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Chinese Communist Party leaders use ‘collective study sessions’ to identify emerging technologies that they can harness politically. Given the merging of civil and military industrial goals in China, the international community needs to recognise the challenges this strategy poses.
Huawei, one of tech war’s main supporting actors, recently completed the rollout in China of its new operating system, HarmonyOS 2.0, which aims to reduce China’s dependence on US technology. During his presidency, Donald Trump had turned that dependency into an existential threat.
While HarmonyOS is a success story in terms of Chinese innovation and scientific and technological progress, it also gives the party-state significantly more power in cyberspace.
Unlike its US rivals, iOS and Android, HarmonyOS requires third-party developers to go through an extensive identification process involving identity cards, passports and bank credentials. These developers, the growth drivers of such platforms, will be rendered, at least to some extent, subject to Chinese law regardless of where they live. That will enable Chinese authorities to bring previously unassailable individuals within the range of Chinese law by threatening them with sanctions, fines or bans. It will also give China increased leverage over newly developing cyber territories.
HarmonyOS’s strict developer identification process can be seen as part of the general regulatory wave targeting big tech in China. But it’s also a reflection of China’s successful transition towards a ‘government-steered market economy’. Over the past decade, the CCP has gained the ability to formulate, implement and evaluate government interventions. This ‘industrial policy’ is now managed through new institutions, interlocking policies and the strong integration of China’s tech companies. The policy has been tailored to reinforce the CCP’s legitimacy and power by developing emerging technologies and appropriating science and technology.
The CCP’s Politburo Standing Committee has long staged ‘collective study sessions’ (集体学习) to introduce the leadership to new ideas while establishing geopolitical contexts, new vocabulary and rhetorical frameworks. For two decades, these visions have been implemented throughout the party and across provinces through policies and laws, institutionalising party doctrine in emerging technology.
The cornerstone for HarmonyOS to expand the party’s sovereignty over cyberspace was set during the 38th collective study session on the development of internet technology in January 2007. Then president Hu Jintao called for the ‘construction and management of cyber culture’ to ‘spread [Chinese] advanced culture’ and ‘the advanced culture of socialism’. He discussed a ‘purified network environment’ (净化网络环境) and a new ‘order for the dissemination of online information’. That study session was followed by the banning of Google and Facebook within China, the expansion of China’s ‘Great Firewall’ and tighter online censorship.
Under Xi Jinping, government interventions have become more potent and Chinese cyber sovereignty has accelerated. China’s national security interests were extended to cyberspace in 2017.
The independent innovation capabilities of Chinese tech giants are suffering as military and civil industries are drawn much closer together and as accountability to the state for search engines, instant messaging services, websites, online payments, e-commerce and software increases.
Xi has also strengthened the signalling power of CCP study sessions to reach those developing new technologies. He has put more such technologies—big data, artificial intelligence and blockchain—on the study agenda than his predecessors and has made sure that the meetings are managed by his close allies, such as Ding Xuexiang, director of the General Office of the CCP, and Jiang Jinquan, director of the Central Policy Research Office.
Once portrayed as proof of the party’s learning capacity, study sessions are now a feature of a personality cult used by Xi to signal his technological vision to reinforce the party’s hold on power. His interest in ‘studying’ emerging technologies shouldn’t be taken simply as an acknowledgement of their economic gravity; it’s also a recognition of their central function in China’s strategic development.
The CCP holds between one (2002) and 10 (2006, 2015) ‘collective study sessions’ for its top ranks every year. In 2017, the head of the party ordered that a new emerging technology must be studied by the leadership every year. In contrast, Xi only put the overall development of science and technology on the agenda once between 2012 and 2016.
CCP collective study sessions by topic, 2002 to 2021
Source: CCP database of collective study sessions.
Xi declared in 2019 that blockchain would not only reduce cross-departmental and cross-sectoral data islands, but also help China exert ‘normative, discursive and rulemaking power’ through the application of the ‘rule of law’. His words caused a redirection of Chinese blockchain projects towards government services.
Similarly, in 2020 Xi identified quantum technology as an ‘emerging sector of strategic importance’ for ensuring ‘national security’ in which China needed to ‘seize commanding heights of international competition’. Two years before that, he declared AI important to China winning the global science and technology race by ‘becoming the pack leader’ (头雁).
China’s increased governmental steering of the economy has to be seen as inseparable from Xi’s vision for emerging technologies and will continue to have global implications. HarmonyOS’s strict registration requirements could soon include every user of the operating system, not just developers. Given Huawei’s strong and briefly world-leading share in the mobile phone market and China’s integral role in 5G mobile technology and the development of the internet of things, this could soon have an impact on a significant part of the global digital economy.
Accordingly, China’s efforts to standardise emerging technologies should be eyed with caution. That includes Beijing’s growing influence over the governance structures themselves (at Europe’s expense) and over efforts towards regional cooperation on standardisation, including the standardisation of technologies such as 5G and autonomous vehicles. Otherwise, tech standards will be developed rather disharmoniously to meet the primary political interests of the Chinese party-state.
When China last hosted the Olympics, in the summer of 2008, the country was a vastly different place.
The Beijing 2008 Summer Games was China’s coming-out party to the world. Less than two decades after People’s Liberation Army troops crushed pro-democracy protests at Tiananmen Square, China was eager to show the world how much it had changed.
The country opened itself up to journalists to travel more freely without advance clearance. International websites blocked behind the Great Firewall of censorship were temporarily made accessible. And Chinese officials, anxious to make the games a success, even cleaned up the notoriously awful air by closing factories and limiting cars on the roads.
And in a break from normal practice, the communist-run government even set up three designated ‘protest zones’ in city parks for demonstrators to lawfully gather, albeit with prior police approval.
That was then. The Beijing Winter Games this year will bear no resemblance to the 2008 Summer Games. That’s because of how much China has changed in the intervening 14 years, and particularly since the ascendance to power of President Xi Jinping.
Under Xi, China is far richer, more powerful, more confident and more influential on the global stage. Xi’s China is no longer eager for international recognition of its success and prowess or craving world’s approbation; it is more impervious to Western reproach. The new China under Xi makes no secret of its ambition to be the dominant power of the next century, and it doesn’t hide its disdain for the West and specifically the US, which is seen as a power in decline.
The self-confidence appears justified, on the surface at least.
A graphic compiled by the Washington Post, showing China statistics from 2008 to 2022, gives some hint of the reasoning behind the hubris. In 2008, China’s GDP was US$4.6 trillion; today it’s $18 trillion.
China was an export-driven economy with more than half its population living in rural areas. The internet was in its infancy and no iPhones were sold in the country. Now, domestic consumption, not exports, is the main economic driver and the majority of the population is urban. China is a vast market for Apple products and Chinese tech companies like Alibaba and Tencent have emerged as global giants. China is now second to the US in the number of billionaires.
