Tag Archive for: China

Protecting crops and promoting resilience in Australian agriculture

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Australia has faced continuous and concurrent crises over the past few years. The nation’s resilience has been tested by challenges ranging from Covid-19 to economic coercion and from drought to floods. While we have weathered these challenges, climate change and geopolitical uncertainty, among other factors, ensure we’ll face increasing exposure to crises. As a nation, we’re great at pulling together to respond to a crisis. However, we can’t keep relying just on our strength in responding; more is needed. Threats to resiliency require prompt attention even in our most vital industry sectors, like agriculture.

Secure maritime supply chains and relative geopolitical stability helped to make globalisation irresistible. For the private sector, economic liberalism made offshoring, just-in-time supply chains and centralisation of production the central tenets in the pursuit of growth and profit. For Australia, the market economy seemed to provide all the answers—and who could argue when the nation was awash with ‘rivers of gold’ as a result of high commodity prices?

In Australia, around 22 million hectares of commercial grain crops are planted each year. Despite increasingly frequent and intense weather events, Australia is a net food producer and a global breadbasket. Our high-quality and environmentally responsible food production is world-renowned.

The scale of our agriculture and cropping industry provides food-security assurance to many Australians. Our status as a food exporter of choice provides many Australians with equal measures of confidence in the industry’s economic resilience. However, the sector is precariously reliant on several critical inputs that make it vulnerable to disruption.

Crop-protection products are at the top of the list of critical agricultural inputs. In 2018, Deloitte Access Economics estimated that up to $20.6 billion of Australia’s agricultural output (or 73% of the total value of Australian crop production) could be directly attributed to chemical crop-protection products.

Farmers use crop-protection products to eliminate pests, weeds and diseases that would otherwise damage crops, reduce yields and compromise food safety. These products allow farmers to produce more food on less land.

Over the past several years, Australia has increasingly relied on imported crop-protection products, particularly from China. Chinese producers have invested significantly in new manufacturing capacity. The investment leveraged the direct access they had to raw materials and low labour costs in mainland China. These efforts were also aided in no small part by trade incentives. In the last five years, China has become a major global supplier of crop-protection products and has market control of many chemical precursors.

Only some countries have passively allowed China to dominate the global crop-protection product market. Major grain-producing jurisdictions like the EU, Brazil and the US protect their local manufacturing of crop-protection products by applying tariffs to imports. Australia is the only major grain producer that doesn’t apply tariffs; indeed, it has the lowest barriers to entry worldwide for crop-protection products. For years it has been removing tariffs under free-trade arrangements, which has made it more challenging for local production.

Australia’s crop-protection industry is also vulnerable to unfair trade practices. Since 2003, the Anti-Dumping Commission has implemented measures to prevent China from dumping a widely used herbicide, 2,4-Dichlorophenoxyacetic acid, in Australia. China also continues to expand tax rebates for glyphosate production, which makes Australian products less competitive. As a result, Australia’s domestic capacity for manufacturing and formulating crop-protection products has contracted sharply.

The Australian agriculture sector’s reliance on Chinese products leaves the industry increasingly vulnerable to international trade distortions, coercion and supply-chain shocks. Adverse trade sanctions on these ingredients from China would threaten the viability of Australia’s $40 billion crop market and put the broader $71 billion agriculture industry at risk.

There are other practical challenges arising from a global supply chain for crop-protection products. Australian farmers face unique conditions in terms of soils, weeds, pests and diseases. We need chemical formulations that are specific to our requirements to increase domestic farming production and its ongoing viability. We need constant research and development focused on enhancing existing formulations and developing new products that add value to our agricultural sector’s performance. We also need a focus on formulating products with less toxic and destructive environmental impacts. Generic global formulations, while not without utility, won’t allow for this.

Market forces cannot, on their own, mitigate this vulnerability. Investment capital is like water: it follows the easiest path. Unfortunately for Australia, private investors looking at investing in the manufacture and formulation of crop-protection products in Australia are aware of the challenges. Our high-cost environment, vulnerability to global supply-chain disruptions and unfair international trade practices hardly make such investment attractive. That means the government can’t rely solely on private capital to expand manufacturing.

Government and private-sector collaboration and co-investment are essential to maintaining a resilient sovereign crop-protection manufacturing capability. This investment would strengthen Australia’s food security and national resilience.

For the Australian government, finding and prioritising the right places to invest in national resilience will be challenging. However, shoring up the resilience of our food production to reduce vulnerabilities is a logical place to start.

Government needs to go back to basics to build an Australian rare-earths industry

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Australia’s ability to make meaningful inroads into the downstream processing and manufacturing of critical minerals is hobbled by the downsizing of the country’s established metals processing industry over the past two decades.

The closure of plants, often under the pressure of Chinese competition, has reduced career opportunities in the technical fields that are needed to build and operate the highly complex processing and manufacturing technologies that many critical minerals require.

Perhaps a pivotal moment was BHP’s 1999 decision to shut its Newcastle steel mill and associated rolling plan, concluding it could not compete with much larger and more modern mills in Japan and South Korea.

In 2004, BHP shut its Boodarie clinker plant designed to upgrade iron ore exports and built at a cost of $2.5 billion over the previous eight years. Rio Tinto shut its Hismelt plant, which used innovative technology to produce high-quality pig-iron, in 2008, just three years after it had opened.

Bluescope, which purchased BHP’s major steel assets, shut Australia’s only tin mill at Port Kembla in 2006. In 2011, it shut one of its blast furnaces and coke ovens at Port Kembla along with its hot strip mill at Hastings in Western Port Bay. Australia can no longer manufacture stainless steel or tinplate.

The aluminium industry has also been contracting. Alcan closed its Kurri Kurri aluminium smelter in 2012, while Alcoa shut its Point Henry smelter at Geelong in 2014, along with rolling mills both there and at Yennora. Australia no longer has the capacity to manufacture flat aluminium products.

A number of the major metals processing plants that survive are relatively marginal operations, often battling the threat of closure. Australia’s remaining aluminium smelters at Portland in Victoria, Tomago in New South Wales, Boyne Island in Queensland and Bell Bay in Tasmania have all had to overcome challenges to their future over the past decade.

Glencore’s copper smelter at Mt Isa and copper refinery in Townsville both faced closure in 2020 but were given another three years of operation, which expires this year, after the Queensland government provided a subsidy.

The Ravensthorpe nickel processing plant in Western Australia and the Yabulu nickel refinery at Townsville have both battled closure, though Yabulu is expected to gain a new lease of life after being sold to a Swiss concern in December.

As a result, metallurgy is not a promising career for aspiring engineers. A 2021 review by the Australian Council of Engineering Deans of graduate specialisations concluded that the combined field of mining, metallurgy and petroleum engineering was in ‘clear decline’.

The study found that the number of domestic graduates with bachelor’s degrees dropped by 40% to just 141 in the four years to 2019. The number graduating with master’s degrees had halved to only nine. The figures are better in chemical engineering, and much of the processing of critical minerals draws on that expertise, but the numbers are still tiny. Immediate metallurgy vacancies are being filled by Indian migrants, but that is hardly enough.

The comparison is invidious, but while Australia had a total of 6,900 engineering graduates in 2020, China recorded 1.4 million in 2021, up from 840,000 a decade earlier.

