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A recent report in China’s Global Times newspaper suggests Chinese steel mills are imposing discriminatory cuts to exports to Australia as a new element in the continuing campaign of economic coercion against the government.

‘China’s shrinking steel supply, against the backdrop of deteriorating bilateral relations, will likely lead to a steel shortage for the recovering Australian economy,’ the report said.

The report cited Chinese analysts saying that although China’s overall steel exports had halved in recent months, shipments to Australia had dropped by much more than that.

If that’s happening, the Australian Steel Association, which represents the major steel trading businesses operating in Australia, hasn’t heard about it. Certainly, supplies from China are down, as they are from other suppliers as well, but global trading businesses aren’t seeing steeper cuts in Chinese shipments to Australia than to other markets China serves. For example, one of the association’s members has seen similar cuts in sales to Africa.

‘We don’t believe it is targeted at Australia in any way,’ says ASA chief executive David Buchanan, adding that cuts to China’s exports seem mainly to be about reducing steel production in the interests of environmental objectives.

The Global Times article was not well sourced, with comments coming from two steel exporters who said they don’t have significant trade with Australia rather than from any official quarter. However, the nationalist paper is often used to ‘front run’ issues on which the Chinese authorities don’t want to comment openly.

When Australian coal shipments started being turned away from Chinese ports in mid-2020, it was initially thought to be a pollution-control measure applying to all of China’s coal imports, and Chinese officials denied there was an issue specific to Australia. It wasn’t until last September and October that it became obvious that there was a complete ban on Australian coal imports.

So it’s possible that a discriminatory squeeze on steel supplies to Australia may yet emerge. If it does, it will be the first time China has used the withholding of its own exports as a coercive tool since 2010, when shipments of rare earths to Japan were stopped in the midst of a dispute over the arrest of a Chinese fishing crew in waters claimed by Japan.

Even if the report is an empty threat—and the Global Times enjoys taunting Australia—it exposes a vulnerability.

It comes as steel is in short supply globally for the first time in decades. It has long been the case that world steel markets were oversupplied, principally because of excess capacity in China. Australia has been at the forefront of nations applying anti-dumping duties to Chinese steel and related products to keep Chinese steel out and protect local industry.

But demand for steel has soared during the Covid-19 pandemic as governments and central banks sought to stimulate housing construction and infrastructure works and house-bound consumers stocked up on new household goods rather than spending on travel.

Efforts by governments around the world, including China, to curb greenhouse gas emissions have resulted in shutdowns of steel-making capacity.

Shortages in steel supplies from the mills are made worse by the lack of shipping capacity to respond to the rising demand for goods generally.

As a relatively small market that’s not on a sea route to anywhere, Australia has always been a difficult market to service for global-scale steel suppliers. At a time of global shortage, Australia is low in the pecking order for available supplies from all major steel-producing countries.

It is a shift in the global balance of supply and demand that exposes the vulnerability of Australia to exactly the sort of threats contained in the Global Times article.

Although Australia retains domestic steelmaking with Bluescope in Wollongong and Liberty Steel in Whyalla, which are both working flat out, its dependence on imports has grown. Australia lost its capacity to produce stainless steel in the 1990s, and Bluescope shut its rolling mill in Hastings about 10 years ago.

Australia has similarly lost its capacity to produce rolled aluminium following Alcoa’s closure of its Australian rolling mills, with Chinese suppliers filling most of the gap.

China has a smaller share of Australia’s basic steel imports than the 30% claimed in the Global Times article, with United Nations trade data showing its share in 2019 was 24%. China provides a larger share of fabricated steel products—for example, it provides about 70% of Australia’s imports of steel sections for use in structures and 53% of imports of steel tanks and drums, although these come from fabricators rather than from the steel mills directly.

The ASA’s Buchanan says steel trading businesses servicing the Australian market have been wary of Chinese supplies partly because of their vulnerability to anti-dumping action, which puts prices out of reach, and also because of China’s own efforts to restrict exports.

China has ordered that steel production this year not exceed the 1.064 billion tonnes produced in 2020 in order to curb greenhouse emissions and is placing curbs on exports to ensure its domestic market is serviced first.

