role.

How world order changes

After the Berlin Wall came down in 1989, and almost a year before the Soviet Union collapsed in late 1991, US President George H W Bush proclaimed a ‘new world order’. Now, just two months into Donald Trump’s second presidency, Kaja Kallas, the European Union’s top diplomat, has declared that ‘the international order is undergoing changes of a magnitude not seen since 1945.’ But what is ‘world order’, and how is it maintained or disrupted?

In everyday language, order refers to a stable arrangement of items, functions, or relations. Thus, in domestic affairs, we speak of an ‘orderly society’ and its government. But in international affairs, there is no overarching government. With arrangements among states always subject to change, the world is, in a sense, ‘anarchic’.

Anarchy is not the same as chaos, though. Order is a matter of degree: it varies over time. In domestic affairs, a stable polity can persist despite a degree of ungoverned violence. After all, organised and unorganised violent crime remain a fact of life in most countries. But when violence reaches too high a level, it is seen as an indication of a failed state. Somalia may have a common language and ethnicity, but it has long been a site of battling clans; the ‘national’ government in Mogadishu has little authority outside the capital.

The German sociologist Max Weber famously defined the modern state as a political institution with a monopoly on the legitimate use of force. But our understanding of legitimate authority rests on ideas and norms that can change. Thus, a legitimate order stems from judgments about the strength of norms, as well as simple descriptions about the amount and nature of violence within a state.

When it comes to world order, we can measure changes in the distribution of power and resources, as well as in adherence to the norms that establish legitimacy. We can also measure the frequency and intensity of violent conflict.

A stable distribution of power among states often involves wars that clarify a perceived balance of power. But views about the legitimacy of war have evolved over time. For example, in 18th-century Europe, when Prussia’s King Frederick the Great wanted to take the province of Silesia from neighboring Austria, he simply took it. But after World War II, states created the United Nations, which defined only wars of self-defense as legitimate (unless otherwise authorised by the Security Council).

To be sure, when Russian President Vladimir Putin invaded Ukraine and occupied its territory, he claimed that he was acting in self-defense against the eastward expansion of NATO. But most UN members voted to condemn his behavior, and those that did not—such as China, North Korea, and Iran—share his interest in counterbalancing American power.

While states can lodge complaints against others in international courts, these tribunals have no capacity to enforce their decisions. Similarly, while the UN Security Council can authorise states to enforce collective security, it has rarely done so. The five permanent members (Britain, China, France, Russia, and the United States) each wield a veto, and they have not wanted to risk a major war. The veto functions like a fuse or circuit-breaker in an electrical system: it is better to have the lights go out than to have the house burn down.

Moreover, a world order may become stronger or weaker because of technological changes that alter the distribution of military and economic power; domestic social and political changes that alter a major state’s foreign policy; or transnational forces like ideas or revolutionary movements, which can spread beyond governments’ control and alter public perceptions of the prevailing order’s legitimacy.

For example, after the 1648 Peace of Westphalia, which ended the European wars of religion, the principle of state sovereignty became enshrined in the normative world order. But in addition to changes in the principles of legitimacy are changes in the distribution of power resources. By the time of World War I, the US had become the world’s largest economy, allowing it to determine the outcome of the war by intervening militarily. Although US President Woodrow Wilson tried to change the normative order with his League of Nations, US domestic politics pushed the country toward isolationism, which allowed the Axis powers to attempt to impose their own order in the 1930s.

After World War II, the US accounted for half of the world economy, but its military power was balanced by the Soviet Union’s, and the UN’s normative power was weak. With the Soviet Union’s collapse in 1991, the US enjoyed a brief unipolar moment, only to overextend itself in the Middle East while permitting the financial mismanagement that culminated in the 2008 financial crisis. Believing the US was in decline, Russia and China changed their own policies. Putin ordered an invasion of neighboring Georgia, and China replaced Deng Xiaoping’s cautious foreign policy with a more assertive approach. Meanwhile, China’s robust economic growth allowed it to close the power gap with America.

Relative to China, American power did decline; but its share of the world economy has remained at around 25 percent. As long as the US maintained strong alliances with Japan and Europe, they would represent more than half the world economy, compared to a mere 20 percent for China and Russia.

Will the Trump administration maintain this unique source of America’s continued power, or is Kallas right that we are at a turning point? The years 1945, 1991, and 2008 were also turning points. If future historians add 2025 to the list, it will be a result of US policy—a self-inflicted wound—rather than any inevitable secular development.

Think laterally: government air and shipping services can boost Australian defence

US President Donald Trump’s unconventional methods of conducting international relations will compel the next federal government to reassess whether the United States’ presence in the region and its security assurances provide a reliable basis for Australia’s national defence strategy. There is reason to doubt that Trump’s US would unequivocally help defend Australia in a war.

Australia must become more self-reliant in defence while increasingly demonstrating that it is a valuable ally to the US worth American commitment to its security. A dilemma is how to strengthen defence while minimising cost.

Imaginative thinking is needed. Conventional boundaries between the civil and military domains should be removed.