A ranking of the world’s top 100 universities for the study of metallurgical engineering listed 28 Chinese institutions, including 10 of the top 20. The list included just three Australian universities: the University of Queensland (ranked 15th), the University of New South Wales (79th) and Deakin University (86th). UNSW complained in 2018 that enrolments in its mining engineering course had dropped from 120 to six over the previous four years.

China has made the build-up of expertise in new materials a state priority for almost 40 years. China’s focus in the area long predates the realisation that critical minerals, particularly the 17 rare-earth elements, would supplant steel and oil as the drivers of economic development in the 22nd century.

In 1986, China’s then leader, Deng Xiaoping, approved what became known as the ‘863 program’ for high-technology research and development (it was launched in March 1986).

It specified seven fields of common interest to both national security and commercial development that would receive priority research funding. The sectors selected were automation, biotechnology, energy, information technology, lasers, new materials and space technology.

In the 1970s, an eminent Chinese chemical scientist, Xu Guangxian, who had been pivotal in the development of China’s nuclear weapons, invented a simplified process for separating the rare-earth elements from the iron ore obtained from the Bayan Obo mine in northern China.

The first specialist rare-earths research institute was established adjacent to the mine in 1962. In 1987, China established the State Key Laboratory on Rare Earths Chemistry and Physics, under the direct supervision of the Chinese Academy of Sciences. Other state laboratories specialising in rare earths followed.

Today the Chinese Society of Rare Earths, established in 1980 as a research network, boasts more than 100,000 affiliated researchers. Its subcommittees cover every conceivable field of rare-earths research. In 2003 China overtook the United States in the number of scientific papers on rare earths published annually, and it has accounted for more than half the patents awarded for rare earths globally since 2011.

Deng’s aphorism that ‘the Middle East has its oil, China has rare earth’ is often quoted; however, China has moved well beyond an aspiration to monopolise the production of rare earths. It aims for leadership in the production of the full range of goods making use of rare earths—from electric cars to wind turbines, MRI scanners, lasers and rocket motors. China is increasingly turning to imports of the raw or lightly processed rare earths to supply its industry. Although China possesses the world’s largest reserves of rare earths, its production is not enough to satisfy its needs.

As well as the end products, China dominates all the associated inputs, ranging from chemicals and gases to tantalum crucibles and other specialised equipment.

Separating rare-earth elements is complex, with each orebody having a unique combination. It took Australian company Lynas, its shareholders and Japanese bankers eight years of patience to get its plant in Malaysia producing rare earths to the specifications of its customers. Turning rare-earth oxides into metals is also complex metallurgy, and little of it is done outside China.

The Australian government sees building a critical minerals industry as a matter of national economic sovereignty. Its ambition is that, first, precursor products will be manufactured in Australia, and then that Australia eventually becomes a significant producer of technologies like solar panels, permanent magnets and batteries.

As a first step, it is subsidising the construction of a $1.2 billion rare-earths processing plant, extending a non-recourse loan to long-established mineral sands miner Illuka. The plant will be built drawing on French expertise and design.

Perhaps a more urgent priority should be to develop a national strategy to stabilise Australia’s basic metals manufacturing capability so there is some sort of industrial base upon which a new industry could be built. As it is, it’s left to state governments—which may be impelled by the ad hoc need to ‘save jobs’ when closures loom—to step into the breach.

Next month, ASPI, with the Northern Territory government’s ‘Investment Territory’ program, will host the inaugural Darwin Dialogue. The 1.5 track dialogue will bring together government, industry and academia representatives, including delegations from Japan and the United States, to discuss establishing secure supply and value chains for mining, processing and refining critical minerals outside China.

Does China’s rapid rise in the Australian car market pose a security risk?

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The news that China was the fourth largest source of car imports to Australia in 2022 would have come as a surprise to all but the closest observers of the automotive industry. Behind only Japan, Thailand and South Korea, sales of Chinese-made cars were up 61% on their 2021 figure to almost 123,000.

The milestone marked another step in the remarkable rise of Chinese-made cars, which now represent more than one in 10 sold in the Australian market. As recently as 2018, China was the 11th largest source of passenger and light commercial vehicles for Australia, with just over 10,000 vehicles sold. Since then, it has overtaken traditional major players like Germany and the US, and in some months last year was also ahead of South Korea.

While brands like MG, Great Wall Motor, Haval and LDV have become common on Australian roads, it’s not only Chinese manufacturers leading the charge. Australian-delivered Tesla and Polestar electric vehicles are also made in China. And while Australia is often derided as a laggard in the uptake of EVs, Tesla’s Model 3 outsold the long-popular Toyota Camry last year to take the top spot in the mid-sized car segment. Last month it was the third most popular vehicle in the country, behind only the Toyota HiLux and Ford Ranger utes.

Tesla may have had a head start in the EV market, but other makers are already catching up, with Chinese brand BYD already in second spot in Australia’s small but fast-growing EV market. In fact, every one of the top five electric cars sold in Australia in February was made in China. Overall, 6.8% of vehicles sold in the month were electric, while the total number of EVs and plug-in hybrids on Australian roads almost doubled over the course of 2022.

So, why does any of this matter? As cars have become more technologically advanced, they have turned into what are essentially rolling computers. Modern cars are swathed in cameras and sensors and increasingly connected to the internet for ‘over the air’ tasks like updating software. They collect data ranging from location and routes driven to phone contacts and calls made by drivers. Such data could be used to put together a comprehensive picture of a person’s activities, and, if a car’s owner drives to work at a secure facility, for example, potentially pose a risk to national security.

Researchers and hackers have already shown that they can remotely stop the engines and lock and unlock vehicles made by numerous manufacturers, while others have tracked vehicle locations and gathered drivers’ financial details.

The data-heavy trend is only accelerating with the rapid uptake of EVs and development of self- and assisted-driving technology. As with any internet-connected devices, cars should come under scrutiny for the security of their systems—and arguably more strict examination since there are literally lives at stake when it comes to the fallibility of self-driving technology.

Tesla has been the subject of a number of lawsuits, the latest launched in the US last week alleging that the company and CEO Elon Musk overstated the safety and efficacy of its ‘autopilot’ and ‘full self-driving’ systems over several years, creating a ‘serious risk of accident and injury’. It comes after Tesla recalled 362,000 vehicles in the US after the National Highway Traffic Safety Administration found that the beta version of its full self-driving software (not available in Australia) could increase the risk of a crash.

As Wired reported last year, China has banned Teslas from the streets of certain cities for major communist party events, as well as military bases and other locations, out of what’s thought to be concern that the vehicles’ data could be exploited. Beijing has now banned automotive companies from sending that data outside of China.

‘While keeping that data in China significantly heightens the likelihood that it could be used by state security services, Tesla quickly acquiesced to the new rules last year, opening a dedicated data center on mainland China to satisfy the regulations,’ the Wired report said.

It’s unclear what the implications of Tesla data being held in China might be for Australian drivers, but concerns have already been raised that it would fall under China’s 2017 national intelligence law, which compels Chinese citizens and companies to aid the country’s spy agencies if asked.