China’s military spending has also skyrocketed from an estimated US$78 billion in 2008 to more than US$250 billion today, in current dollar terms. When the 2008 Summer Olympics were held, China had 73 miles of high-speed rail lines; today, the network is 25,000 miles, and its ambitious Belt and Road infrastructure program promises to expand lines even further into Europe and Southeast Asia.
Where once China’s dictum was to keep its head low and bide its time, a new generation of Chinese diplomats, dubbed ‘wolf warriors’ after a Chinese action movie hero, have made a point of aggressively countering any perceived slight or criticism, often with smash-mouth insults and chest-thumping bravado more common to Pyongyang than Beijing. And the country’s more assertive voice is amplified by the increasing global reach of its international media as they push China’s story to the world.
China’s newly assertive diplomats and its state media are backed up by an army of patriotic young nationalists known as ‘little pinks’, who grew up thoroughly indoctrinated in the Chinese Communist Party ethos. When anyone—an American athlete, a basketball team general manager, a fashion brand or an actor like Keanu Reeves—dares to speak out or tweet about an issue that goes against China’s official policy, they will be subjected to an online boycott and savaged by the army of internet trolls.
China’s hubris began immediately after the 2008 Summer Games, with the global financial crisis that wreaked havoc on banking systems and exposed debt weaknesses in the US and Europe—but which China escaped relatively unscathed. When Obama administration officials (including then–vice president Joe Biden) trekked to China seeking Beijing’s help to stabilise global finances and bail out the euro, they were typically greeted with lectures about the need for America to get its debt in order and protect China’s investment in US Treasury securities.
In a speech last year, marking the 100th anniversary of the CCP, Xi sent an unmistakable message that he sees this era as ‘the great rejuvenation of the Chinese nation’, and no country can stand in China’s way. ‘The Chinese people will never allow any foreign forces to bully, oppress or enslave us,’ Xi declared. ‘Anyone who dares try to do that will have their heads bashed bloody against a Great Wall of steel forged by over 1.4 billion Chinese people.’
China’s sense of pride and its move to regain its historic greatness were further boosted by the global coronavirus pandemic. Covid-19 was first detected in Wuhan, whose residents suffered horrendously in the early weeks of 2020 and where the pandemic response was mishandled. But China has since been seen as successfully containing the virus’s spread through its often harsh ‘zero Covid’ strategy that has seen millions of people locked in their homes and mass testing. Western countries, particularly the US and UK, are seen as having botched their handling of the pandemic, leadings to tens of thousands of unnecessary deaths.
Now China is hosting a Winter Olympics under strict Covid protocols that will largely isolate the athletes and other attendees from ever mixing with ordinary Chinese and prohibit them from venturing beyond the enclosed Olympic Village. Foreign visitors to Beijing won’t be able to wander the city and marvel at the futuristic skyscrapers because China doesn’t need to show off to outsiders.
Unlike 2008, this time there is no opening of travel, no easing of the Great Firewall of internet restrictions and no designated protest zones, because protests now are effectively outlawed. Where China once treated foreign journalists with some wary respect, wanting to show off the country’s accomplishments, today journalists are treated like the enemy; reporters from major outlets like the New York Times, the Wall Street Journal and the Washington Post had their visas revoked and were effectively expelled.
Will the 2022 Winter Olympics be a success? Most likely so, because Xi has ordered it to be, and China has shown it can pull off large and awe-inspiring feats, like hosting an international sporting event during a pandemic.
But is the self-confidence justified? That’s a more difficult question. Beneath the veneer of a rising power lie pressure points, and uncertainties.
China is facing a demographic time bomb. Various government schemes and exhortations have not been able to reverse a declining birthrate, which hit a record low in 2021. Domestic debt—of local governments, corporations and households—is a growing and unchecked problem. The property sector is wobbly and building infrastructure no longer yields the growth it once did. China’s insistence on clinging to a zero-Covid problem appears unsustainable and a drag on the economy, and China is facing a major growth slowdown.
Xi this year is about to embark on a third five-year term in power, indicating a return to personalised, strongman rule that had been jettisoned in the last three decades of collective leadership and a rotating presidency. Such a concentration of power in the hands of one man in the past has led to more tumult than stability.
And for a country at the peak of its power, China remains remarkably prickly and reactive to even the slightest hint of criticism.
So expect a well-organised Olympics, because staging big events is what China does best. But this time the mood seems more anxious and uncertain, because of Covid, economic crosswinds and other potential pitfalls. China will once again project the image of a powerful nation. What the leadership may not want the world to see is that behind the curtain, the emperor has no clothes.
‘Serving as minister of foreign affairs is not an easy task,’ said Joseph Wu, Taiwan’s foreign minister, in conversation with ASPI Executive Director Peter Jennings. ‘Somebody joked that the president must dislike me very much to put me in this position.’
Wu expects his job to get even more difficult over the next year as China continues to intensify pressure against Taiwan on a range of military, economic and diplomatic fronts.
The military pressure is certainly growing more palpable. ‘If you look at the types of military exercises they’ve been conducting, it’s becoming more complex, more suited for modern warfare, and more threatening than ever,’ said Wu. ‘Chinese air exercises around Taiwan increased to almost 1,000 sorties in the last year.’
China has also chalked up some wins in its ongoing efforts to isolate Taiwan diplomatically, with Kiribati, Solomon Islands, Panama and Honduras recently switching their diplomatic recognition from Taipei to Beijing.
And, like Australia, Taiwan has been on the receiving end of Chinese embargoes on its agricultural products.
But a new phase in Beijing’s Taiwan campaign has recently seen it moving to sanction countries that support Taiwan.
‘I’m sure Australian friends have noticed the case of Lithuania. The Lithuanian government decided to have some relations with Taiwan by allowing Taiwan to open up a representative office in Vilnius. The way the Chinese are putting pressure on that small country in the Baltic—it’s unbelievable’.
But that’s not the end point, said Wu. ‘China is targeting European corporations doing business in Lithuania. This is a secondary sanction. Now, the European countries realise that it is a very hostile act against the EU, not just against Lithuania.’
Given the hostility that such moves are generating against China, Wu said that he remained confused about Beijing’s end game. ‘Sometimes I wish that I worked in Zhongnanhai in order to understand why they would do all this, because it’s not in line with their interests in the long run’.
But for Taiwan, China’s actions only make sense in the broader context of its ambitions.
‘If you look at their international operations, we come to a very sober conclusion, that authoritarianism is trying to expand its influence globally, beyond Taiwan. What they have done to Hong Kong, it’s very obvious. Hong Kong is a symbol of freedom and liberalism, politically and economically, but they have put it to an end by imposing the national security law.’
Here Wu points out the mixture of coercive military and economic diplomacy employed by China across the globe. For example, according to the Japanese government, China has dramatically increased its incursions into disputed territories in the East and South China Seas. It also has ramped up tensions in its border dispute with India, has deepened its political and military influence in Africa, and is actively trying to neutralise the EU in any disputes through the economic promise of its Belt and Road Initiative.