The federal government recently said it was prepared to acquire Regional Express to avoid the airline’s financial collapse. But the government could nationalise the airline as a defence enterprise. The airline’s staff—including pilots, engineers and air and ground crews—could mainly be permanent and reserve defence personnel. It could provide passenger and freight services to all major remote and regional Australian communities, improving their access to essential services and markets. The airline could also provide transport for defence personnel and stores, and for their families on remote bases. The resource and other sectors could also be incentivised to use the airline.

The airline could eventually take over national responsibility for emergency aeromedical services, search and rescue, border security, maritime surveillance, aerial firefighting and other specialised national aviation tasks. It would benefit from an expansion of the federal government’s remote airstrip upgrade program. The airline, its facilities, and personnel would also be available for use in civil defence such as national emergencies and in wartime.

Such an airline would effectively be an auxiliary air force. It would provide new options for government, and increased capability for defence planners if the aircraft types that were operated also had useful military variants. The cost of operating the airline would be covered by revenue and from other parts of the federal budget.

The federal government announced a pilot program in September to create a ‘maritime strategic fleet’ to ensure supply of essential resources during national emergencies. If this strategic fleet were a defence enterprise, the ships could be captained and principally crewed by permanent and reserve defence personnel, with a narrower focus on providing support to our naval operations as well as those of the US and other allies.

The concept of a strategic fleet could be changed to that of an auxiliary naval fleet, still using defence personnel, which conducted commercial-like activities that supported Australia’s engagement and geostrategic interests in our near regions. This could also reduce some of the pressures on the navy.

The icebreaker operated by the government’s Antarctic Division could become one of several that are used to increase Australia’s presence and activities in Antarctica. The US and other allies could contribute to the cost of operating icebreakers, as these vessels would support their own Antarctic programs. And Australia could have cruise and cargo ships support our Pacific development and engagement programs. The ships could also be partly crewed by Pacific islanders to maximise regional economic benefits. They would also be designed to support humanitarian, littoral and supply operations. Such commercial activities would cover some of the operating costs of these ships.

Our defence force must be based on a new form of service, where our personnel are neither permanent nor reserve as organised by the current model. A new model of service would attract people because it offers a mixture of civil and military opportunities, more career options and longevity and does not isolate the person from broader civil occupations or professions. The defence force would increase its size and broadening its skills and experience while contributing to the national economy.

National mobilisation cannot meet the sudden needs of national defence. And conscription or requisition won’t be accepted if the foundations for civil defence are not already there. Mixed purpose industries can foster a civic culture of service. They would also ensure broader skills and training in defence personnel and broader society.

We need to change our thinking about defence spending as another demand on strained budgets to how defence and the economy support and reinforce each other. Our national activities should act as triple levers, adding to our means of defence, national resilience and thus to strategic deterrence.

Australia must become more self-reliant for our national defence while meaningfully contributing more to collective security. That requires us to become more imaginative with how we respond to our strategic risks, and exploit our strategic advantages, to avoid simply burdening the national economy further. Australia needs to bring together its civil and military domains. Only then can we remain a free, prosperous and secure nation.

Life after D-notices: Australia can learn from Britain’s updated system

For decades, Britain and Australia had much the same process for regulating media handling of defence secrets. It was the D-notice system, under which media would be asked not to publish.

The two countries diverged when, around 1982, Australia’s much-maligned D-notice system fell into disuse. Britain kept but progressively overhauled its framework, eventually creating the Defence and Security Media Advisory (DSMA) system in 2015.

Something like Britain’s DSMA system could have significant benefits for Australian government and media and has been recommended by, for instance, the Independent National Security Legislation Monitor. Although the present monitor, Jake Blight, assesses that Australian government and media don’t trust each other enough to make it work.

A successful Australian system would require deliberate steps to build the trust which underpins the British system. But this could be achievable through: careful appointments, a media-led approach (including a media-majority committee), a clear separation from national security laws, and ongoing engagement between the press and national security agencies.

A healthy tension between government and the media is fundamental to democracy, ensuring transparency while holding power to account. In national security, however, this balance is particularly delicate—too much disclosure can compromise capabilities and lives, while excessive secrecy risks unchecked power, eroding public trust and democratic oversight. Balance is essential to safeguard national security and maintain confidence in the institutions that protect it.

A structured space for dialogue between government and media could help balance openness and security by allowing the government to convey national security concerns and ensuring the media’s editorial independence.

Today in Britain, the DSMA Committee oversees a voluntary system centred on five standing DSMA-notices covering military operations, weapons systems, military and intelligence techniques, physical property and assets, and personnel (and their families) who work in sensitive positions.

Each notice sets out why inadvertent disclosure of certain information should be prevented and requests that editors and journalists seek advice from the DSMA secretary before publicly disclosing related material. The DSMA Committee meets twice a year (and other times as necessary) to consider these notices, the system as a whole and requests for advice.

The DSMA Secretariat comprises Secretary Brigadier (Retired) Geoffrey Dodds, assisted by Deputy Secretaries Captain (Retired) Jon Perkins and Lieutenant Commander (Retired) Stephen Dudley. The wider committee includes senior officials from the Home Office, Ministry of Defence, Foreign Office and Cabinet Office on the government side.