Reports that ‘tracking devices’ containing SIM cards were found in sealed components in UK government vehicles have highlighted concerns about the prevalence of Chinese-made parts in the wider automotive industry. Such devices could allow a vehicle’s location to be tracked and would have gone unnoticed had searches not been conducted.

Almost all major car companies source parts from China and some, including BMW, Volkswagen, Volvo, Jaguar and Land Rover, have reportedly worked with China Unicom, which is banned in the US, to develop 5G vehicle connectivity.

As ASPI’s Critical Technology Tracker has found, China is already a leader in many of the technologies that will be vital to the future of transportation, including electric batteries and the analytics and artificial intelligence required to process the huge amounts of data vehicles collect and, in time, integrate them into so-called smart cities.

The Chinese car industry has also been linked to forced labour in the Xinjiang region. Authorities are thought to have detained a million Uyghur and other Muslims there since 2017 and, among abuses the UN has found may constitute crimes against humanity, have forced many to work in industries including the production of car parts, tyres and batteries. Volkswagen produces cars for the Chinese market in Xinjiang and has come under fire for maintaining a presence there, though the company says it has seen ‘no sign’ of forced labour in its plants.

With a wide range of new electric and conventional vehicles coming on sale, China is only likely to increase its market share in Australia in the short term. Much in the same way that crash-testing standards are developed, it’s up to parliament and regulators to implement guidelines that will keep drivers safe on the road—and that means ensuring that cars and their increasingly connected systems are as protected as possible from compromise. Consumers also need to be aware of the potential risks to themselves, their families and their data, and consider whether a vehicle that’s made in China—regardless of the manufacturer—is something they are willing to lay down their hard-earned cash for.

Washington needs to ditch its America-first approach to critical minerals

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Over the past few years, Covid-19, climate change and Chinese economic coercion have catalysed rapid global economic, foreign relations and national security policy changes. In Australia, the public discourse on sovereignty, national capacity and secure supply chains is one area where this change is particularly evident. These discussions have more recently prioritised the supply and value chains for critical minerals and rare-earth elements because of their links with advanced and low-emissions technologies.

In some countries, these policy challenges have given rise to responses based on a new version of economic nationalism. Sovereign critical mineral and rare-earth resilience is beyond the reach of any one country. Unilateral responses will not produce secure or reliable supply chains. Indeed, economic nationalism may actually aggravate the problem.

A critical mineral is a metallic or non-metallic element that is essential for modern technologies, economies or national security and has a supply chain at risk of disruption. Geoscience Australia lists 26 critical minerals ranging from graphite to magnesium.

The rare earths are a subset of critical minerals and comprise 17 metals—15 elements from the lanthanide series and two chemically similar elements, scandium and yttrium. All have unique properties that make them vital for various commercial and defence technologies, including batteries, high-powered magnets and electronic equipment.

Chinese economic coercion and ham-fisted domestic policy have highlighted the risk of disruption to global rare-earth and critical mineral supply chains.

Chinese foreign ministry spokesperson Zhao Lijian was right when he said: ‘No one should use the economy as a political tool or weapon, destabilise the global industrial and supply chains or punch the existing world economic system.’ Yet that is precisely what the Chinese Communist Party has been doing for the past decade with rare earths.

In 2010, the CCP effectively restricted rare-earth exports to Japan after a Chinese fishing trawler collided with a Japanese coastguard vessel near the disputed Senkaku Islands.

More recently, it threatened to limit rare-earth supplies to US defence contractors, including Lockheed Martin, over US arms sales to Taiwan.

But the problem isn’t just about economic coercion; the CCP’s domestic policy has had other serious consequences. In 2021, the central government began actively monitoring energy consumption across China. Later that year, Shaanxi province fell victim to the country’s ‘double control’ when it failed to meet energy consumption targets. The CCP swiftly shut down high-energy-intensity industries, including aluminium production. An international supply crisis ensued, and prices have soared.

China’s coercive actions and domestic policies represent unacceptable economic and resilience risks to rare-earth and critical mineral supply chains. Diversified supply chains are now needed to mitigate the economic and national security risks associated with disruption.

Japan has led the way in responding to China’s dominance of the rare-earth market. Its investment in Australian company Lynas Rare Earths should provide confidence in an alternative, resilient supply chain. And its approach reveals the superiority of collaborative responses over economic nationalism.

Other nations, like the US, have been slower to recognise the benefits of a coordinated response, showing early signs of a preference for an America-first approach. However, in doing so, the US may deny itself and its allies the opportunity to achieve resilience through approaches that engage with such concepts as near-shoring and friend-shoring.

The landmark US Inflation Reduction Act, or IRA, is a case in point. The act is intended to catalyse investments in domestic manufacturing capacity; encourage procurement of critical supplies domestically or from free-trade partners; and jump-start research, development and commercialisation of leading-edge technologies such as carbon capture and storage and clean hydrogen. It was passed by the US Congress and signed into law by President Joe Biden in August 2022.

Many of the IRA’s tax incentives are aimed at quickly scaling up domestic production and domestic procurement. For example, to unlock the full tax credit for an electric vehicle, a percentage of critical minerals in the vehicle’s battery must have been extracted or processed in the US or in country that is a US free-trade partner. The percentage will increase by 10 percentage points each year, from 40% in 2023 to 80% in 2026.

The IRA, even with its reference to free-trade partners, creates advantages for domestic US rare-earth and critical mineral supply and value chains that will impact Australian industry.

In its submission to the IRA, Australia encouraged the US to consider policy measures that acknowledged Australia’s role as a secure, reliable and trusted free-trade partner that can support achieving the IRA’s objectives.

The IRA could be a disincentive for North American companies to enter into mineral offtake or processing agreements with Australian companies or battery manufacturers. BHP CEO Mike Henry argues that the IRA ‘has improved quite markedly the attractiveness of the US as an investment destination’. He also notes that the act has ‘stimulated other countries into the race, and they’re now trying to compete in their own way’. The rapid growth of the US sector is also likely to intensify competition for labour, materials and capital.

In the face of great-power competition, geostrategic uncertainty, more regular global disruption and domestic narcissism, the US must avoid reflexively responding with economic nationalism. Recent reports have indicated that the US government is exploring the development of ‘narrowly focused trade pacts on critical minerals with Japan and the UK, in addition to talks with the European Union’.

Australia is investing heavily in growing its manufacturing capability and should be a partner of choice for the US industry to support diversified and resilient supply chains. Given Australia’s important role in the Indo-Pacific and its enormous potential to supply rare-earth elements and critical minerals, the US should be looking in our direction as a matter of priority.

Next month, ASPI, with the Northern Territory government’s ‘Investment Territory’ program, will host the inaugural Darwin Dialogue. The 1.5 track dialogue will bring together government, industry and academia representatives, including delegations from Japan and the United States, to discuss establishing secure supply and value chains for mining, processing and refining critical minerals outside China.

State of Southeast Asia Survey 2023: It takes three to tango

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A tango for two is an intricate, demanding affair, often daunting even for the most skilled dancers. In the case of ASEAN, the grouping must tread carefully in order to navigate two separate tangos, one with China and the other with the United States, to ensure a peaceful, stable and secure Southeast Asia. But China and the United States are increasingly loath to venture onto the same dance floor, making it difficult for ASEAN to find a way to balance the interests of both powers while still ensuring regional security and economic cooperation.