Therefore, Wu says Taiwan very much welcomes not just stronger bilateral relationships with his country, but also Australia’s closer relationship with Japan and the AUKUS agreement. All these developments are important in signalling to China that democracies are coming together to push back against the expansion of authoritarianism.
So, what is Taiwan’s plan of action over the next year to counter China’s campaigns of influence and intimidation?
Any strategy will succeed or fail on Taiwan’s diplomatic capacities. Wu explained that, in the first instance, Taiwan wants to impress upon the international community that it is not a troublemaker, that it wants to be a ‘force for good in the world’. He’s been heartened that US decision-makers have supported this view.
But in more than words, Taiwan has been trying to make contributions to the international community wherever possible.
‘We want to be a positive force in making contributions to the fight against terrorism, to preserve religious freedom, to extend democracy and human rights to the areas beyond Taiwan, and to fight against those authoritarian forces like North Korea by joining international sanctions.’
Working with partners to provide international assistance to developing countries is necessary to keep building Taiwan’s reputation. ‘It is very important for Taiwan to shine internationally, to have that Taiwan model of international assistance to other countries,’ said Wu.
Taiwan is especially interested in working with Australia on capacity-building in the South Pacific.
But especially critical is securing Taiwan’s supply of the weapons it needs for self-defence. So securing US support into the long term is Wu’s key priority.
‘We have been working very closely with the United States, as you can imagine. The US has been providing Taiwan not only with defensive weapons, but also with maintenance capabilities, services and training. That has substantially strengthened our defence capabilities.’
But Taiwan has also been collaborating with the US on asymmetric defensive options against increasing Chinese military pressure, said Wu.
In addition, Taiwan is trying to strengthen its reserve forces so that ‘we not only have the first layer of defence, but also the second layer and the third layer of defence’.
Wu also underlined the value of the strengthened relationship with Australia.
But if there was one thing that Australia could do for Taiwan in the next year, it would be to help it join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, known as the CPTPP.
‘Of course, Taiwan is trying to participate in the CPTPP. We have a strategic objective in this, and we are very glad to hear that the Australian decision-makers are very supportive. If Taiwan can join the CPTPP, I’m sure Taiwan–Australia relations would even be closer.’
Few regions in the world wobble the tension of the tightrope governments walk between raw interests and principle in foreign and strategic policy more than Central America. And few have mattered less to Canberra over the decades, generally for sound, realist reasons going to Australia’s negligible commercial and strategic interests there.
Nonetheless, it warrants a momentary excursion into the region’s exotic, intriguing if often tragic environs because it matters so much to the United States, and because of China’s changing relationship with it. This is especially evident in the spate of defections from Taipei—which until recently had enjoyed the recognition of virtually all the region’s nations—to Beijing, reshaping Central America’s economics and international policy settings.
The notion of giant powers pursuing spheres of influence might be an uncomfortable and unacceptable one for Australians thinking about China in the Western Pacific or Russia in its near abroad. But anyone who doesn’t think that Washington has long regarded Central America in this light, and often with terrible consequences, hasn’t been paying much attention to history and international affairs.
The Mexican dictator toppled in the 20th century’s first great revolution, Porfirio Diaz, best expressed the region’s relationship with Washington in describing the state and fate of his own North American nation. ‘Poor Mexico,’ he lamented, ‘so far from God, and so close to the United States.’
Over the past two centuries, numerous Central American and Caribbean leaders, from tyrants to democrats, have had ample cause to say the same. The region’s history is replete with repression, gross injustice, revolution and civil war, corruption, gang violence and femicide, and of such commercial exploitation and institutional capture that the term ‘banana republic’ sprang from it. US complicity in many of these dark episodes—refuge from which, incidentally, has seen Australia become home to the world’s third largest Salvadorean population outside of El Salvador itself—has been all too evident and far too extensive to document here.
That said, Washington’s record in the region is also not without beneficence, idealism and practical benefit. Historically, its two-way trade, investment flows and development assistance have dwarfed all others’. The US is the principal source of much-needed remittances from its large Central American diaspora. Its support for democratic reforms and better governance has often been strong and practical. US administrations have used carrots at least as often as sticks. It has helped remove thugs from power, just as sometimes it has propped them up.
China’s relationship with Central America, however, has historically been insignificant. As recently as 20 years ago, China’s volume of trade with all of Latin America amounted to just US$12 billion. Central America’s share was paltry.
Yet much has changed, especially since 2007, when Costa Rica became the first Central American nation in the millennium to break from Taiwan and recognise the People’s Republic of China. The move saw Costa Rica benefit from higher trade flows with China, increased Chinese investment and a new national sports stadium, among other infrastructure and development projects.
Panama offers a similar story. In 2001–02, its exports to the PRC totalled US$2 million; its imports from China amounted to just US$41 million. After recognising the PRC in June 2017, however, the Panamanian government opened negotiations on a free-trade agreement and became the first in the region to sign up to the Belt and Road Initiative. Two-way trade accordingly multiplied by a factor of 22. Panama’s exports to China rose to US$33 million by 2019, its imports from China mushroomed to 27 times that figure.
Panama’s BRI affiliation promised much and soon delivered. Twenty-one major infrastructure projects have either happened or been touted, ranging from container ports and terminals linked to the Panama Canal to a fourth bridge over the waterway, rail lines, electricity transmission lines and telecommunications. Chinese commercial interests were soon sniffing around Panama’s largest commercial operation, a copper mine that ranks among the world’s largest (owned by a Canadian company with foundational links to Australia).
More recently, El Salvador and Nicaragua have abandoned Taipei. In the former’s case, this happened in August 2018 under El Salvador’s left-wing government, led by Salvador Sanchez Ceren, a former guerrilla leader who had waged a civil war against a US-backed junta from 1979 to 1992.
In 2019, seeking US President Donald Trump’s favour, Sanchez Ceren’s successor, the self-styled ‘coolest dictator in the world’, Nayib Bukele, initially flirted with reinstating ties to Taiwan. But whatever hopes of greater transparency and good governance his ascension to power might initially have raised have largely been dashed. As President Joe Biden’s administration has increasingly bridled at his blatant authoritarianism and alleged deals with criminal gangs, Bukele has lurched towards a more accommodating Beijing, signing deals for US$500 million worth of development financing for everything from a new sports stadium to a national library and his cherished plan to turn part of El Salvador’s Pacific coast into ‘Surf City’.
Bukele also endorsed an earlier agreement for China to build a new deep-water port in the Gulf of Fonseca to service a special economic zone and logistics hub originally designed to privilege Chinese business interests (and well-connected Salvadoreans). He is rolling out 5G technology in a manner set to benefit Huawei and looking to boost bilateral trade.