Balancing this, 20 senior media representatives—including chief editors from major print and digital outlets—ensure broad industry engagement and representation. The committee operates at the intersection of national security and press freedom: it is chaired by the Ministry of Defence’s director general of security policy, supported by ITN’s head of compliance as vice-chair.

In contrast to the now defunct D-notice approach, the DSMA system is widely regarded in a positive light by, remarkably, both media and government actors. It holds significant promise for Australia, which could learn four key lessons from Britain.

First, the secretary must have full security access and extensive experience and must earn the trust and backing of media representatives. This is an important but challenging requirement. The appointment of trusted individuals shifts the focus away from the unrealistic goal of full institutional trust and instead ensures credibility through the reputation and independence of key personnel.

Second, the committee must be media-led. It consists of a strong majority of respected industry professionals who uphold press freedom, public interest and expertise in media practices.

Third, the DSMA system must remain advisory. It operates within the editorial sphere to balance national security and public access to information, free from legal enforcement or censorship. Clear separation between the system and national security laws prevents legal entanglements and ensures the process remains advisory rather than regulatory, let alone investigative or prosecutorial.

Finally, the system must be genuinely voluntary. An editor or journalist can choose to ignore DSMA advice. Trust will develop in practice rather than existing as a prerequisite through education and ongoing engagement between media and security officials.

Altogether, the idea of ‘slapping a D-notice’ on something as a form of censorship does not apply. The committee’s media-led nature means the secretariat draws insights from leading editors and media players in formulating its advice, which carries the weight of those actors as well as the secretariat itself.

Ultimately, the DSMA system’s relative success lies in trust, respect and shared interests. At their core, media and government serve the public interest. Neither is interested in unethical (or even sloppy) journalism. Both pursue the well-being and security of the nation and its people.

What can emerge from the DSMA system are negotiated outcomes in which crucial parts of a story can be told (from a journalist’s perspective) without disclosing truly problematic information (from a security standpoint). That discussion must be had from a position of mutual trust and respect.

This article has been corrected to say that the Australian D-notice system fell into disuse around 1982 and to correctly state the title ‘Independent National Security Legislation Monitor’.

Diplomacy is the newest front in the Russia-Ukraine war

The war between Russia and Ukraine continues unabated. Neither side is in a position to achieve its stated objectives through military force. But now there is significant diplomatic activity as well.

Ukraine has agreed to a 30-day ceasefire, in large part to patch up relations with US President Donald Trump’s administration, which unravelled during a 28 February Oval Office confrontation between Trump and Ukrainian President Volodymyr Zelensky. Russia rejected the ceasefire proposal, instead suggesting (but not implementing) a prohibition on attacking energy infrastructure. Both sides also indicated a readiness to accept a ceasefire in the Black Sea, but with Russia linking its support to a relaxation of sanctions, it is far from clear when—or even if—such a limited ceasefire would start, much less what it would encompass.

Such partial steps, if implemented, could be a way-station to something more significant. But it is at least equally possible that partial steps would not lead to a comprehensive peace agreement. Russia could prosecute the war even if the Black Sea were not an active theatre.

The biggest question remains US policy. The Trump administration has used a combination of pressure and incentives to persuade the two sides to stop fighting. But its approach has been skewed toward offering benefits to Russia while bringing heavy pressure to bear on Ukraine.

To be clear, it is appropriate to offer Russia certain incentives. This could include a willingness to resume high-level contacts and restaff embassies, support for limited relaxation of sanctions if specified conditions are met, and to allow Russia to keep its long-term objectives for Ukraine on the table.

What is not acceptable is to embrace flawed Russian positions, such as its claims to Crimea, Donetsk, Luhansk, Kherson and Zaporizhzhia based on the results of illegal referenda conducted by Russian occupation forces. It is one thing for Trump’s envoy to the Kremlin, the property-developer-turned-novice-diplomat Steve Witkoff, to characterise Russia’s stance and quite another for him to adopt it as his own.

More broadly, there is no good reason to introduce final-status considerations at this point. The goal for now should be an open-ended ceasefire agreement, not a permanent peace treaty. In this instance, excessive ambition is likely to be the enemy of the possible.

To achieve a cessation of hostilities, the agreement ought to be as clean and simple as possible. Only two elements are essential for a viable ceasefire: a cessation of all hostilities, and a separation of forces, ideally with a peacekeeping contingent between them.

Everything else, including the disposition of territory and populations, should be left for final-status negotiations. For now, both sides should be allowed to arm or agree to security arrangements with third parties. Nothing should be done to preclude measures that would buttress a ceasefire. Russia should be permitted to retain North Korean troops on its territory; Ukraine could invite forces from European countries.

What is essential is for the United States to continue providing military and intelligence support to Ukraine. Such support is the only way to convince Russian President Vladimir Putin that further stalling is not in his interest, and is essential to Ukraine’s ability to deter renewed Russian aggression even if there is a ceasefire agreement. But it need not be unlimited: such US assistance has totalled around US$40 billion a year for three years—a level that is likely to suffice for the foreseeable future.