After decades of peaceful economic cooperation, a tectonic geopolitical shift starting with a low-boil US–China trade war four years ago has now developed into moves to decouple the world’s two largest economies amid calls for ‘China containment’. This is against a background of greater militarisation after the invasion of Ukraine, rising protectionism and stronger nationalistic sentiments around the world.

In the report on the ISEAS – Yusof Ishak Institute’s latest State of Southeast Asia Survey, such concerns are reflected even more starkly. Almost 60% of Southeast Asians are concerned with unemployment and economic recession this year, with 57.1% saying that climate change was their top concern. But what was most striking was that increased military tensions became one of this year’s top three concerns, tied at third place with widening socioeconomic gaps and rising income disparity. Southeast Asian respondents’ frustrations with ASEAN, the region’s premier organisation, are also more palpable: 82.6% said that it is slow and ineffective in coping with the rapidly changing geopolitics, compared to 70.1% last year.

Parallels between Ukraine and Taiwan were drawn soon after Russia invaded Ukraine in February 2022. Speaking at the Shangri-La Dialogue in June last year, Japanese Prime Minister Fumio Kishida warned, ‘Ukraine today may be East Asia tomorrow.’ Nearly half of the respondents expressed serious concerns over the invasion, and at least a third said that they were somewhat concerned. The dotted lines between Russia and China can’t be missed, given the rather untimely proclamation of a ‘no limits’ partnership between Russian President Vladimir Putin and Chinese President Xi Jinping just days before the invasion and China’s refusal to condemn Russia after the invasion.

Perhaps most telling of all the findings in this year’s survey, alongside concerns of increased military tensions, are worries over a potential conflict in the Taiwan Strait and other unresolved disputes with China. In a question on hostilities in the Taiwan Strait, 43.3% of respondents said that such an event could destabilise the entire region. Another 28.7% are worried that ASEAN countries may be forced to take sides. On the question of their country’s responses to such a conflict, 45.6% said that their governments should oppose the use of force using diplomatic measures. Another third of respondents felt that remaining neutral in a conflict between China and Taiwan would be wise. There was little appetite for sanctions or demonstration of support for either China or Taiwan. These reactions provide a bellwether to how the region is thinking about a potential conflict, but ultimately it will boil down to who the provocateur is, the circumstances surrounding the provocation and whether the US and/or its allies are involved.

China remains the undisputed economic power in Southeast Asia, but its economic-influence rating declined from 76.7% in 2022 to 59.9% this year. The decline is likely due to China’s long zero-Covid policy through most of 2022. The significant margins between China and the US mean that it is unlikely that China can be unseated in the foreseeable future (the US scored 10.5% in 2023, just a smidgen higher than its score of 9.8% the previous year). Misgivings about China’s economic strength continue to dominate, with 64.5% of the region saying that they were concerned about its influence. When it comes to exercising political and strategic influence in the region, China is again top-ranked at 41.5%, albeit with a significant drop from 54.4% the year before. Worries about China exercising this form of influence remain high at 68.5%, albeit dropping from 76.4% last year. Xi’s foreign policy moves such as taking coercive measures against trading partners and employing strong-arm tactics in the South China Sea may have added to elevated concerns.

Assessment of the Biden administration’s level of engagement with the region is fairly positive, with 39.4% of respondents saying that engagement has increased or increased significantly. This is a marked difference compared to the 2020 results for the Trump administration, where a clear majority of 77% of Southeast Asians felt that engagement had decreased significantly. But the US continues to fare badly in the economic sphere, with only 10.5% of Southeast Asians viewing it as carrying some clout. The US’s unwillingness to inject any meaningful economic agenda (beyond the Indo-Pacific Economic Framework for Prosperity at this point) has affected its ability to project greater influence in the region. This is contrasted with the views that it can be a reliable security partner; confidence levels increased from 42.6% last year to 47.2%. The US’s security-driven agenda has not gone unnoticed by Southeast Asia and is in fact welcomed by more respondents in Indonesia, Singapore and Vietnam.

When it comes to specific US- or China-led initiatives such as the Indo-Pacific Economic Framework or the Global Security Initiative, the region tended to be agnostic, with 41.8% saying they were unsure about the IPEF and 44.5% expressing little or no confidence in the benefits of the GSI. A third of those with negative views about the IPEF said that US–China competition would worsen, while another 24.2% said that the IPEF would hasten the US–China decoupling process. Among those with little or no confidence in the GSI, a third were concerned that it would increase tensions between the US and China, and another third feared that ASEAN would be forced to take sides. It’s worth noting that a higher proportion of respondents (61.1%) chose the US over China (38.9%) as compared to 2022 in a hypothetical question that forced such a choice.

More established minilateral initiatives such as the Quad garnered greater appreciation, with 50.4% saying that the Quad was ‘positive and reassuring’ for the region. Despite lingering misgivings over the threat to ASEAN centrality and ASEAN-led mechanisms, more than a third felt that the Quad would be complementary to ASEAN, and another third said the Quad would be beneficial to the region. The region’s reception to the Quad may have warmed after 2021 with the promise of practical, tangible benefits, but there is still a modicum of wariness towards Beijing’s response.

Levels of trust in India increased across all ASEAN countries (except Cambodia) in this year’s results. Overall trust in India jumped from 16.6% last year to 25.7% this year, and distrust ratings dropped in tandem. The prevailing reason given was that India was seen as a responsible stakeholder in international law (25.4%) but also that its military power could be an asset for global peace and security (18.2%).

These findings are not hard to explain. India has maintained a quiet position of neutrality on the Ukraine–Russia war due to its longstanding relationship with Russia. India has refused to condemn Russia with the other Quad members, yet its willingness to demonstrate pushback with Prime Minister Narendra Modi telling Putin that ‘today’s era is not of war’ shows India’s ability to exercise foreign policy independence. Historically, the global south recognises India’s de facto non-alignment leadership. In the case of India’s position on climate change, for instance, the global south found cover in India’s refusal to accept the phase-out of coal at the UN Climate Change Conference (COP26), which bought the developing world time in the global energy transition.

So, if China and the US won’t tango, what are ASEAN’s choices? Pragmatic as always, ASEAN’s favourite choices for partners remain the European Union and Japan. The top choice of a ‘third party’ to hedge against US–China strategic rivalry remained the EU at 42.9%, and Japan was the second choice at 26.6%. But attention appears to have been drawn to India this year as a surprising third choice (11.3%) overtaking Australia. Perhaps ASEAN’s reason for looking to India can be explained in its use of ‘strategic ambiguity’ in foreign policy decisions and the strategic counterweight that it can offer. But it remains to be seen if India will ask for ASEAN’s dance card. Even if it did, can India move in lockstep?

Marines chief says deterring China will take ‘everything in the cupboard’

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Deterring an aggressive China will take creative use of all the art, science, diplomacy and other capabilities the United States and Australia can muster, says the general commanding the US Marines.

In a discussion at ASPI, US Marine Corps Commandant David Berger notes that ‘we haven’t been in a competition at this level since I was a kid.’