Chinese authorities have cancelled rebates of value-added tax on steel exports and are rumoured to be planning to impose export duties in an effort to force a reduction in steel production. Chinese mills pass these costs directly on to users, leading trading companies to seek alternative suppliers.

The shortages have resulted in huge price increases of between 60% and 100% for basic steel products. Australian customers who held off making orders expecting prices to fall are now scrambling to fill them.

The Australian government has been alert to the danger of essential industrial supplies being disrupted, commissioning a Productivity Commission study into the risks and establishing a new Office of Supply Chain Resilience in the Department of the Prime Minister and Cabinet.

The recently completed Productivity Commission study concluded that there were relatively few imported goods for which Australia was largely dependent on a single supplier without obvious alternative suppliers. It estimated that only one in 20 of the almost 6,000 different products Australia imports was vulnerable to disruption. It also said that many of them were not essential items, citing Christmas decorations as an example.

However, the Productivity Commission used high thresholds to determine vulnerability, counting only goods where 80% came from a single nation that also controlled more than half of global trade in those goods. Curbs to Chinese supplies with market shares much lower than that could cause economic disruption in some Australian industries.

Of the 292 goods that fell within that definition, two-thirds came from China, including a number of essential goods such as chemicals, pharmaceuticals and metals. China also accounts for a large share of fertiliser supplies.

As ASPI’s recent report on Australia’s trade vulnerability in any future conflict over Taiwan demonstrated, disruption to the flow of imports is likely to be more damaging to the economy than blockages to exports.

In the year 2034, the United States and China become embroiled in a series of military conflicts that escalate into a devastating tactical nuclear war. Other countries—including Russia, Iran and India—get involved. Suddenly, the world is on the verge of World War III.

This is the scenario described in 2034: A novel of the next world war, an engrossing work of speculative fiction by a former supreme allied commander at NATO, Admiral James Stavridis, and Elliot Ackerman. The book is part of a growing chorus now warning that a clash between the world’s current rising power and the incumbent one is almost unavoidable. Graham Allison of Harvard University has dubbed this phenomenon the ‘Thucydides trap’, recalling the ancient Greek historian’s observation that, ‘It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.’

True, throughout history, when a rising power has challenged a ruling one, war has often been the result. But there are notable exceptions. A war between the US and China today is no more inevitable than was war between the rising US and the declining United Kingdom a century ago. And in today’s context, there are four compelling reasons to believe that war between the US and China can be avoided.

First and foremost, any military conflict between the two would quickly turn nuclear. The US thus finds itself in the same situation that it was in vis-à-vis the Soviet Union. Taiwan could easily become this century’s tripwire, just as the ‘Fulda Gap’ in Germany was during the Cold War. But the same dynamic of ‘mutually assured destruction’ that limited US–Soviet conflict applies to the US and China. And the international community would do everything in its power to ensure that a potential nuclear conflict did not materialise, given that the consequences would be fundamentally transnational and—unlike climate change—immediate.

A US–China conflict would almost certainly take the form of a proxy war, rather than a major-power confrontation. Each superpower might take a different side in a domestic conflict in a country such as Pakistan, Venezuela, Iran or North Korea, and deploy some combination of economic, cyber and diplomatic instruments. We have seen this type of conflict many times before: from Vietnam to Bosnia, the US faced surrogates rather than its principal foe.

Second, it’s important to remember that, historically, China plays a long game. Although Chinese military power has grown dramatically, it still lags behind the US on almost every measure that matters. And while China is investing heavily in asymmetric equalisers (long-range anti-ship and hypersonic missiles, military applications of cyber, and more), it will not match the US in conventional means such as aircraft and large ships for decades, if ever.

A head-to-head conflict with the US would thus be too dangerous for China to countenance at its current stage of development. If such a conflict did occur, China would have few options but to let the nuclear genie out of the bottle. In thinking about baseline scenarios, therefore, we should give less weight to any scenario in which the Chinese consciously precipitate a military confrontation with America. The US military, however, tends to plan for worst-case scenarios and is currently focused on a potential direct conflict with China—a fixation with overtones of the US–Soviet dynamic.