The goal should be to give Ukraine what it needs to deter and defend against Russian aggression, not to liberate its lands. To assert, as Witkoff did, that there is no reason to worry about renewed Russian aggression is not serious. After all, the current war is Russia’s second invasion of Ukraine since 2014, when it illegally annexed Crimea. Given Putin’s intentions, what matters are capabilities.

Matters could come to a head by summer, when the pipeline of congressionally-approved arms for Ukraine runs out. The Trump administration will have to decide (if it has not already done so) on the connection between the security relationship with Ukraine and US diplomacy.

As we attempt to discern what the administration will choose to do, the February 2020 deal that the first Trump administration signed with the Taliban should give us pause. The agreement was negotiated over the head of the US’s Afghan partners through direct talks with the Taliban, paving the way for the Taliban’s swift takeover of Afghanistan a year and a half later. One can only hope that the price President Joe Biden paid, both domestically and internationally, for implementing Trump’s deal will lead Trump to think twice before abandoning Ukraine to a similar fate.

Trump should also keep in mind that abandoning Ukraine would not bring peace. Zelensky, who is more popular than ever at home (thanks in no small part to the infamous Oval Office meeting) would likely opt for no ceasefire or peace treaty rather than one that compromised Ukraine’s core interests. It could fight on in one form or another for years using domestically produced arms and weapons imported from Europe and Asia—and, free of US restrictions as a condition of aid, it might even be tempted to act more aggressively in its choice of targets within Russia.

At the same time, Russia would most likely view US separation from Ukraine as an opportunity to press or even escalate militarily. Far from bringing peace, a US military cutoff of Ukraine could actually bring about an escalation in the fighting.

The stakes are high, and not just for Ukraine. What plays out with Russia will have a significant effect on the future of Europe, on whether China uses force against Taiwan, or North Korea against South Korea, and on how the US is perceived both by its friends and enemies around the world.

Australia can take USAID’s place in the Pacific islands

One of the first aims of the United States’ new Department of Government Efficiency was shutting down USAID. By 6 February, the agency was functionally dissolved, its seal missing from its Washington headquarters.

Amid the sudden shutdown, Australia must increase its developmental aid to Pacific islands before China fills in.

The most aid-dependent countries—the Freely Associated States, including Marshall Islands, Palau and the Federated States of Micronesia—happen to be among the most strategically located for US resistance to possible Chinese aggression against Taiwan, Japan and the Philippines. Maintaining aid to them is doubly important.

Moreover, island countries across the Pacific suffer from intense poverty and are unusually vulnerable to climate change.

The Pacific islands’ geostrategic importance necessitates aid to achieve ideal defensive posture. The primary military value of the islands is that they enable the US to disperse military assets across the wide expanse of the region. The second island chain provides several secondary and tertiary operating locations important in a Sino-American conflict. Important islands include Palau, and Yap and Chuuk in the Federated States of Micronesia.

The Pacific is important to China’s counterinsurgency strategy, which aims to prevent reinforcement of the US’s position inside the first island chain. Limiting access is the name of the game for military strategists on both sides of the Pacific. If Beijing were to convince countries in the second island chain to let the Chinese army’s rocket force deploy ballistic missiles on their soil, that would be devastating for the US. The DF-17 medium-range ballistic missile has a range of 1600km, while the DF-ZF hypersonic glide vehicle has a range of 2000km. Given that there are currently no viable defences against hypersonic weapons, this would effectively box US navy carrier strike groups out of much of the Pacific Ocean.

The Pacific is the world’s most aid-dependent region and thus particularly susceptible to China’s coercion. Pacific states are small with few natural resources, making them reliant on aid to develop. Between 2008 and 2021, the region received more than US$40 billion in aid.

Aid packages are only effective in scoring geopolitical influence insofar as they align with the priorities of Pacific countries, which are increasingly concerned with adapting to the negative impacts of climate change. This makes complete sense: rising sea levels, declining fish populations and increased natural disaster prevalence all spell a true existential threat. With the planet surpassing the 1.5 degrees C limit outlined in the Paris Climate Agreement, Pacific island states will need further aid to diversify food sources and build seawalls. USAID created the Pacific-American Climate Fund in 2020 specifically to help Pacific island countries weather the effects of climate change through grants and loans to local organisations. This program ceased with the agency’s sudden closure.

It is perfectly reasonable for these states to look for a more reliable source of funding, which China is eager to provide. This is a real threat: on 15 February, the Cook Islands signed a comprehensive strategic partnership agreement with China. This agreement is just the latest in a series: in 2019, China sent generous economic aid to Solomon Islands, leading the Pacific state to drop its diplomatic recognition of Taiwan. Kiribati soon followed.

Australia is the ideal candidate to aid the freely associated states to prevent a Chinese fill-in. China is the second-largest provider of aid to the Pacific after Australia. US aid is primarily directed to the Federated States of Micronesia, Marshall Islands and Palau, with whom the US has Compacts of Free Association. These three states contain key dispersed military operating locations and they received about 82 percent of the roughly US$250 million the US sent to the region in 2022. These states are therefore sensitive to a funding freeze. The Biden administration signed into law US$7.1 billion in aid to them in 2024, though USAID’s axing has likely disrupted this funding.