On the threat posed by China to Taiwan, Berger’s view is that it is going to take ‘everything in the cupboard’ to prevent a conflict. ‘When the other side has stated openly: “We will do this if they don’t voluntarily reintegrate with China, if Taiwan doesn’t come back, then we have no choice”, then we’d better look in the cupboard and bring out everything and make sure it’s meshed together. And then mesh all of our tools with all of your tools and figure out how to use all of that to prevent a conflict,’ Berger says.

‘If there’s art in there, science in there, a lot of diplomacy in there, we’ll need all aspects of it. We’re pretty capable. Both countries have done this before, and we will do it again. It would be hard to imagine that’s possible if we were starting from scratch, but because we’ve got 100 years working together this is all possible.’

Later Berger tells The Strategist the US and Australia must be able to deter a nation from carrying out damaging action, short of open warfare, in the so-called ‘grey zone’. There, conventional deterrence will not be enough because there’s not an open conflict, but there’s definitely a competition going on, he says.

‘I would agree with the notion that it’s much more than military and you have to have a clear understanding of what the other side’s goals are, and that they may make incremental advances, half a step at a time. Deterrence may be a calculus of how to prevent those half steps from happening,’ Berger says.

The general has just completed his second visit to Australia in less than a year and says that indicates how important the bilateral defence relationship is. You use your time where it matters most, he says, especially in a rapidly evolving security environment. The alliance is built on personal friendships and professional relationships that are not easily replicated, he says.

Because the US Marine Corps is inherently a joint force, it works with many elements of the Australian Defence Force. ‘I think we’re headed in the same direction in terms of reassurance of allies and partners in the region, and deterring the main challenges to both of our countries.’

With that comes modernisation which both countries are managing in parallel.

Berger’s sweeping redesign of Marine Corps war-fighting concepts has brought a strong focus on keeping maritime choke points open to allow commerce to flow freely, and to allow military forces to manoeuvre. ‘If you can’t manoeuvre through that, then you’re restricted,’ he says. A key marines contribution to the joint force is to keep control over such key terrain.

At an ASPI masterclass on space and national security last year, futurist Jeffrey Becker described a military mindset where things continue to be done in a certain way because they’ve always been done in that way. He said that imposed an inertia that could stop military organisations adapting fast enough to keep up with technological advances. Becker spoke of the need for the military to be open-minded to the advantages of, for instance, equipping small independent units with the latest communications, robotics, artificial Intelligence, laser systems, electric vehicles and the like to make them more lethal and mobile.

Berger says the notion of empowering small tactical units to give them an outsized influence will ‘absolutely matter’. It means giving such units increased training and capability at lower tactical levels than when he was a young officer—possibly moving those capabilities from battalion to platoon level.

‘So, the focus for us is not just the technical capabilities. It’s the training. It’s the marine himself or herself, the level of decision-making that they can have, the capabilities that we can deliver to them—and do they have the experience to make the right tactical decisions. That’s going to be the magic of it.’ The Ukraine conflict, Berger says, has demonstrated how much small unit leadership matters.

Berger says marines will operate forward to remain alongside allies and partners and will be mobile and difficult to detect and track. ‘We’re staying forward in a way that can paint a picture of what’s in front of us and hopefully prevent the other side from collecting [intelligence] against us.’ To survive, such units need to be able to lower their signatures, be mobile and operate alongside allies in a way that makes it difficult to target them and to discern what their intentions are. ‘The key is to do all that in an austere expeditionary environment.’

He says sophisticated equipment ranging from drones to surveillance devices and logistical tools that once existed in small numbers are now plentiful, and available at the squad level. ‘It requires a level of decision-making at a lower level that was held at higher levels before, but we’re plenty capable of that as long as we train in the way we’re headed right now.’

Australia will purchase the HIMARS mobile rocket launcher that has proved so effective in the hands of Ukrainian forces fighting the Russians. Berger says the ADF will find it particularly valuable when combined with a helicopter or fixed-wing aircraft to move it. ‘Long-range precision weaponry you can relocate quickly gives you a great advantage.’

On lessons to be learned from the Ukraine conflict, Berger notes that the war began when Russia invaded the east of the country and annexed Crimea in 2014. It has demonstrated, he says, that ‘logistics matters, small unit leadership matters, the ability to see the other side and understand what they are doing matters. The basics, camouflage, deception, tactical mobility, all that matters. The importance of information, who can gain an advantage in moving it and hiding it and distributing it matters. All those I think are going to be lessons learned that all our forces will apply.’

In terms of challenges the marines will face in future conflicts, Berger says a crucial one will be handling logistics, a priority that had not changed over 100 or 200 years. ‘You skip past that step, you know you’re in trouble. So, plan for logistics up front, especially in a region like this where there are large distances to cover over great expanses of ocean.’

Aside from that, says Berger, the close relationship between the US and Australia would be crucial in a conflict. ‘I think we have to work very hard at understanding each other’s capabilities and how they can complement each other, which is why we’re here—to get an update from the Australian Defence Force. Where are you now? Where are you headed? We have to understand both of our capabilities and how we can mesh them together in a complementary way.’

The roles of artificial intelligence and autonomous systems are still being determined, Berger says.

While some focus on autonomous weapons, other such systems could move supplies and transport patients. ‘If it can help us solve logistics, why would we not work hard on the application of autonomy to logistics at the tactical level?’

For two centuries, US marines have gone to war on ships and Berger says that is unlikely to stop despite the sophistication of weapons ranged against the surface fleet.

‘It’s not the end of ships, absolutely no,’ says Berger. ‘The art of it, I think, will be finding ways so that the ship, as part of a formation, becomes harder to track, harder to detect, harder to identify, and sometimes that’s as simple as getting lost in clutter.’

The US needs to work very closely with Australia to use and to protect space-based systems crucial to timing, positioning and navigation on operations, Berger says. ‘This this is an area of contest between nations where we have to figure out the rules of the road in advance and work very closely with Australia, the UK and other nations that have space-based capabilities in terms of how to protect, how to make sure that we preserve the capabilities we need.’

US and Australian forces will learn from each other on space-based command and control networks and share ideas on redundancy in systems to ensure there’s enough resilience built in to avoid a single point of failure.

And sometimes, he says, it makes sense to reveal a capability to a potential enemy as part of the process of deterrence. ‘You bet’.

Despite the rhetoric, China’s economy is struggling

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The Chinese government seems to have fallen back in love with economic growth. As the chaotic exit from its zero-Covid-19 policy has unfolded—leading to tens of thousands of deaths (at least)—the country’s leaders have been eager to profess their undying devotion to robust economic recovery. But lip service alone will get China nowhere.

Last month’s central economic work conference—the annual meeting where the top leadership of the Chinese Communist Party sets the economic-policy agenda for the next year—established growth as the government’s top economic priority in 2023. In the weeks that followed, the public was treated to a spectacle not seen in years, as provincial governors fell over themselves to echo the CCP’s commitment to growth and reassure jittery private investors and entrepreneurs.

The political motivation for this shift is obvious: the CCP hopes to restore public support, after popular frustration with draconian zero-Covid restrictions gave way to dissatisfaction with the botched exit from the policy. But it will mean little unless the government translates its pro-growth rhetoric into action.