The only surprising aspect of Nicaragua’s recognition of the PRC last December is that it took so long. The country’s president, Daniel Ortega, another former guerrilla, first cut ties with Taiwan in 1985 after overthrowing the US-backed Somoza regime and winning the subsequent election. His successor reverted to Taipei in 1990, however, a move that Ortega chose not to overturn when he was re-elected in 2006. Initially careful to maintain constructive ties with Washington and his own business community, he grew increasingly autocratic, which culminated in the bloody suppression of anti-government protests in 2018. Already rocky in the Trump era, Nicaragua’s relations with the Biden administration have deteriorated badly.
The quid pro quo is again set to be Chinese promises of infrastructure projects and higher trade flows (albeit with a massive imbalance in China’s favour). It seems unlikely, however, that it will come with a commitment to revive a grandiose US$50 billion scheme to construct a new cross-isthmus canal that a Chinese billionaire set in train before his own economic fortunes nosedived, and which the US Treasury has alleged has been used by Ortega’s family and cronies to launder money and acquire land.
The most recent Central American nation to flag defection is Honduras, whose departing president, Juan Orlando Hernadez, enjoyed some support from Trump in exchange for suppressing migration flows, despite highly credible allegations of his involvement with narco-traffickers. After winning the presidential election last November, president-elect Xiomara Castro raised the prospect of recognising the PRC. Since then, however, she has come under US pressure to maintain the status quo. Both US Vice President Kamala Harris and Taiwanese Vice President William Lai are slated to attend Castro’s inauguration on 27 January, which suggests that Taiwan might yet stay in favour in Tegucigalpa provided the right arrangements for financial and developmental support can be made.
Indeed, the PRC’s failure so far to nail down a Honduran deal is just another pointer to the limits of its reach in Central America. If Beijing offers distinct benefits to corrupt, undemocratic or proto-autocratic regimes like those of Ortega and Bukele that are facing the Biden administration’s sanctions or censure, it has a far more difficult task in maintaining influence over administrations in the more democratic and accountable polities of the region, especially Costa Rica and Panama.
And for different reasons, it’s hard to see Guatemala—whose president seems to be intent on keeping Washington onside by, inter alia, proposing to introduce 30-year jail terms for people-smuggling—and its local rival, the British Commonwealth nation of Belize, dumping Taipei for Beijing.
At times, China’s own clumsy behaviour makes that objective harder still to attain, as its failure to build a vast embassy on a strategic location at the entrance of the Panama Canal exemplifies. The symbolism of such a construction was not only intolerable to Washington, which lobbied successfully to stop it. It also aroused nationalist sentiment among Panamanians, for whom the Panama Canal and its zone—until 1999 the property of the US—stand as the exemplar of national sovereignty.
China, in short, is posing significant new challenges and competition for the US in its sphere of influence, and Washington has grounds for viewing Beijing’s behaviour cautiously, especially when it comes to port construction and telecommunications. Most of the region welcomes the economic opportunities that China’s influx of development financing and cheap goods can bring. They may well enjoy the emergence of a counterweight of sorts to a traditional hegemon whose pre-eminence has often been far from benevolent, not least in its Reagan and Trump incarnations.
But the PRC is hardly about to displace the US as the most consequential external actor in Central America, however many deep-water, potentially dual-use ports and football stadiums it might construct. Cooler than ever, Bukele may have made his country the first to adopt bitcoin as an official currency—with prospectively disastrous results—but the nation’s actual currency remains the US dollar. Others have their own currencies, but the greenback is accepted happily in marketplaces everywhere bar Costa Rica, a privilege the renminbi is not about to gain. And US embassies dwarf those of China (and everyone else), even in Managua.
Many Central American authorities (especially the region’s US-educated elites) are not oblivious to the price that Beijing too often also exacts, not least their countries’ dramatically widening trade imbalances. States like Panama and Costa Rica are only too aware that China is wooing them not just to degrade Taiwan and profit commercially. They understand their place in China’s geostrategic and geoeconomic calculus, and most have no interest in flaring problems with Washington, with all the consequences that can follow, by conceding too much to its great competitor.
Even Ortega, should Nicaragua ever gain a Chinese-built deep-water port of its own, will probably think twice before allowing Beijing’s navy to use it for anything other than symbolic purposes.
Remarks by Australia’s prime minister and defence minister and discussions in Washington about the future of US security policy in the Taiwan Strait highlight a growing consensus among like-minded partners about the need to respond to any Taiwan contingency. Unfortunately, these conversations often only explore the contours of a future conflict and too rarely discuss what the US, Australia and others can do to support Taiwan pre-bellum.
Washington and Canberra have a variety of diplomatic and economic tools they can use now to mitigate Chinese coercion and build a coalition for a Taiwan contingency. US and Australian leaders can use these tools to create a broader global consensus that supports Taiwan’s defence, favours closer ties with Taipei, protects the international status quo, and clearly communicates the costs to China of military action against Taiwan.
This should start with the members of the Quadrilateral Security Dialogue—Australia, India, Japan and the US—better articulating the group’s military commitments in the region. While the Quad partners have so far opted not to focus on the security dimensions of their partnership in public, they should cooperate, to the extent possible, across the intelligence, information and cyber domains to deter malign behaviour.
Similarly, the Australia, the UK and the US can use the AUKUS deal to highlight the benefits of closer hard security cooperation and discuss how each country can support Taiwan’s defence in any future conflict scenario. This will help the Quad partners understand how they can field forces necessary to deter China and/or help defend Taiwan, and will signal to smaller countries in the region the Quad’s ability to meet their security needs.
The US and Australia can use the promise of a more engaged Quad to foster closer ties between Taiwan and the international community. China has successfully pressured many countries to abandon their recognition of Taiwan’s government in favour of full relations with Beijing. Several countries have ended their official relationships with Taipei since 2016. Isolation makes Taiwan more vulnerable to Chinese coercion and reduces the international community’s ability to mobilise against Beijing should conflict unfold.
Despite steps taken by some in the US Congress to address this issue, more can be done. A broader coalition would signal to China that Taiwan’s future isn’t just of interest to a few concerned stakeholders; Beijing’s relationship with the international community is at risk. That may not lead China to reconsider military action against Taiwan, but it could help like-minded countries organise an appropriate response to any unilateral action taken by Beijing in the Taiwan Strait.
Deeper ties between Taiwan and the international community would also provide space for countries with historically close ties to the US and Australia to reconsider their engagement on this issue. Freedom-of-navigation operations in the Taiwan Strait by the United Kingdom and France represent welcome action by capable partners, but more is needed. A growing pro-Taiwan international consensus may finally prompt capitals around the world to consider wielding the more serious economic tools in their policy toolboxes.
These options, however, would need to be more than sanctions. Beijing would likely be willing to weather the effects of sanctions (no matter how costly) if it thought they would eventually end. Washington and Canberra would need countries to fundamentally rethink their economic and financial relationships with China. The European Union, for example, imports more goods from China than from any other country. If the EU were to reconsider its trade relationship with China in a Taiwan contingency, it might give Beijing pause.