Australia is best equipped to fill the void left by the US, given its robust relationships with many Pacific countries. Additionally, most US money dedicated to Pacific aid goes through Australian NGOs. This decreases the need to alter existing programs, which increases the chances of a smooth transition.

The shutdown of USAID has been an enormous hit to US soft power and its ability to counter China in the Pacific. But the worst outcomes can be avoided through the intervention of steadfast allies—especially Australia.

This article has been amended to omit references to AusAID, which was absorbed into the Department of Foreign Affairs and Trade in 2013.

The US alliance is precious, but Australia should plan for more self-reliance

If our strategic position was already challenging, it just got worse.

Reliability of the US as an ally is in question, amid such actions by the Trump administration as calling for annexation of Canada, threating to disband or leave NATO, and suddenly suspending support for Ukraine. This follows the 2023 Defence Strategic Review, which declared Australia’s strategic circumstances the worst since World War II.

As Australia seeks to urgently enhance its defence capabilities and sovereign capacity—including by acquiring nuclear submarines, long-range strike options, war stocks and emerging and disruptive technologies—our key ally of more than 70 years has become highly unpredictable.

In Australia’s immediate region, three critical questions arise. Can Australia depend on US military support, particularly the delivery of nuclear submarines within the AUKUS agreement?  Will the United States continue to develop and honour security agreements with Japan? And will the US help Taiwan in the face of potential Chinese aggression? This is not a complete list of concerns for the Australian government and Defence officials.

We should be careful not to throw our most fundamental alliance out with the bathwater of one US administration. But we had better start thinking now about what we would have to do if we needed greater defence self-reliance. To some extent, that implies preparations now.

As the old joke goes, if Australia asked for directions to a self-sufficient defence policy, the reply would be, ‘Well, you wouldn’t want to be starting from here.’  But here we are.

Despite early speculation, it is unclear how isolationist this Trump government will be. Its responses to Ukraine and Gaza present contrary pictures. It is important to remember that the US was isolationist and leaned heavily towards non-interventionism after the beginning of both World Wars I and II. Ultimately, it entered both conflicts on the same side as Australia. The bonds formed between Australian and American military forces in those conflicts are deep and enduring and are often invoked by politicians and service personnel alike. The dominant feature of the Australian defence headquarters in Canberra is a towering, stylised eagle symbolising Australia’s gratitude for US help during the Pacific war and the more than 100,000 Americans who died fighting there. America has been hard to predict and slow to react at times, but it has turned up for the free world when it matters most.

Despite some unnerving pronouncements from Trump, over the longer term the US has been more predictable and positive to Australia’s global interests. Australia benefits from American influence, even unpredictable American influence, as it helps maintain the mutually beneficial status quo. Beyond military advantages, our US alliance delivers essential intelligence through the Five Eyes intelligence partnership. The scale and breadth of that partnership would be nearly impossible to replace fully in any new arrangement.

I don’t like to imagine an Australian Defence posture without the US alliance, but I understand the need to consider the possibility. Australia would face an increasingly volatile world without the US as a strategic ally. It is wishful thinking to assume that Russia, China, North Korea or Iran would benignly fill any power void left by America. In such a world, deterring the use of force as a policy option would remain paramount. Deterrence is achieved through credible military capabilities, political resolve and, more often than not, alliances that complicate and overwhelm any opportunistic use of force. Deterrence is the starting point for any defensive national strategy.

A self-reliant Australia would have choices in how it achieves deterrence. The spectrum of deterrence options extends from neutrality to nuclear weapons. The most recognised example of neutrality is Switzerland’s armed neutrality. This is supported by more than 90 percent of its people, while defence costs less than 1 percent of its GDP. Although Switzerland’s approach has worked in a geopolitical sense to date, it is challenged by pressure from allies during crises to align with such policies as sanctions on Russia and by emerging security threats, such as cyber.

Nuclear weapons and the policy of mutually assured destruction have helped ensure there have been no global conflicts since 1945. Russian threats to employ nuclear weapons also appear to have restrained further escalation by other nations in Ukraine. The grim reality is that nuclear weapons remain the ultimate deterrent. However, these weapons are expensive to build and maintain, and a decision to acquire nuclear weapons is not straightforward or guaranteed.

Australia could consider each of these options. How a neutral or a nuclear-armed Australia would be accepted in our region is an open question. Whether the Australian public could be convinced to go down either path is doubtful. Domestic opinion will probably remain somewhere on a middle path. Australia would need greater self-sufficiency or a revised alliance framework without American military capability as a backstop. Defence self-sufficiency would not come cheaply and could not be achieved without a defence budget beyond 3 percent of GDP. It is impossible to determine the precise requirement, but it is sobering to note that Australia’s defence budget in 1942–43 was 34 percent of GDP.