This raises the risk of being blindsided by other threats. Time and again since the Korean War, asymmetric threats have proven the most problematic to national security. Building a force that can handle the worst-case scenario does not guarantee success across the spectrum of warfare.

The third reason to think that a Sino-American conflict can be avoided is that China is already chalking up victories in the global soft-power war. Notwithstanding accusations that Covid-19 escaped from a virology lab in Wuhan, China has emerged from the pandemic looking much better than the US. And with its Belt and Road Initiative to finance infrastructure development around the world, it has aggressively stepped into the void left by US retrenchment during Donald Trump’s four years as president. China’s leaders may very well look at the current status quo and conclude that they are on the right strategic path.

Finally, China and the US are deeply intertwined economically. Despite Trump’s trade war, Sino-American bilateral trade in 2020 was around US$650 billion, and China was America’s largest trade partner. The two countries’ supply-chain linkages are vast, and China holds more than US$1 trillion in US Treasuries, most of which it can’t easily unload, lest it reduce their value and incur massive losses.

To be sure, logic can be undermined by a single act and its unintended consequences. Something as simple as a miscommunication can escalate a proxy war into an interstate conflagration. And as the situations in Afghanistan and Iraq show, America’s track record in war-torn countries isn’t encouraging. China, meanwhile, has dramatically stepped up its foreign interventions. Between its expansionist mentality, its growing foreign-aid program and rising nationalism at home, China could all too easily launch a foreign intervention that might threaten US interests.

Cyber mischief, in particular, could undercut conventional military command-and-control systems, forcing leaders into bad decisions if more traditional options are no longer on the table. And Sino-American economic ties may come to matter less than they used to, especially as China moves from an export-led growth model to one based on domestic consumption, and as two-way investment flows decline amid escalating bilateral tensions.

A ‘mistake’ on the part of either country is always possible. That is why diplomacy is essential. Each country needs to determine its vital national interests vis-à-vis the other, and both need to consider the same question from the other’s perspective. For example, it may be hard to accept (and unpopular to say), but civil rights within China might not be a vital US national interest. By the same token, China should understand that the US does indeed have vital interests in Taiwan.

The US and China are destined to clash in many ways. But a direct, interstate war need not be one of them.

After their rapid victory in Afghanistan, do the Taliban have the capacity to govern and keep unified control?

David Kilcullen, professor of international and political studies at the Australian Defence Force Academy, says the Taliban have got a lot better at governing but the future is uncertain. ‘They have trained governance cadres and they are much better at communications and messaging. They also run a shadow government in most provinces and a kind of guerrilla government in major cities.’

This is a critical source of revenue for the Taliban, says Kilcullen. ‘They have a pretty effective local taxation system, and take cuts of drug, agricultural and timber production.’

But once the big push is over, unity may become a problem. There’s been a long history of dissention among the Quetta, Peshawar and Miran Shah shuras that direct Taliban activities.

Kilcullen notes that anti-Taliban strategy has always aimed to encourage this. But he says the current Taliban supreme leader, Hibatullah Akhundzada, has proved much more able than his predecessor at keeping the factions together.

Under the previous leader, Mullah Omar, who was killed by a drone strike in 2013, there was open revolt against the Quetta Shura. ‘And there’s always problems with young, aggressive field commanders going their own way who need to be disciplined. But in the initial push they will be unified,’ says Kilcullen.

He says it’s also important to remember that the Taliban remain closely affiliated with al-Qaeda and Islamic State Khorasan (IS-K), as well as the Pakistan-based Haqqani Network (HQN). Last year, the New York Times published an oped attributed to HQN leader Sirajuddin Haqqani in which he implied that HQN will have a strong hand in the next iteration of the Afghan state.

Kilcullen says that many still think of HQN as separate from the Taliban, or at least quasi-autonomous. While it has suited HQN’s interests to maintain that fiction, in reality it is completely integrated with the Taliban. HQN militants often serve as the shock troops for the Taliban, while remaining close to Directorate S, ­the unit of Pakistan’s Inter-Services Intelligence (ISI) that runs Pakistan’s clandestine relationship with the Taliban.

This connection with Pakistan explains why HQN is also helping China, a close Islamabad ally, to run operations against Uyghur co-religionists in Afghanistan.