The US and Australia would need to reassess how they engage with Russia vis-à-vis China as well. Russia and China enjoy a warm relationship and share a similar distaste for America’s view of the international order. Yet Moscow may find reason to cooperate with Washington, Canberra and others on this specific issue. Leaders in Moscow wouldn’t want to trade the current international system for a new order that continues to leave Russia as a ‘junior partner’. Russia will likely never trust any effort led by the US, but anything that would give Moscow an incentive not to support Beijing in a Taiwan contingency should be considered.
None of these diplomatic initiatives on its own would cause Beijing to abandon any plans it might have to attack Taiwan. However, they all capitalise on America’s and Australia’s comparative advantage relative to China in a Taiwan conflict scenario—their extensive network of allies and partners. The US, Australia and like-minded states have the means to impose a variety of costs on China.
However, given the asymmetry of interests involved in a military confrontation, it’s very likely Beijing would tolerate a higher level of losses than would Washington and Canberra. This means that those interested in helping to defend Taiwan and the status quo would need to impose costs beyond those on the battlefield. Washington and Canberra must begin to mobilise support for this course of action now.
Originally published 16 September 2021.
On 5 September, Guinea’s special forces took control of the country, detaining the president, Alpha Conde, and suspending the constitution. Citing endemic corruption, human rights abuses and poverty, coup leader Lieutenant Colonel Mamady Doumbouya announced the next day that a new administration of ‘national union’ would be formed in the coming weeks.
During a scheduled press conference that day, a Chinese foreign ministry spokesperson said that Beijing was closely following developments and that it opposed the military unit’s actions and called for the president’s ‘immediate release’. What’s striking is Beijing’s break with its posture of ‘non-interference’, issuing such strong statements on a country’s domestic politics. In Guinea’s particular case, however, there are good reasons for China to pay close attention to political developments there.
The first is the extent to which Guinea’s coup impacts China’s long-term strategy to diversify its iron ore suppliers. Part of that strategy has involved turning to Africa. With two of Beijing’s top 15 suppliers—South Africa and Mauritania—already in Africa, Chinese companies are currently studying reserves in Algeria, Cameroon, Republic of Congo, Liberia, Senegal, Sierra Leone, Gabon, Nigeria and Madagascar.
However, Guinea is unique. A mineral-rich country, its 100-kilometre-long Simandou mountain range holds an estimated 8.6 billion tonnes of iron ore graded at more than 65.5%, seen to be one of the world’s last untapped high-grade reserves. The Guinean government had leveraged Simandou’s potential for Chinese investment in a major 650-kilometre railway project, a deep-water port and related facilities as part of China’s Belt and Road Initiative.
Thus far, Beijing has been reluctant to bring Australian iron ore imports into its campaign of economic coercion against Australia, in which the beef, barley, lobsters and wine industries have been badly hit. While some analysts say Guinea represents ‘one of the best medium- to long-term solutions to reduce dependency’ on Australian iron ore and others caution it’s not big enough to free China from its reliance on Australian supply, Guinea’s reserves carry the potential to give Beijing some leverage.
Guinea’s potential still depends on a few factors. For one, it’s not clear that the coup leaders and interim administration will honour agreements signed with Chinese companies under the previous government. One such agreement, signed between the Conde administration and the SMB-Winning consortium in June last year, allows the Chinese–Singaporean–Guinean group to acquire the mining rights to two blocks in the north of Simandou worth roughly $19 billion.
Plans to develop Simandou have stalled over the past two decades due to corruption and fluctuating levels of interest, despite the involvement of a number of mining companies and investors (Rio Tinto was the first foreign investor given a licence to explore in 1997). If China is prepared to double down on Simandou, it will have to pay up to $20 billion over the next five years to develop the infrastructure and mine. As one analyst noted, ‘in these tenuous times China appears ready to make that investment’.
Domestic factors in China like cuts to steel production, restrictions on pollution and the precarious financial situation of large property developers will also shape Chinese purchases of Australian iron ore. The coup adds greater uncertainty for now to Beijing’s plans.
In addition to iron ore, China is also worrying about disruption to its supply of aluminium. As the world’s second largest supplier of bauxite, Guinea meets 55% of China’s demand for it. With fears that the political turmoil could disrupt supply, the price of aluminium hit a 10-year high on the day after the coup. For now, mining companies are exempt from Guinea’s nationwide curfew; however, the status of operations on the ground remains unclear. Some operators said it was business as usual, while other companies did not confirm. If that situation changes, Canberra and Jakarta could benefit. Together with Guinea, Australia and Indonesia comprise 99% of China’s bauxite purchases.
With those key commodities in mind, there are legitimate concerns in China about Guinea’s future economic and political stability. While there has so far been no resistance from other army units, including the presidential guard, risks remain. A Chinese official with the economic and commercial office of the Chinese embassy in Guinea warned of several factors including a general economic slowdown. While Conde’s removal has been celebrated by some Guineans, if coup leaders are unable to satisfy both his supporters and opposition camps, the risk of public unrest remains. Violence erupted and 21 people were killed after last year’s presidential election in October. Shops were closed, and internet and telephone networks severely disrupted or shut down for a few days.
China has called for the president’s release, but that would do little to address the waning public confidence in Guinea’s political system. The country’s democracy was already under siege before the coup. Last year’s legislative election and constitutional referendum were postponed for two weeks after the Organisation internationale de la Francophonie, an organisation of French-speaking governments, raised concerns about 2.49 million ‘problematic’ entries on the electoral roll.
But Guinean public support for the ousting of the president should not be thought of as support for military rule. Memories of brutal periods of military intervention run deep. In September 2009, soldiers killed 157 unarmed coup protesters in a stadium, leaving 1,253 wounded, with 109 women raped or sexually abused.
Chinese state media network CGTN aired the statement of a Guinean government spokesperson who was ‘worried’ about bilateral ties with China, calling on ‘everybody to work together to save this cooperation’, particularly on current and future projects. And yet, despite its massive and concerted investment in infrastructure, emerging markets and even peacekeeping across the African continent, it seems there are few levers Beijing can pull in order to substantially influence political and military actors on the ground. Despite being ‘all in’ on Conde as a means of guaranteeing access to commodities, Beijing will have to invest anew in keeping Guinea’s new powerbrokers on side.
Originally published 3 November 2021.
September was a dizzying month in Australian foreign policy, especially in the Australian–American relationship. In quick succession were the 70th anniversary of ANZUS, the announcement of the new AUKUS defence partnership, the annual AUSMIN consultations and the Quad’s first in-person leaders’ meeting. The pace was relentless and the consequences breathtaking, with AUKUS the most notable development.
Much Australian commentary has focused on what drove Canberra to join this partnership—the potential risks and benefits, the political dimensions and the challenges. Less discussed are the multiple factors that drove Washington to this decision. None relate to over-the-top claims that it was motivated by a desperate and provocative grasp at preserving its primacy. Understanding the multiple rationales at work is key to determining how important AUKUS is to America, the strength and durability of its commitment, and the likely evolution of this rapidly changing partnership.