A revised alliance framework could help mitigate costs. It would also bring the advantages of burden-sharing, enhanced mass and breadth, and more significant strategic complications for adversaries. Beyond the US, our traditionally nearest and most predictable military partners are New Zealand and Papua New Guinea. However, they each spend less than 1 percent of GDP on defence. They offer limited practical capability in either scale or deterrence. Indonesia will remain an important partner, but our relationship with it will—for historical and cultural reasons—continue to wax and wane.

Further afield but closely linked to our region and interest in the status quo is Japan. It has a credible military force, and the national and military relationships with Japan are developing strongly. There is good potential for an alternative alliance here. Our relationship with India is less well developed. India’s strategic worldview is also less aligned with ours than Japan’s is. There is potential with India, but building a trusting relationship with it will likely be slower.

We could look at the possibility of working more closely with Singapore, which is well armed for its population of 6 million and is highly skilled in regional statecraft. Our former closest ally, Britain, remains a trusted and capable partner, but it is far from our region and must remain focused on European concerns.

These are a few obvious options for a new alliance framework. No combination will replace the US military’s global reach and scale (including its nuclear capabilities) or capacity for deterrence. Nor could the new alliance replicate the Five Eyes intelligence apparatus in any reasonable timeframe. Australia’s relative security position would be degraded without US military backing.

What, then, would Australia need to prioritise in defence policy if it judged that the US was no longer a reliable ally?

The two key elements of military capability are the ability to shield (defend) and to strike (attack). Each requires a third element, intelligence, to be effective. Australia would need to enhance all three to be more self-sufficient. None would come cheaply in dollars or workforce. Typically, these capabilities take decades to establish. Building them up would require bipartisan agreement through successive government terms of office. In all three, we would be better off maintaining the US alliance through thick and thin. But let’s imagine what we’d do if we were unsure of the alliance, as follows.

Intelligence would require new trusted partners and additional technical and human capabilities for collection and analysis. AI will help but will demand ever-larger supercomputers and data centres. The workforce is specialised and complex to scale, let alone quickly. With national resolve, we could be more capable in a decade.

Concerning shielding, strategically, we would have to decide whether to defend forward (in our near region) or back (on our home shores). Either would have implications for our close neighbours.

Regardless of that choice, we would have to step up preparations that we are already undertaking. Critical infrastructure and locations already require hardening from physical and cyber threats. We need proven air and missile defence capabilities such as Patriot and THAAD ( both, incidentally, US systems) and an ability to integrate them. In a policy and coordination sense, we require a national alert system for air and missile threats and enhanced capabilities to counter sabotage, subversion and espionage within Australia. All this would become more important if the US alliance looked unreliable.

Similarly, additional strike options and weapons holdings are necessary and would be all the more so if we needed to be more self-reliant. The current Guided Weapons and Explosive Ordnance program to expand our domestic munitions-production capability is worthwhile but needs additional funding and acceleration.

Greater reach, particularly to strike targets from the air and sea in the maritime domain, and an ability to fight for protracted periods are key. It would be expensive to buy additional weapons and platforms (such as aircraft and ships) and to make genuine effort to expand domestic production. Increased domestic production is already necessary, and more of it would be needed for greater self-reliance.

Nuclear submarines are essential to our deterrent posture, because they most credibly contribute to intelligence, shielding and striking. Their full cost is still being realised but they do more to complicate an adversary’s strategic and tactical calculations than any other kind of platform. Walking away from the effort to acquire nuclear submarines (if we could) would undermine our greatest deterrent.

If we are determined to achieve greater maritime reach and influence, the debate about Australian aircraft carriers should be revisited. Again, the cost of these ships would be significant, and having an ally that might deploy a few in our region would be very attractive.

Autonomous air and sea systems offer potentially more cost-effective surveillance and shield and strike options. We already need to incorporate more of these with greater urgency. Even more of them would be part of an Australian Defence Force that might have to stand without the US.

We are already in a world where almost nothing happens without some ability to maintain our operations from space. Satellites and the ability to protect them are increasingly essential (and expensive) capabilities in which we are underinvested. A shift away from the US alliance would necessitate very substantial investment here.

These are only a few of the most critical areas for consideration in a more self-sufficient defence posture for Australia. If we broke our alliance with the US for any reason, we would need to increase defence spending enormously to maintain credible deterrent forces.

A final point should be emphasised: a move away from our alliance of more than 70 years—and a military partnership founded in World War I—should not result from the term of office of just one erratic US administration. The ramifications for Australia would be profound.

The US has many chip vulnerabilities

Although semiconductor chips are ubiquitous nowadays, their production is concentrated in just a few countries, and this has left the US economy and military highly vulnerable at a time of rising geopolitical tensions. While the United States commands a leading position in designing and providing the software for the high-end chips used in AI technologies, production of the chips themselves occurs elsewhere. To head off the risk of catastrophic supply disruptions, the US needs a coherent strategy that embraces all nodes of the semiconductor industry.

That is why the CHIPS and Science Act, signed by President Joe Biden in 2022, provided funding to reshore manufacturing capacity for high-end chips. According to the Semiconductor Industry Association, the impact has been significant: currently planned investments should give the US control of almost 30 percent of global wafer fabrication capacity for chips below ten nanometres by 2032. Only Taiwan and South Korea currently have foundries to produce such chips. China, by contrast, will control only 2 percent of manufacturing capacity, while Europe and Japan’s share will rise to about 12 percent.