What might Pakistan’s Prime Minister Imran Khan, army chief Qamar Javed Bajwa, and ISI Director-General Faiz Hameed be most worried about now? To a point, these three represent competing tensions when it comes to Pakistan’s relationship with the Taliban, says Kilcullen.

‘There’s the official and unofficial Pakistan position. Officially, Pakistan supports a negotiated outcome and would not support a forceful takeover. But the ISI and elements of the army have covertly backed the Taliban for decades as insurance against the influence of India in Afghanistan,’ he says.

‘Bajwa will be very concerned about refugee flows. The EU is promising assistance, so they will be very keen to facilitate that. He’ll also be worried about how a Taliban victory might be a morale boost for Pakistan’s version of the Taliban, Tehrik e Taliban’.

General Bajwa recently warned that the Taliban and Tehrik e Taliban are ‘two sides of the same coin’.

Tehrik e Taliban was ‘defanged’ in 2016 by Pakistani security forces but has shown recent signs of resurgence. There are varying reports of over 100 attacks in Pakistan attributed to the group since May. And it is one of many anti-government terrorist organisations operating in Pakistan.

Khan needs to concentrate on economic development. For that to happen, he needs a stable government in Kabul, and a stable security situation at home. Both may not prove possible. Continued investment in the region by China is also important to Islamabad, which would welcome more Chinese involvement in Afghanistan to balance the influence of India.

‘It’s clear that China has anointed the Taliban as Afghanistan’s next rulers,’ says Kilcullen, pointing to the public meeting in July between China’s Foreign Minister Wang Yi and Mullah Barader, the head of the Taliban political committee.

But at the most recent Shanghai Cooperation Organisation meeting, also in July, Wang signalled that China’s support might be contingent on the Taliban helping counter Uyghur groups, IS-K and the East Turkestan Islamic Movement.

More broadly, China is intent on preserving its resource investments in Afghanistan. And although its Belt and Road Initiative doesn’t encompass Afghanistan, it is an important transit route across Central Asia to other nations like Iran, with which China has just inked a 25-year economic and security agreement.

But can the Taliban be a trusted partner for Beijing?

Kilcullen says many Uyghur militants who were fighting in Syria have gone back to Afghanistan. ‘So how the Taliban treats those groups will an indicator. Will they hand them over to China, or keep them in reserve for leverage?’

The Taliban will have other points of leverage with China, he says. ‘For instance, they can control access to resources, access to transport routes and telecommunications access. To some extent China can hedge against this by sending in private security companies to guard assets.’

Most Australians would be wondering how we can have a ‘one-China policy’ when Defence Minister Peter Dutton has warned that war with China over Taiwan can’t be ruled out. ‘Why is it so?’, as Julius Sumner Miller would have said.

The one-China policy accepts that there’s only one sovereign state under the name China, as opposed to the notion that there are two: the People’s Republic of China and the Republic of China. The simple reason for the one-China policy is that the PRC has always been more important strategically to the international community than the ROC.

By way of background, after the Sino-Soviet border conflicts of 1969, relations between China and the Soviet Union were marked by ongoing military and political tensions, and it suited both the West and China to seek rapprochement with an eye on the Soviet Union. At the time, China, like Taiwan, was poor and there was no obvious prospect of its becoming an economic powerhouse.

In 1971, the United Nations voted to recognise the PRC as the sole government of China. After that, the PRC refused to have diplomatic relations with countries that recognised the ROC.

This led to countries—mainly developing ones subsidised by China—recognising only China. Others, mainly developed countries (including Australia and its Five Eyes partners) recognise China but maintain ‘unofficial’ relations with Taiwan. A few nations that are subsidised by Taiwan recognise the ROC as China’s sole legitimate government.

The basis of Australia’s one-China policy is the 1972 communiqué issued by the Commonwealth of Australia and the PRC, which states:

The Australian Government recognises the Government of the People’s Republic of China as the sole legal Government of China, acknowledges the position of the Chinese Government that Taiwan is a province of the People’s Republic of China, and has decided to remove its official representation from Taiwan before January 25, 1973.