AUKUS represents a sea change in US strategic thinking towards empowering its allies, redistributing its forces around the Indo-Pacific, and better integrating its allies into its supply chains and industrial planning to deal with an increasingly aggressive China. This requires sharing sensitive technologies, deepening intelligence cooperation, pooling resources and changing domestic legislation around export controls. It could fundamentally change America’s engagement with the region, its approach to technological acquisition, and its relationship with Australia and other allies.
Given the strategic, bureaucratic and legislative hurdles, this will be no mean feat. So, what explains this shift in Washington’s attitude? Several factors, as it turns out.
President Joe Biden has repeatedly asserted that alliances are America’s greatest asset and pledged that his administration will repair and reinvest in them. This isn’t simply a desire to apply rhetorical balm after four years of disruptions, although that’s undoubtedly at work too. For Biden, as with nearly all his predecessors, this is a matter of security.
‘When we strengthen our alliances,’ Biden told America’s diplomats shortly after becoming president, ‘we amplify our power as well as our ability to disrupt threats before they can reach our shores.’ This straightforward logic has guided American policymakers for decades: there’s safety, and power, in numbers and threats are best confronted as far from the American homeland as possible.
For Washington, AUKUS is a tangible demonstration of its commitment to allies under duress. More significantly, it is a recognition that in a deteriorating security environment with a shifting balance of power, America is prepared to significantly augment close allies’ capabilities and enable them to do more.
Similarly, America needs to address persistent questions about its commitment to, and staying power in, the Indo-Pacific. Foreign observers have obsessed over how inwardly focused America is, where its actual, as opposed to stated, priorities lie, and its ability to defend itself and others from emerging threats.
America’s allies and partners have asked these questions out of a sense of concern; its adversaries out of a sense of opportunity. In recent months, such concerns were heightened in the aftermath of America’s chaotic withdrawal from Afghanistan and growing alarm over Taiwan’s vulnerability. AUKUS will not put an end to those debates, but willingly sharing the crown jewels of America’s technological and military prowess is a big step forward.
Just as significant, AUKUS will help shift America’s strategic focus and lay the foundation for a significantly expanded regional presence. Related to this is the message intended simultaneously for external audiences and domestic ones that the needs of the Indo-Pacific will take priority over other interests and drive bureaucratic choice and resource allocation.
The special regard that Australia is held in, by both American policymakers and the American public, combined with Washington’s desire to do more to help Australia respond to China’s bullying, also helps account for Washington’s willingness to pursue this deal. Australia and America have had a close relationship for decades but, over the past several years, a special interest in, and respect for, Australia’s own policies has grown in the US.
Australia is seen a canary in the coalmine, often the first to experience and be forced to respond to various forms of Chinese coercion and political interference. In Washington, politicians and policymakers now cite Australia as an example of both what Chinese coercion looks like and how to respond. This, and not paeans to the countries’ shared history on battlegrounds, is what is driving Washington’s desire to work more closely with Australia. That sentiment is true at both the elite and popular levels.
Polling reveals that Americans are willing to take significant risks to defend Australia. Biden’s statement that the ‘US has no closer or more reliable ally than Australia’ should be seen as a reflection of these views, and a desire to help turbocharge Australia’s efforts.
Of course, America’s desire to shore up its alliances and display its Indo-Pacific focus goes far beyond its relationship with Australia. But given the amount of trust required to share nuclear secrets and collaborate on cutting-edge technology, AUKUS could only have been undertaken with the closest of allies. As US Secretary of State Antony Blinken declared in May, ‘The US will not leave Australia alone on the field.’ AUKUS should be seen as a significant attempt to make good on that statement.
In strategic terms, AUKUS is largely driven by Washington’s recognition that it needs more capable players in the field (or, rather, in and under the sea) to help correct a shifting balance of power. China’s decades-long economic expansion has allowed its rulers to rapidly modernise its military. Beijing now possesses the world’s second largest defence budget, fields the largest conventional missile force, and controls the biggest navy and coastguard.
While China has poured resources into defence and rapidly grown its forces, the US and its allies and partners have not kept pace. The US still has a military advantage over China, but the gap has been rapidly closing in Asia, and in certain domains it may already have been erased. Without an urgent drive to address such trends, the regional balance of power may soon tip in China’s favour.
Responding to such imbalances requires greater numbers and more advanced capabilities. AUKUS holds out the possibility of fielding more forces and upgrading their capabilities. As China has not yet developed robust anti-submarine capabilities, nuclear-powered submarines can offset Beijing’s advantages—if more Australian, British and American submarines can be put in the water on an accelerated timeline.
A final American motivation is the hope that AUKUS will galvanise greater investments, efforts and collaborations by other nations concerned by the rapid growth of China’s military and its increasingly assertive use. While the sensitivity of the technology being shared and the complexity of the logistical requirements mean AUKUS will remain limited, the idea of nations working together to balance China’s rise is by no means exclusionary. This can already be seen with Japan’s and India’s contributions to the Quad.
Southeast Asia’s initial response to AUKUS has been more varied, but Taiwan, Vietnam, Singapore and the Philippines have all shown a willingness to enhance their defence capacities and augment their security partnerships, even if defence spending across the region remains low.
Europe too has shown interest in increasing its military presence, which makes it even more important to encourage greater regional involvement by France, despite its loss of Australia’s submarine contract. Some of these efforts are more aspirational than others, but the more coordinated efforts take place, the more convincing becomes the argument that Beijing is no longer operating in a permissive security environment.
The desire to empower America’s closest allies; the need to demonstrate the US commitment to, and prioritisation of, the Indo-Pacific region; the respect for and trust of Australia; the drive to balance Beijing with more robust defence capabilities for its allies; and the hope that bold actions will galvanise more nations to act all played a part in Washington’s decision to support AUKUS. Canberra may have initiated this deal with London, but Washington rightly saw the opportunity to advance its own strategic goals.
Australia’s 2020 defence strategic update concluded that the regional security environment was deteriorating more rapidly than earlier assessments indicated, requiring new thinking and new action.
Recognition of an altered landscape and the need to mobilise greater collective efforts can produce radical shifts in what is necessary, and what is possible.
During America’s Civil War, President Abraham Lincoln declared, ‘The dogmas of the quiet past, are inadequate to the stormy present.’ Thus he laid the political, moral and strategic groundwork for the Emancipation Proclamation to formally abolish slavery in America. ‘As our case is new, so we must think anew, and act anew.’ Attempting to motivate his fellow Americans, Lincoln concluded that his nation could succeed only by concert, not with, ‘Can any of us imagine better?’ but with, ‘Can we all do better?’ That simple statement preceded one of the boldest acts of statecraft in American history.
Many questions about AUKUS remain unanswered, and critical ones may not yet have been asked. But Washington and Canberra seem to have made the same bet, that only collective effort, and not individual actions, will produce lasting security and stability.
Originally published 22 September 2021.