To some extent, it already has. From easing borrowing restrictions on ‘high-quality’ property developers to supporting demand for housing, measures aimed at breathing new life into the beleaguered real-estate sector are high on the government’s agenda.

But such efforts are far from sufficient. As important as the property sector is to China’s GDP, a (moderate) real-estate rebound alone cannot drive a comprehensive economic recovery, let alone a return to rapid growth. Likewise, the government’s other short-term stimulus measures—such as monetary and fiscal expansion, including infrastructure investment—will likely provide only a temporary boost.

Zero-Covid restrictions left deep scars on China’s economy. Before the pandemic, the country boasted 44 million micro and small enterprises, which accounted for about 98% of all registered businesses and some 80% of jobs outside the state sector. More than 90 million individuals were self-employed.

But zero-Covid changed all that. Because lockdowns were not accompanied by direct financial assistance for micro and small firms, many were driven out of business, placing a serious drag on growth.

Geopolitical pressures—not least the tech war with the United States—are compounding the impediments to Chinese growth. America is more committed than ever to restricting China’s access to semiconductors and is applying diplomatic pressure on the Netherlands to block the Dutch company ASML from selling a wider range of its chip-production machines to China. The possibility of new American sanctions on China cannot be ruled out, especially now that Republicans control the US House of Representatives.

Meanwhile, China’s implicit support for Russia’s war against Ukraine has soured its relations with its second-largest trading partner, the European Union. Some in Europe are now following the US example and calling for an economic ‘decoupling’. Already, many European companies are seeking to diversify their manufacturing supply chains—including by sourcing alternative inputs and shifting some production—in order to reduce their reliance on China.

As long as geopolitical tensions persist, the business climate will remain uncertain, discouraging investment and reducing manufacturing employment as foreign companies exit the market. Finding ways to improve relations with the West is thus a prerequisite for economic recovery.

To be sure, the Sino-American relationship is probably beyond repair at this point. Nonetheless, China could improve the diplomatic atmosphere by limiting its support for Russian President Vladimir Putin, as well as its sabre-rattling vis-à-vis Taiwan, thereby assuaging investors’ fears of a Chinese invasion or naval blockade of the island.

At the same time, China must launch a credible reform program. Under President Xi Jinping’s leadership, China’s government has embraced orthodox communist ideology and sought to increase the party’s dominance over society and the economy. This approach—exemplified by tighter social control, the establishment of CCP cells in private firms and provocations against China’s most important trading partners—has severely damaged business confidence.

If the CCP is serious about growth, it must recommit to former leader Deng Xiaoping’s most important political reforms, such as meritocracy, mandatory retirement and term limits. Increasing the legal system’s independence is particularly urgent, in order to reassure private entrepreneurs that their personal safety and property will be protected.

In terms of economic policy, China must privatise inefficient state-owned enterprises and create a more business-friendly regulatory environment. Measures aimed at supporting small businesses are also essential to a lasting economic recovery.

Despite all the talk about growth, China’s government has not unveiled any such plans. And nothing in official government rhetoric indicates that a fundamental change of direction—like Deng’s decisive break with Maoist ‘class struggle’ in 1979—is being considered. So, don’t believe the hype: China’s economy may be sputtering for a while yet.

Peak China?

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The failure of China’s zero-Covid policy is leading to a reassessment of Chinese power. Until recently, many expected China’s GDP to surpass that of the United States by 2030 or soon thereafter. But now, some analysts argue that even if China achieves that goal, the US will surge ahead again. So, have we already witnessed ‘peak China’?

It is just as dangerous to overestimate Chinese power as it is to underestimate it. Underestimation breeds complacency, whereas overestimation stokes fear; but either can lead to miscalculations. A good strategy requires a careful net assessment.

Contrary to conventional wisdom, China is not the world’s largest economy. Measured in terms of purchasing power parity, it became larger than the US economy in 2014. But PPP is an economist’s device for comparing estimates of welfare; even if China someday surpasses the US in total economic size, GDP is not the only measure of geopolitical power. China remains well behind the US on military and soft-power indices, and its relative economic power is smaller still when one also considers US allies such as Europe, Japan and Australia.

To be sure, China has been expanding its military capabilities in recent years. But as long as the US maintains its alliance and bases in Japan, China won’t be able to exclude it from the Western Pacific—and the US–Japan alliance is stronger today than it was at the end of the Cold War. Yes, analysts sometimes draw more pessimistic conclusions from war games designed to simulate a Chinese invasion of Taiwan. But with China’s energy supply exposed to US naval domination in the Persian Gulf and the Indian Ocean, it would be a mistake for Chinese leaders to assume that a naval conflict near Taiwan (or in the South China Sea) would stay confined to that region.

China has also invested heavily in its soft power (the ability to get preferred outcomes through attraction rather than coercion or payment). But while cultural exchanges and aid projects could indeed enhance China’s attractiveness, two major hurdles remain. First, by indulging in ongoing territorial conflicts with neighbours such as Japan, India and Vietnam, China has made itself less attractive to potential partners around the world. Second, the Chinese Communist Party’s domestic iron grip has deprived China of the benefits of the vibrant civil society that one finds in the West.

That said, the scale of China’s economic reach will remain important. The US was once the world’s largest trading power and bilateral lender. But now, nearly 100 countries count China as their largest trading partner, while only 57 have such a relationship with the US. China has lent US$1 trillion for infrastructure projects through its Belt and Road Initiative over the past decade, while the US has cut back aid.

China’s economic success story undoubtedly enhances its soft power, especially vis-à-vis other developing and emerging markets. And its ability to grant or deny access to its domestic market gives it hard-power leverage, which its authoritarian politics and mercantilist practices allow it to wield freely.

Where does that leave us in assessing the overall balance of power? Importantly, the US still has at least five long-term advantages. One is geography. The US is surrounded by two oceans and two friendly neighbours; China, by contrast, shares a border with 14 other countries and is engaged in territorial disputes across the region.

The US also has an energy advantage. Over the past decade, the shale revolution transformed it into a net energy exporter, whereas China has become ever more dependent on energy imports.

Third, the US derives unrivalled financial power from its large transnational financial institutions and the international role of the dollar. Only a small fraction of total foreign-exchange reserves is denominated in renminbi, while 59% are held in dollars. Though China aspires to expand the renminbi’s global role, a credible reserve currency depends on it being freely convertible, as well as on deep capital markets, an honest issuing government and the rule of law. China has none of these, making the renminbi unlikely to displace the dollar in the near term.

Fourth, the US has a relative demographic advantage. It is the only major developed country that is currently projected to hold its place (third) in the global population ranking. Seven of the world’s 15 largest economies will have a shrinking workforce over the next decade, but the US workforce is expected to increase by 5%. China, meanwhile, will suffer a 9% decline in its working-age population—which already peaked in 2014—and India will surpass it in terms of population this year.

Lastly, America has been at the forefront in the development of key technologies (bio, nano and information) that are central to this century’s economic growth. China, of course, is investing heavily in research and development, so that its technological progress no longer depends solely on imitation. It has managed to become competitive in fields such as artificial intelligence, where it hopes to be the global leader by 2030. US efforts to deprive China of the most advanced semiconductors may slow this progress, but they will not end it.