Since we signed the 1972 communiqué, Taiwan’s progress from military dictatorship to democratisation has been impressive. So (like China’s) has been its economic development.

At present, 179 of the 193 UN member states recognise the PRC, while only 14 and the Holy See have official diplomatic relations with Taiwan. Most developed countries, like Australia, maintain unofficial diplomatic ties with Taiwan through representative offices and institutions that function as de facto embassies and consulates.

Australia’s representative office in Taiwan doesn’t have diplomatic status, and nor does Taiwan’s Taipei Economic and Cultural Office in Australia.

The Department of Foreign Affairs and Trade website notes that:

The Australian Government strongly supports the development, on an unofficial basis, of economic and cultural relations with Taiwan including a range of two-way visits, state, territory and local government contacts, trade and investment opportunities and people to people links. Australia supports Taiwan’s participation in international organisations and conferences where appropriate.

In 2003, I ran a counterterrorism workshop for Taiwan’s National Security Bureau. The director-general wanted to establish a working relationship with the Australian Security Intelligence Organisation on issues of common interest. I broached the offer in Canberra, but at that time there was no Australian interest in a security intelligence relationship with Taiwan.

International organisations in which the PRC participates are pressured to either refuse to grant membership to Taiwan or allow it to participate only on a non-state basis. (For example, Taiwan competes at the Olympics as ‘Chinese Taipei’.)

As China expert Mark Harrison has noted: ‘The legacy of Confucianism is why Beijing is so acutely sensitive to the language that is used with respect to Taiwan. For Beijing, any vocabulary that implies that Taiwan is a nation-state … would ultimately undermine the historical legitimacy of the PRC party-state.’

Taiwan (by contrast with China) is now ranked highly in terms of political and civil liberties. It’s also rated highly for education, health care and human development. Taiwan’s export-oriented industrial economy is now the 21st largest in the world by nominal GDP, with major contributions from steel, machinery, electronics, and chemicals manufacturing. Components of major computer brands like HTC, Acer, Asus and MSI are manufactured in Taiwan.

In 2018 (the latest data available), Taiwan was Australia’s sixth-largest merchandise export market and 16th-largest source of merchandise imports. Australia’s exports to Taiwan in 2018 were worth $10.6 billion. Our major exports were coal, iron ore, natural gas and copper.

This is still miniscule compared to our trade with China. China is Australia’s largest two-way trading partner in goods and services, accounting for 29% of our international trade. Two-way trade reached $251 billion in 2019–20, and our exports to China grew by 9% to $168 billion.

Our one-China policy is effectively a ‘having our cake and eating it too’ policy.

How valid is China’s claim that Taiwan is a province of China? Geographically and historically, it seems fairly tenuous.

Taiwanese indigenous peoples settled the island around 6,000 years ago. It was annexed in 1683 by China’s Qing dynasty and there followed a large-scale Han Chinese immigration. For a time in the 17th century it was partly under Dutch rule. Japan took control in 1895.

In 1945, following Japan’s surrender, the Nationalist ROC took control of Taiwan and tried to do the same in mainland China. This led to the resumption of the civil war between Chinese Communist Party forces under Mao Zedong and Nationalist forces under Chiang Kai-shek. By 1949, the Nationalist forces had been soundly defeated in mainland China and fled to Taiwan.

Since then, the Nationalist ROC in Taiwan has intermittently claimed to be the rightful government of China, while the PRC has claimed to be the rightful government of both China and Taiwan.

There is no prospect of Taiwanese indigenous people successfully laying claim to the island. More than 95% of its 23.4 million people are Han Chinese, while only 2.3% are indigenous.

Today, Taiwan’s main political divide is between parties favouring eventual reunification with China and those aspiring to an independent Republic of Taiwan. (But any prospect of reunification after China’s crushing of democracy in Hong Kong seems very remote.)

In any case, both political groupings are conscious of the danger of pushing their agendas too hard. Most voters are less concerned about Taiwan’s governance or politicians’ ambitions than the traditional Chinese values of maintaining family ties and family prosperity, both of which are best served by maintaining an amicable working relationship with China.

Meanwhile, Australia’s current position reflects a curious Confucian obfuscation between a foreign policy that recognises one China and a strategic policy that doesn’t.