When Australia announced the AUKUS pact together with the United States and United Kingdom, it knew that China would be hostile and France would be disappointed. Predicting the reaction in Southeast Asia would have been more difficult: views vary. From Australia’s perspective, its relations in the region have generally been good in recent years. So much so, that Jakarta even welcomed Canberra’s 2020 defence strategic update, though it foreshadowed Australia playing precisely the more regionally ambitious role that it is now pursuing.
While some countries, notably the Philippines and Singapore, were positive about the AUKUS announcement, statements from Jakarta and Kuala Lumpur reflected concerns that the AUKUS arrangement would contribute to a regional military build-up, raising tensions and making conflict more likely.
These perspectives don’t accord with Canberra’s strategic world view, so the temptation to dismiss them in various ways will be strong.
Most fundamentally, some will see Indonesia and Malaysia as strategically naive: China is launching new ships and submarines much faster than the US, let alone Australia. And a move like AUKUS that signals a strong US commitment to the region should help prevent China from dominating it, something every country is worried about. They’ll take comfort from the fact that the Philippines, one of the key claimant states in the South China Sea, is much more supportive, and that Vietnam is likely to be too.
Some will try to airbrush Southeast Asia out of the ‘Indo-Pacific’ entirely, pointing out that Japan and India, the two most consequential regional powers, are supportive of AUKUS.
And some will argue that the Indonesian reaction was ‘avoidable anxiety’—in other words, something that could have been prevented with better Australian diplomacy.
Others will say that private reactions, especially in the region’s defence ministries, which work closely with Australia and the US, are probably more positive than what’s being said publicly. They’ll point out that practical defence cooperation remains strong; actions speak louder than words.
Canberra must resist the solace of these approaches and take regional reactions to AUKUS seriously.
Regional views matter, because Canberra’s own defence strategic planning describes Australia’s cooperative defence activities with regional countries as ‘fundamental to our ability to shape our strategic environment’. It notes the importance of our defence forces maintaining operational access in the region, and of our being able to lead coalition operations when it is in the interests of the region that we do so.
In short, our ability to respond to plausible China-related contingencies in Southeast Asia depends on regional countries seeing that our interests align with theirs. Euan Graham’s account of the 2020 West Capella incident, involving the US, Australia and Malaysia, neatly illustrates this point. A US Navy strike group sailed close to the area where a Malaysian drillship, the West Capella, was being intimidated by a Chinese maritime force. Though the US intended a strong message of reassurance, Malaysia had mixed feelings about the intervention, fearing that the presence of any warships and vessels could increase tensions and raise the risk of conflict.
At the heart of these differing perceptions is this: Australians by and large see the US as a benign and moral actor, upholding the regional security order. By definition, its actions don’t destabilise the region. Some of our neighbours are more ambivalent, seeing both the US and China as contributing to a more tense and unstable region. These concerns were eloquently expressed by Singapore’s Prime Minister Lee Hsien Loong in his 2019 Shangri-La Dialogue address. That speech drew the ire of some Americans, who argued it was wrong to see the US and China as morally equivalent.
Taking this sense of moral equivalence seriously is not the same as agreeing with it. Australia should not resile from AUKUS or the idea that the full range of our security cooperation with the US is beneficial for the region. But because not all countries automatically agree, these benefits must be demonstrated, not merely asserted. This is why it’s so important for the US to participate in mutually beneficial regional economic arrangements, like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and continue to provide public goods, like vaccines.
A second, related opinion across the region is that AUKUS indicates an intention by outside powers to determine the future of the region, adding to fears that ASEAN’s influence and coherence are being eroded. This perception arose not because of the substance of AUKUS—an agreement to share defence technology—but because of its form, a loudly announced Anglosphere security partnership. That cannot be undone, but it has lessons for the way Australia talks about the extensive deepening of the US defence relationship envisaged in last week’s AUSMIN statement.
We shouldn’t exaggerate the degree of negative opinion in the region about AUKUS. But if there’s any uncertainty, the prudent course of action would be to assume that concerns are real and deeply held, not to blithely hope that ultimately Southeast Asia will come around to our way of seeing the world.
Originally published 28 April 2021.
There’s a greater likelihood of major conflict in the Indo-Pacific region now than at any time since the end of the Vietnam War.
That’s why the Australian government’s 2020 defence strategic update ended the longstanding planning assumption for the Australian Defence Force that we would have 10 years of strategic warning time to prepare for military conflict.
The Chinese government under Xi Jinping is the major driver of this stark assessment because of its creation of a People’s Liberation Army that is able to project power—and in particular because of its use of the PLA to take over disputed areas in the South China Sea and build military bases there, its use of the PLA on the India–China border, and the high tempo of its aggression in the East China Sea and in the airspace and sea around Taiwan.
These actions have been in direct contradiction with Beijing’s assurances of peaceful intent, which makes it hard to trust the words of Chinese leaders and diplomats when it comes to security.
Most infamously, in 2015 Xi assured US President Barack Obama that China would not militarise the South China Sea—and then went home and accelerated the PLA’s efforts to do just that. More recently, we’ve seen the Chinese government simply abandon its international commitment to maintaining Hong Kong’s open system of free speech and independent courts. Beijing broke its treaty with the UK, introduced a draconian national security law and followed up with arrests, prosecution and long jail terms for Hongkongers who practised political freedoms denied to China’s mainland citizens.
Xi has spoken of using force against Taiwan to unify it with mainland China. He and other senior government figures also speak about defending China’s growing ‘core interests’ by force. Related actions include authorising not just its military, but its coastguard to use lethal force wherever China claims jurisdiction.
None of the above is anything other than simple factual description of what Chinese armed forces have done and what Xi as the commander-in-chief of the PLA has said about using the military.
Reporting what Xi says and what the PLA and other Chinese armed forces do is not ‘stoking the drums of war’; it’s noticing what is happening in our region that affects our security. It is a matter of empirical fact that Chinese military incursions into Taiwanese airspace in 2021 are at record levels, multiple times the average over the previous four years. And Chinese naval activity around Taiwan has also intensified.
This military pressure is being felt in Taiwan and is the reason for various international leaders’ meetings mentioning Taiwan in their public statements.
US Secretary of State Antony Blinken did so in Alaska, at the first senior-level US–China meeting following US President Joe Biden’s first phone call with Xi.
Taiwan was discussed at the March virtual meeting of the Quad leaders, and also featured in the statement of the US–Japan summit between Biden and Prime Minister Yoshihide Suga last week.
Discussion of the potential for conflict without naming the source of this conflict naturally leads to anxieties and also to claims that people are stoking war by talking.
The source of instability and tension in our region is the Chinese state under Xi and its use of the PLA. Saying this is being open about why there is tension in the Indo-Pacific.
Being able to say what the source of the problem is useful if you then want to do things to resolve the problem. A ‘country agnostic’ approach to the causes of regional insecurity is simply not credible—and distorts public debate.