All told, the US holds a strong hand. But if it succumbs to hysteria about China’s rise or complacency about its ‘peak’, it could play its cards poorly. Discarding high-value cards—including strong alliances and influence in international institutions—would be a serious mistake.

One important issue to watch will be immigration. Around a decade ago, I asked former Singaporean prime minister Lee Kuan Yew whether China would surpass the US in total power any time soon. He said it would not, because America can draw upon and recombine the world’s talents in ways that simply are not possible under China’s ethnic Han nationalism.

For now, Americans have ample reason to feel optimistic about their place in the world. But if the US were to abandon its external alliances and domestic openness, the balance could shift.

Editors’ picks for 2022: ‘How firm is Xi Jinping’s grip on power?’

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Originally published 14 October 2022.

Rumours that President Xi Jinping was under house arrest amid a military coup in China—apparently driven by Falun Gong–linked social media accounts known for spreading factually problematic information—spread widely in late September. The available facts told most analysts that a coup probably hadn’t occurred, so it wasn’t surprising when Xi resurfaced on 27 September. That said, analysts shouldn’t be quick to deny that Xi’s position in power is more precarious than it might appear. No one knows for sure the degree to which his position is absolute. And neither, perhaps, does Xi himself. He may have positioned himself as ‘dictator for life’, but the forces of control are dynamic and he has survived in part because he doesn’t make that assumption himself.

Ahead of the 20th National Party Congress, kicking off on Sunday, we have been reminded that from the Chinese Communist Party’s perspective, power isn’t inevitable. We saw ramped-up prosecutions, continued calls for loyalty and warnings of colour revolutions. None of this is necessarily a sign of weakness or strength. The constant cycle of crisis or potential crisis is something the Chinese Communist Party also derives power from. It is a means for mobilising the party and the public, and for justifying intensified security measures and crackdowns. The threats are not imaginary.

A good rule of thumb for assessing political rumours from China is to consider them based on the balance of probabilities. If we’re going to talk about Xi’s power, it’s best to use the structure of power as a framework and shape the questions from there. As suggested to me by my colleague Peter Mattis, there are five main elements to being the foremost leader in the People’s Republic of China: gun, paper, pen, knife and blood.

The ‘gun’ is the People’s Liberation Army. The PLA is the party’s armed wing—not the country’s army—and is the guarantor of the party’s power. As Mao Zedong famously wrote, ‘Political power grows out of the barrel of a gun.’

The ‘paper’ is handled by the central paper-pushers in the General Office of the Central Committee and the Organisation Department, which play an important role in the party’s management of itself.

The ‘pen’ is the propaganda apparatus. The gun defeats enemies, but the pen, as Mao noted, unites the people (under the leadership of the party) and attacks and destroys the enemy. It also defines and interprets party orthodoxy.

The ‘knife’ is the internal security apparatus (the Ministry of State Security and Ministry of Public Security) responsible for social and political control.

And finally, the ‘blood’, representing the core families of the party. They hold massive wealth, much of which sits outside of China, and command their own loyalists by extension.

Mao controlled these elements as he rose to power and as he stayed in power after the forming of the PRC. As chronicled in Gao Hua’s meticulous study of Mao’s seizure of power, he began with his base in the Red Army and steadily moved to control how the central party machinery functioned and the propaganda organs. Xi has gone after each of these areas, it would appear with great success.

Early in his tenure, Xi began an anti-corruption campaign targeting the PLA. Two former vice-chairmen of the Central Military Commission were singled out for particular scrutiny: General Xu Caihou, who died of cancer in 2015 a year after being put under investigation, and General Guo Boxiong, who was sentenced to life in prison. Another PLA officer, General Gu Junshan, former deputy director of the PLA General Logistics Department (since rebranded as the Logistic Support Department), was given a suspended death sentence.

As analyst Kevin McCauley wrote in 2015, much of the early anti-corruption campaign and personnel changes focused on logistics and political officers responsible for money, personnel, materiel and construction projects. The significance of these posts is even more crucial in a political context, because the party’s ability to rely on the PLA to mobilise in a crisis requires political loyalty as well as preparedness for military action.

At the same time, Xi put himself in charge of huge PLA reforms with the establishment of the Leading Small Group on Deepening Reform of National Defence and the Military in 2014. He oversaw the establishment of the PLA Ground Force headquarters, the PLA Rocket Force and the PLA Strategic Support Force in 2015, and directed a major PLA restructure that began in 2016.

Xi was quick to focus on ensuring that the propaganda apparatus was on his side. Propaganda controls party dogma and helps Xi to project an image of strength, domestically and internationally. Huang Kunming, a Xi ally, was appointed head of the Central Propaganda Department, under the CCP’s Central Committee, in 2017. During Xi’s tenure, the department has tightened its control over media, with the State Administration of Press, Publication, Radio, Film and Television being moved from the State Council to the Central Propaganda Department’s control in 2018. This strengthened Xi’s ability to define how the party’s theory about achieving national rejuvenation suggested Beijing’s direction in light of real-world events.

Like every party general secretary, Xi has his supporters in key positions, like the person running the CCP General Office. He also has enough control of the party discipline and anti-corruption organisations to use them against political opponents—as he clearly did in July with the sentencing of white-glove financiers for his political opponents and in September with the sentencing of a number of officials linked to the Ministry of Public Security.

To control the knife, Xi launched a rectification campaign against the political–legal apparatus last year. One of the most senior officials taken down in the anti-corruption campaign, Zhou Yongkang, had most recently been head of the Central Political and Legal Affairs Commission, an area of the party-state apparatus that had resisted Xi’s efforts to politicise everything. Xi had either neutralised people or put his own in places of political power. Zhao Kezhi, who held the post of minister of public security, was recently replaced by Xi ally Wang Xiaohong. Zhao had earlier been replaced by Wang in the concurrent role of party secretary in the Ministry of Public Security.

Xi has generated the most resistance from the CCP’s elite families. The question here is whether the old power-broker system continues to function and has enough influence to unseat someone like Xi. It’s possible that the system has changed so fundamentally that the party elders can no longer act as a check on Xi.

The video message of Song Ping, the elderly representative of a significant PLA faction, is one of the most dramatic signs that the party’s bloodlines may be opposed in the current moment. (It is worth noting that signs of such dissatisfaction go back years.) As commentator Dimon Liu pointed out in June, criticisms of Xi by individuals writing from within the PRC have been published. None of those people are known to have been arrested, which is only possible if they are being protected by someone powerful in the PRC.

Yet, despite his consolidation of power, Xi has clearly made some mistakes.

The dynamic zero-Covid policy has created widespread dissatisfaction and left a trail of economic damage. Its disruptions have encouraged companies to think more directly about diversifying supply chains and forced new conversations about quality of life.

Xi’s decision to enter a ‘no limits’ partnership with Russia on the eve of its invasion of Ukraine put the PRC on the other side of an issue that has united the US and Europe. Although European countries are grappling with the energy crisis brought about by their dependence on Russian gas, new conversations are beginning about dependence on PRC supply chains.

Xi’s pressure campaign on Taiwan has closed off pathways for peaceful unification and encouraged the US to more explicitly state its support for Taipei. Last month, President Joe Biden for the fourth time stated that America would defend Taiwan if the PRC launched an unprovoked attack.