US politicians from both congressional parties are worried that China is overtaking America as the global leader in science and technology. In a rare display of bipartisanship, the normally gridlocked Senate passed a bill in early June to spend close to US$250 billion in the next decade to promote cutting-edge research. But lawmakers may be fretting unnecessarily, because the Chinese government seems to be doing everything possible to lose its tech race with America.

The latest example of China’s penchant for self-harm is the sudden and arbitrary regulatory action taken by the Cyberspace Administration of China (CAC) against Didi Chuxing, a ride-hailing company that recently raised US$4.4 billion in an IPO on the New York Stock Exchange. On 2 July, just two days after Didi’s successful offering, which valued the firm at more than US$70 billion, the CAC, a department of the ruling Chinese Communist Party masquerading as a state agency, announced a data-security review of the company. Two days later, the CAC abruptly ordered the removal of Didi from app stores, a move that wiped out nearly a quarter of the firm’s market value.

The CCP’s crackdown against Didi under the pretext of data security seems to be just the beginning of a wider campaign to assert control over China’s thriving tech sector. On 9 July, the CAC further shocked tech entrepreneurs and their Western investors with an official announcement that all companies with data from more than one million users must pass its security review before listing on overseas stock exchanges. Once fully implemented, the new policy could choke off Chinese tech firms’ access to foreign capital.

Ironically, US China hawks have long dreamed of accomplishing just that. In December last year, Congress passed a law authorising the delisting of Chinese companies from US stock exchanges if they fail to meet US auditing standards. Now, it seems that Congress need not have bothered. Its nemesis, the CCP, will be doing the same job far more effectively and thoroughly from now on.

Any so-called data-security review conducted by a secretive party agency with little technical expertise, no legal accountability and a responsibility only to its political masters will erect another unpredictable regulatory hurdle deterring most, if not all, foreign investors. Since foreign backers of Chinese tech start-ups usually plan to exit their investment through an overseas listing—preferably in New York—the prospect of a CCP agency wielding a veto over future listings may make them extremely reluctant to invest.

Foreign investors, usually well-established venture-capital firms, bring not only much-needed financing, but also valuable expertise and best governance practices that are vital to the success of tech start-ups. Almost all dominant Chinese tech giants, including Alibaba, Tencent and Baidu, relied on foreign funding to grow into spectacularly thriving companies. Had the CCP required a similar data-security review two decades ago, none of them would have existed—and China’s tech landscape today would be desolate.

The CAC’s crackdown on China’s most successful tech firms isn’t driven by concerns about data security. China’s surveillance state offers citizens no data security or privacy to speak of. And given that China’s data-security law already requires all tech companies to store their data inside the country’s borders, the government’s worries about a potential data leak by a ride-sharing platform such as Didi hardly merit radical rule changes and arbitrary restrictions. Minor regulatory tweaks would be more than adequate to address policymakers’ legitimate national security concerns.

But foreign investors hoping that Chinese leaders will realise their folly and reverse course should think again. Killing the proverbial golden goose seems to be a CCP specialty. In fact, neither Didi nor Alibaba—which in April received a record US$2.8 billion antitrust fine from the Chinese government—even come close to being the biggest such creature China has slaughtered recently. That unwanted distinction belongs to Hong Kong, whose autonomy and prosperity are in grave peril following the government’s imposition of a draconian national security law last year.

Paranoia, bullying instincts and contempt for property rights are deeply embedded in the CCP’s collective psyche, predisposing the Chinese government to self-destructive policies, regardless of well-intentioned advice or even evidence of their harmful consequences. And overcentralisation of power under strongman rule in China today has made self-correction nearly impossible.

For China’s tech entrepreneurs, Didi’s travails should serve as a rude awakening. Many may think that they can thrive under a dictatorship as long as they stay out of politics and focus on making money. However, to paraphrase Leon Trotsky, while they may not be interested in the dictatorship, the dictatorship is very interested in them.

A well-known Chinese proverb applies to the CCP. The party keeps ‘hurting loved ones and delighting the enemy’ (qintong choukuai). China’s tech bosses are learning the hard way that they may well have more to fear from their own government than from America’s bipartisan Sinophobia.