Australia contributes to a powerful combination of allies and partners that can provide credible deterrence and raise the costs of military adventurism for China. But this does require unity of effort and clear-minded analysis of the issues at hand.
The government’s plan for developing Australia’s military capabilities is designed around shaping the strategic environment in ways that make military conflict less likely, and having the military power and partnerships to deter conflict.
That plan includes giving the ADF more offensive power to raise the costs of conflict for others. And it’s based on strong alliance and security partnerships, with the US, Japan, India and Australia’s other security partners in the Five Eyes, the wider Indo-Pacific region and Europe.
This isn’t about Australia acting alone.
No one power needs to face the challenge of deterring Beijing from use of military force alone; it is best done multilaterally. And before anyone contemplates the use of military force, the costs of conflict can be raised by other activities. In Taiwan’s case, that includes reintegrating it into international forums and organisations like the World Health Organization and UN bodies, reversing Beijing’s long-term political isolation of the island.
But the idea that quiet behind-the-scenes diplomacy will raise the costs of conflict in Xi’s eyes and act as a deterrent seems to have no supporting evidence from recent history. Instead, the evidence suggests that the Chinese government’s confidence that its actions won’t have consequences is increased by international silence on regional security and is reduced by international discussion and cooperation.
Xi has no doubt been encouraged by the limited international response to his takeover of Hong Kong institutions and repression of freedoms China guaranteed to retain for decades. His military activities in the South China Sea have also proceeded without tangible opposition.
But he will have noticed that Taiwan is featuring at international meetings in discussions about finding ways to support Taiwanese security and reintegrate it into the international community. These efforts are all about reducing the prospects of China using force against Taiwan’s 23 million people.
The Chinese government’s judgements about being able to use force against Taiwan with impunity are affected by this, which is why Chinese government officials react so stridently to any moves to support Taiwan. Changing those calculations is the goal of credible deterrence.
Originally published 3 May 2021.
China’s steel industry is blaming the concentrated ownership of Australia’s iron ore mines for the soaring ore price and is calling for Chinese government intervention.
‘We believe that the supply side is highly concentrated and the market mechanism is not working, so we call for the authorities to play a bigger role in the event of market failure,’ Luo Tiejun, vice president of the China Iron and Steel Association, told an industry conference last week.
The reality is that the market is working well and that the Chinese authorities have much less power to influence it than Luo might imagine.
Astronomical iron ore prices reflect the inefficiency of China’s own iron ore mines rather than any alleged monopolistic behaviour by the major Australian mining companies.
It must be galling to Chinese authorities that, notwithstanding their determination to punish Australia for its many perceived sins, their annual imports from Australia are running at near record levels and appear likely to surpass the $150 billion peak reached in the first half of last year.
The iron ore price has been nudging close to a record US$200 a tonne, more than double the price of a year ago and three times the price expected by the Australian government when it compiled last year’s budget.
The price is delivering fabulous profits to Australian mines and is also boosting Australian government tax revenues. The cost of extracting iron ore is not much more than US$16 a tonne for BHP and Rio Tinto.
In any commodity market, the price is dictated by the highest-cost or marginal supplier. After making allowance for quality and transport, all suppliers of a commodity get the same price in an open market, regardless of what it costs to produce. So, the highest-cost producer is the one that would stop mining if the price were to fall, leaving the market short of supply.
In the iron ore market, the highest-cost producers are all Chinese. China normally takes around 70% of the seaborne trade in iron ore, or around 1 billion tonnes, but it relies on domestic production for a further 900 million tonnes.
However, around three-quarters of China’s domestic production needs a price of at least US$100 a tonne in order to operate, with some mines having much higher break-even thresholds than that. China’s iron ore reserves are low quality and require expensive heat treatment before they can be fed into steel mills. Production peaked at 1.5 billion tonnes in 2015, but has fallen because of the sector’s poor economics and government efforts to stop shallow strip mining, which is environmentally damaging.
While the high operating costs of China’s most marginal mines set a pricing floor, the market has been swept along by demand fuelled by government stimulus spending, both in China and across the world, in response to the Covid-19 pandemic, which has fired steel-hungry construction and consumer goods industries.
Chinese authorities had set an objective of reducing steel production in line with their goal of reducing carbon emissions and particle pollution.
In the heart of China’s steel district in Tangshang, 150 kilometres east of Beijing, mills have complied with orders to lower production, but that has caused a panic among steel buyers and sent the steel price soaring. Steel mills across the rest of China have been ramping up production in order to take advantage of the strong price. China’s total steel production is running at record levels.
The failure of the central authorities’ efforts to shut down inefficient and high-polluting steel mills has been chronic since the price boom of 2009–10 and partly reflects the fact that local steel mills are more responsive to provincial authorities, for whom they are an important source of revenue, than to Beijing.
Historically, the iron ore price tracks the steel price, so the current price boom at least partly reflects the tensions in government policy to control air quality and carbon emissions.
Global iron ore supply hasn’t been especially weak, but it has not responded to the increase in demand both from China and from the rest of the world.
Australia has been supplying about 60% of world iron ore trade, with exports forecast to reach 900 million tonnes this year. China has been buying up what it can from wherever it can get it, including a doubling of its purchases from India. However, at around 30 million tonnes, India is only a marginal supplier.
China’s great hope is that Africa will provide some relief from its dependence on Australia. It is looking at projects in Algeria, Congo and Guinea, with the last the most advanced.
Analysts expect the Simandou project in Guinea, in which Rio Tinto has a stake alongside Chinese state-owned resources group Chinalco, will proceed, with a total cost of around US$20 billion. It is a large and high-grade orebody, although the infrastructure challenge of getting the ore to port is formidable.
China’s Global Times last week declared that ‘the exploitation of the Simandou mine in Guinea, with the participation of a Chinese company, is expected to help cut the heavy reliance on Australia for imports’.
However, the project, which has been stalled for more than a decade amid corruption claims and conflicts between the government and partners, would take several years to complete, and production in the initial phase is expected to be in the region of 100 million tonnes a year, or about two-thirds the output of Australia’s Fortescue Metals Group. It’s not a big enough project to materially transform the global iron ore market or to free China from its dependence on Australia.
The steel association’s demand that the authorities do something about the surging iron ore price mirrors their response to the iron ore price spike in 2008–09, which was generated by Chinese government stimulus spending in response to the global financial crisis. Then, as now, they blamed Australian producers.
The Chinese government was thwarted by the Rudd government in its attempt to have Chinalco take over Rio Tinto, which it thought would give it the ability to keep a lid on iron ore prices.
At some stage, China’s economy will move beyond its heavy reliance on construction as the source of its growth and become more focused on services. That might come as a result of a maturing of its economy or it could be sparked by a debt crisis.
A serious cut in China’s demand for steel and iron ore could see prices plummet to something much closer to the marginal cost of Australian iron ore mines, but such a result wouldn’t come from the interventions demanded by the China Iron and Steel Association.