But US President Donald Trump is now trying to roll back this strategy, describing the CHIPS Act—one of his predecessor’s signature achievements—as a waste of money. His administration is instead seeking to tighten the export restrictions that Biden introduced to frustrate China’s AI ambitions.

It is a strategic mistake to de-emphasise strengthening domestic capacity through targeted industrial policies. Coercive measures against China not only have proved ineffective, but may have even accelerated Chinese innovation. DeepSeek’s highly competitive models were apparently developed at a fraction of the cost of OpenAI’s. A substantial share of the semiconductors used in DeepSeek’s R1 model comprises chips that were smuggled through intermediaries in Singapore and other Asian countries, and DeepSeek relied on clever engineering techniques to overcome the remaining hardware limitations it faced. Meanwhile, Chinese tech giants such as Alibaba and Tencent are developing similar AI models under similar supply constraints.

Even before the DeepSeek breakthrough, there were doubts about the effectiveness of US trade restrictions. The Biden administration’s export ban, adopted in October 2022, targeted chips smaller than 16nm, banning not only exports of the final product, but also the equipment and the human capital needed to develop them. Less than a year later, in August 2023, Huawei launched a new smartphone model (the Mate 60) that uses a 7nm chip.

Even if China no longer has access to the most advanced lithography machines, it can still use old ones to produce 7nm chips, albeit at a higher cost. While these older machines do not allow it to go below 7nm (Taiwan Semiconductor Manufacturing Company is working on 1nm chips), Huawei and DeepSeek’s achievements are a cautionary tale. China now has every reason to develop its own semiconductor industry, and it may have made more progress than we think.

To reduce its own supply-chain vulnerabilities, the US cannot rely on an isolationist reshoring-only approach. Given how broadly the current supply chain is distributed, leveraging existing alliances is the only viable way forward. ASML, the Dutch firm with a near-monopoly on the high-end lithography machines used to make the most advanced chips, cannot simply be recreated overnight.

So far, the US has focused on reducing security risks related to the most sophisticated chips, giving short shrift to the higher-node chips that are needed to run modern economies. Yet these legacy chips (those above 28nm) are key components in cars, airplanes, fighter jets, medical devices, smartphones, computers and much more.

According to the Semiconductor Industry Association, China is expected to control almost 40 percent of global wafer fabrication capacity for these types of chips by 2032, while Taiwan, the US and Europe will account for 25 percent, 10 percent, and 3 percent, respectively. China will thus control a major strategic chokepoint, enabling it to bring the US economy to a halt with its own export bans. It also will have a sizable military edge, because it could impair US defences by cutting off the supply of legacy chips. Finally, China’s security services could put back doors into Chinese-made chips, allowing for espionage or even cyberattacks on US infrastructure.

Compounding the challenge, Chinese-made chips are usually already incorporated into final products by the time they reach the US. If the US wants to curtail imports of potentially compromised hardware, it will have to do it indirectly, tracking down chips at customs by dismantling assembled products. That would be exceedingly costly.

Fortunately, the US does not lack policy tools to reduce its vulnerabilities. When it comes to military applications of legacy chips, it can resort to procurement restrictions, trade sanctions (justified on national-security grounds), and cybersecurity defences. As for expanding domestic production capacity, it can use anti-dumping and countervailing duties to counter unfair Chinese practices, such as its heavy subsidisation of domestic producers.

Chips, and the data they support, will be the oil of the future. The US needs to devise a comprehensive strategy that addresses the full range of its current vulnerabilities. That means looking beyond the most advanced chips and the AI race.

Looking back to look forward, 10 years after the First Principles Review

Exactly 10 years ago, the then minister for defence, Kevin Andrews, released the First Principles Review: Creating One Defence (FPR). With increasing talk about the rising possibility of major power-conflict, calls for Defence funding to increase to at least 3 percent of GDP, and questions raised about Defence’s ability to spend the money appropriated to it, it is the perfect time to assess whether Defence created the sustainable and enduring business model that the Review championed.

The FPR was commissioned in August 2014 by the predecessor of Andrews, David Johnston, as both an election commitment and a response to the 2014 National Commission of Audit’s recommendation for an efficiency review ‘as a pre-condition for setting any new funding profile for Defence under the White Paper’.

Conducted over eight months and chaired by David Peever, the FPR was an end-to-end review of Defence’s business processes, structure and organisation. It was designed to look forward to the challenges Defence would face in the 21st century and structured around the need for a sustainable and enduring business model. The combined effect of the review was supposed to be a more unified and integrated organisation, more consistently linked to strategy and led by its centre.