Xi also has doubled down on state-owned enterprises leading the economy, refusing to look at rebalancing the economy towards consumer demand. Now the headwinds are rising quickly and economic forecasts look increasingly grim.

So, the control solidified early on could be wearing down, and we are left to ask, by how much? At what point does dissatisfaction become opposition? Have generational change and Xi’s anti-corruption drive disrupted the familial and patronage networks that gave party elders power in the past?

For the CCP, the party congress is not when and where major political and personnel decisions are made. It is the platform the party uses to formalise and announce what already has been decided in backrooms. It isn’t always clear what those decisions might be until they become known to the world. It’s even possible that a palace coup and political manoeuvre forcing Xi out could go unmarked until the party congress provides the opportunity to tell the world.

In uncertain times when the rules have been cast out, regional specialists should be more open to possible discontinuities. As former director of US Central Intelligence Robert Gates noted, ‘Area experts, country experts, are sometimes the very last to see a revolutionary change coming, because the history of most countries is a history of continuity. In discontinuity, they find too many reasons why that won’t happen.’

The history of the CCP is littered with political crises, the most dangerous of which involved  questions of leadership succession and economic policy. Even if the coup rumours were a false alarm generated by wishful thinking, the current dynamics should have us systematically assessing potential discontinuities because of the potential for another crisis to emerge that tests the resilience of the CCP. Xi’s behaviour shows that he knows that the struggle for power is never over. We should take note of this in our own thinking.

A year of economic warfare

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The world has witnessed the outbreak of economic warfare this year, quite unlike anything seen since the end of World War II.

The machinery of economic sanctions, which has been honed over decades against minor dictatorships, has been turned by the West on Russia with a ferocity never before applied to a major economy.

Russia has been using its role as the world’s largest energy exporter to strike back, curbing supplies to Europe as the northern winter approaches in the hope that freezing its citizens will persuade their governments to cut support for the Ukraine.

At the same time, Washington has choked the flow of US technology to China and is trying to enlist allies to do the same, with the objective of maximising the West’s technological lead and, implicitly, retarding China’s economic development.

China has not yet found ways to retaliate against the US but is continuing its campaign of economic intimidation against smaller nations, including Australia and Latvia, by closing its markets to selected exports.

After decades during which the rapid growth in international commerce was seen as a desirable goal in itself, the outbreak of economic hostility among major powers marks a structural break.

One lesson from the economic warfare of 2022 is that it doesn’t bring quick results. Another is that stopping a country from importing can be more disruptive than stopping it from exporting. That’s because imports find their way into so many nooks and crannies across a nation, whereas export industries tend to be fairly concentrated. And perhaps a third is that commodities are less effective as economic weapons than high-end technology.

While most economists, including those at the International Monetary Fund, expected that the loss of around 40% of Europe’s pre-Ukraine-war gas supply would result in a recession, the latest figures show that manufacturing production across the European Union is at record levels, with nearly all EU countries producing more in September 2022 than they did a year earlier.

A Financial Times newsletter reports that an astonishing 75% of German industrial companies using gas for their primary energy source have been able to reduce their gas use without having to cut production. Nearly 40% say they could cut their usage further without sacrificing production. Similarly, in Italy, industrial gas consumption has dropped 24% below the 2019–2021 average, but industrial output has increased.

There’s a widespread view in Europe that the gas shortages are encouraging a faster shift away from fossil fuels and towards renewables. There’s also confidence that Europe has accumulated sufficient gas reserves to see it through the winter, although the International Energy Agency warns that it may be harder for Europe to replenish those reserves ahead of the 2023–2024 winter if the supply cuts continue.

Europe and the West have been targeting Russia’s energy exports. Russian coal, which used to supply around 18% of the global thermal coal trade, has come under sanctions, meaning ships carrying it can’t get insurance or trade finance from European or US institutions. The West is also imposing a cap on the price of Russian oil and is planning to do the same on Russian gas. The oil price cap of US$60 a barrel, intended to stop Russia from profiteering from the war, has so far had no effect because the price for Russian oil has fallen below that. A softening world economy means that the loss of Russian supplies is no longer squeezing the oil price. Gas and coal prices have also eased, although they remain elevated.

From Moscow’s perspective, the West’s economic sanctions haven’t brought the Russian economy ‘to its knees’ as some expected. The IMF’s latest forecast is a 3.4% contraction this year and another 2.3% in 2023. Both Russian businesses and consumers are making do without supplies from the West. As an excellent Financial Times report shows, smuggling is occurring on a large scale through former Soviet states like Kazakhstan and Armenia, and manufacturers are being innovative in replacing Western supplies. A forklift manufacturer now uses motors made in Belarus rather than Japan. The microchips that used to control tractors have been replaced by simpler chips from Asia. It’s harder to improvise with servers and other high-end electronics, and smuggled goods don’t carry warranties or after-sales service.

In the longer term, consumers and businesses will adjust to the more limited choice of goods and poor product quality, as was the case in the Soviet Union. The FT report cites a Russian oligarch saying, ‘There will be more paper in the sausage.’ Russia’s imports are down by about a quarter. It is estimated that most Russian industry relies on imports for at least half its inputs. Russia will also probably never regain access to European markets for its piped gas and it will take many years to divert it to Asia.

The impact of US efforts to sever China’s access to Western technology will also take time to emerge. There has been a profound shift in Washington’s attitude towards global business. Open trade served US strategic interests during the great expansion of US multinationals from the 1950s to the 1980s, helping cement the US’s place as a global power. The US is now less convinced that, for example, the operations of Apple or Tesla in China are fundamental to its interests. Businesses will always have an influential voice in Washington, but the US is more concerned with the advantages, both economic and strategic, from technological leadership than with the benefits that flow from offshore investment by US multinationals, which was the logic underpinning Pax Americana in the decades after World War II.

As US National Security Advisor Jake Sullivan explained in September, the US had always sought to stay a step ahead of rivals on technology, but that was no longer enough. ‘Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.’ The US national security statement released the following month set an objective for the US of ‘outcompeting [China] in the technological, economic, political, military, intelligence, and global governance domains’.

The export controls imposed in October prevent US companies from selling advanced microchips or chipmaking equipment to China, while a growing number of Chinese technology companies have been placed on the US ‘entity list’, which prohibits any US sales at all. The new US CHIPS and Science Act prevents any tax credits from going to companies that build or expand fabrication operations in China.

The effectiveness of this strategy will turn on how successful China is at developing its own indigenous capacity and on the success of the US in gathering the support of key allies like South Korea, Japan, the Netherlands and Taiwan. The Netherlands is home to ASML Holding, the most important manufacturer of high-end chip-making equipment, and is under pressure to strengthen its controls on exports to China. At the G20 meeting in Bali last month, Chinese President Xi Jinping sought out Dutch Prime Minister Mark Rutte.

Xi’s G20 meeting with Prime Minister Anthony Albanese is yet to be followed by any relaxation of Chinese import barriers, although the end-of-year visit to China by Foreign Minister Penny Wong has raised hopes.  China would in particular like to resume access to Australian coal. Although the barriers have caused some pain in the wine and lobster industries, other exporters have largely diversified away from China.

Much like the Ukraine war, it’s hard to see what would bring a return to the days of economic peace.

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