Key among the FPR’s recommendations were:

—Establishment of a strong, strategic centre to strengthen accountability and top-level decision-making. This would involve a new ‘One Defence’ business model, a streamlined top level management structure, establishment of a strong and credible internal contestability function, and a reduced number of committees;

—The establishment of a single end-to-end capability development function to maximise the efficient, effective and professional delivery of military capability. This included establishing the new Capability Acquisition and Sustainment Group (CASG) with reduced management layers, and transferring accountability for requirements setting and management to the vice chief and the service chiefs;

—The implementation of an enterprise approach to the delivery of services enabling corporate and military operations to maximise their effectiveness and efficiency. This would involve consolidation and standardisation in estate, information management, geospatial intelligence and customer-centric service delivery;

—The creation of a ‘One Defence’ workforce to ensure committed people with the right skills are in appropriate jobs, through the development of a strategic workforce plan for building a highly professional workforce across the Department and the Australian Defence Force; and

—The management of staff resources to deliver optimal use of funds and maximise efficiencies, through stripping back and simplification of overly complicated processes and structures, as well as the introduction of greater transparency, contestability and professionalism.

The review set out an ambitious agenda to ensure that Defence was fit for purpose and able to deliver with the minimum resources necessary. Most of the recommendations were implemented over two years.

At its simplest, the FPR sought to ensure that respective ministers, secretaries and chiefs of defence force would ask themselves every working day: Does this decision (or these options to government) strip back and simplify complicated processes and structures? Do they introduce greater transparency, contestability and professionalism? Do they enforce accountability and leadership?

Against these three questions, sadly, Defence’s implementation did not climb to the ambitions demanded by the review team. Despite the FPR’s intent to dethatch Defence’s hierarchy, devolve accountabilities to the lowest level possible and de-layer the organisation, Defence now has more senior executive service and star-ranked officers and organisational units than it did in 2015.

Committee structures have similarly reverted, though it should be acknowledged that the Investment Committee has been a positive advance for the organisation, though the burden on its members continues to be back-breakingly cumbersome. The behavioural change that is necessary to transform Defence seems to have broken on the rocks of institutional resistance.

The review highlighted ‘an organisational culture within Defence that is risk-averse and resistant to change’. The FPR authors were deeply focused on the risk culture of the organisation and many of their recommendations centred on practical ways to overcome this risk aversion. The simplicity and elegance of their recommendations were certainly lost on the upper floors of the Russell offices during the implementation process.

Defence’s failure to change—with concomitant failure to deliver—represents the organisation’s unwillingness to explore a different concept of risk management. This was also the case with Peever’s subsequent review of Defence innovation in 2021, which called for Defence to embrace a desire to improve (we think—the review was heavily redacted, including all of its recommendations).

Similarly, the concept of a single end-to-end capability development function has not taken root, with the contestability function failing to meet the aim of a ‘robust and disciplined contestability function to provide arm’s-length assurance to the secretary that the capability needs and requirements are aligned with strategy and resources and can be delivered’. Correspondingly, the transfer of accountability to the service chiefs appears to have frustrated the FPR’s aims for an integrated capability management process, in which all the fundamental inputs to capability (including industry support, facilities, ICT and workforce) are managed as a whole.

This has been particularly challenging for the capability managers within CASG, who no longer have all the levers necessary to effectively and efficiently manage the ‘smart buyer’ function. It appears that the common-sense approach to acquiring and sustaining capability—where the full process does not need to be followed when common sense says that the judicious use of a fast-track path is appropriate and risks are acceptable—has struggled. Few are the examples of innovative use of procurement practices, development of fast-track projects, or the creation of novel contractual relationships.

Skill development in CASG, and in Defence more broadly, continues to be a fundamental challenge. The Defence Workforce Plan didn’t emerge until 2024, and we are yet to see whether this plan will effectively deliver the required workforce, identify the critical skills gaps or build those skills and workforce strategies that place ‘the right people with the right skills in the right roles at the right time to deliver Defence’s mission’.

Defence is pursuing yet another strategic reform agenda, set out in Chapter 11 of the National Defence Strategy. It aims to deliver both strategic reform—the transformation of the core elements of Defence that deliver effects to achieve the strategy of denial—and enterprise reform—the transformation of Defence’s enabling elements that drive performance. In doing so, it could do worse than returning to the fundamental first principles that drove the FPR:

—Clear authorities and accountabilities that align with resources (empowering decision-makers to deliver on strategies and plans within agreed resourcing, while also holding them responsible);

—Outcome orientation (delivering what is required with processes, systems and tools being the means, not the end);

—Simplicity (eliminating complicated and unnecessary structures, processes, systems and tools);

—Focus on core business (Defence doing only for itself what no one else can do more effectively and efficiently);

—Professionalism (encouraging committed people with the right skills in appropriate jobs);

—Timely, contestable advice (using internal and external expertise to provide the best advice so that the outcome is delivered in the most cost-effective and efficient manner); and

—Transparency (behaving in a way that enables others to know exactly what Defence is doing and why).

If Australia is to effectively meet the challenges it faces, the government and the public need to have confidence in the combat capabilities of its armed forces, the effectiveness and timeliness of Defence’s decision making and the efficient use of the nation’s treasure.

Peever and his team set up a strong and sensible plan to ensure Defence was able to meet these three demands. Sadly, because of culture, behaviour and bureaucratic malaise, the FPR proved less enduring than the review team—and the Australian public—needed it to be.