Australia has passed through a baffling period in public and policy debate on China–Taiwan relations. It has been prompted by a tactical step by the People’s Liberation Army Air Force over the last 12 months to engage in flights over the Taiwan Strait and through Taiwan’s air defence identification zone. These have been met by Taiwanese intercepts and have led the United States and other countries to undertake naval exercises around Taiwan and through the strait itself. The US has also signalled clear support for Taiwan through statements, visits and an upgrade of bilateral protocols.

Cross-strait relations are poised at a higher state of activity and tension. It’s almost certain that Beijing is planning another tactical step forward in its actions towards Taiwan.

In Australia, this changed dynamic over 2020 began attracting media attention early this year. News Corp websites have delivered a steady flow of reports about China’s actions in the context of its growing military power and possible conflict with the US. Then, in March and April, the Australian Broadcasting Corporation published a number of ostensibly serious analyses on this theme claiming that a US–China war over Taiwan was coming.

These hyperbolic reports and analyses were just part of the already intense debate about Australia–China relations. They created the fertile ground for questions put to Defence Minister Peter Dutton by the ABC on 25 April about the prospects of conflict, which elicited an equivocal response, and for a message by Home Affairs Secretary Mike Pezzullo for the commemoration of Anzac Day about a future in which war was again possible.

These comments can be understood and critiqued in isolation and in the context of the changed cross-strait dynamic. But after the weeks of hyperbolic reporting, they sparked an explosion of national media reports and commentary about China and war.

This immediately triggered a political reflex in Australian public life to relitigate political and military history and the pathologies of national identity. A debate ostensibly about Beijing’s tactical actions towards Taiwan turned into one about a national propensity to participate enthusiastically in wars for imperial powers, from World War I to Vietnam and Iraq, which then led to commentaries about the urgent need for an anti-war movement to hold back a warmongering government and military.

Thus, Australia arrived at a debate about the need to stop marching to a war with China, rather than one about reality. It included wild inaccuracies, tendentious argumentation and even offensive presumption. Beijing has no doubt been perplexed. More disenchanting, the people against whom any war would actually be fought by China, the Taiwanese, have been almost wholly erased from Australia’s debate.

Matters were further complicated on 6 May when Prime Minister Scott Morrison was asked about Taiwan in a radio interview and confused Beijing’s unification formula, ‘one country, two systems’, for Australia’s ‘one China’ policy. He regrettably restated it a week later, an error which led to three notable outcomes.

First, the Australian media for the first time attempted to properly explain exactly what Australia’s ‘one China’ policy is. This is a complex policy area but one notorious for its misrepresentation in reporting and analysis. Second, the opposition entered the debate with criticism of the government. And third, Finance Minister Simon Birmingham sought to tamp down the issue by saying in a press conference that there had been no change to Australia’s policies towards Taiwan.

Even if Birmingham’s statement cannot be read as a definitive Australian government position, the denouement would no doubt have pleased Beijing and greatly disappointed Taipei, which has been looking for stronger signals of support from Australia for some time. Indeed, a case can be made that Australia should, in fact, be considering the parameters of its Taiwan policies in light of Beijing’s escalated military actions.

The whole episode has been a salutary reminder of how ill-prepared Australia’s public debate and policymaking infrastructure actually are for an event in the Taiwan Strait. There’s a lack of understanding of the policies, politics and history of China and Taiwan in Australia’s politics and media, and there’s a reflexive tendency to revert substantive issues into parochial metaphors for Australia’s own nationhood.

While the connection between foreign and defence policy and democratic practice has always been fraught, Australia needs a public sphere that’s able to sustain substantive debate to respond to events in cross-strait relations with measure and purpose.

Australia has made significant strides in defence preparedness and political resilience to ‘grey-zone’ tactics in recent years but another tactical step forward against Taiwan by Beijing is highly likely in the short- to medium-term. That could involve a limited naval or air engagement in the Taiwan Strait or landing troops or marines on a location such as Taiwan-controlled Taiping Island in the South China Sea.  The last two months have demonstrated that Australian public life is not ready for that step.

In last week’s expansionary budget, one area that felt a bit underdone was defence. Here, the government delivered what it promised 12 months ago: $44.6 billion, an increase over last year’s budget of 4.1% in real terms.

At any time in the last 25 years a defence budget growing at that level would have been welcome. But now Australia and the wider region faces the direst strategic outlook since perhaps the end of World War II.

It’s clear that Scott Morison and his ministers understand that the region is facing a crisis brought on by an increasingly bellicose Chinese Communist Party. Taiwan is the immediate flashpoint and the level of risk will peak in perhaps four to five years’ time. In that period, according to the United States Defense Department, the People’s Liberation Army will gain a strong military edge over the Taiwan Strait in air power, missiles and ships.

Would Xi Jinping risk his own future, as well as that of the CCP, to stage an attack on Taiwan? Xi has learned to turn risky situations to his advantage. In the illegal annexation of the South China Sea, in cyber spying and intellectual property theft, the imposition of communist authority in Hong Kong, and in the economic coercion of Australia, Xi took significant risks to strengthen his rule and largely got away with them.

He will apply the same strategy to Taiwan, using all means short of war and indeed some measures that cross that offensive line right up to the limits of US tolerance.

I’ll come to what this might mean for Australia and for the defence budget soon, but first consider a remarkable phenomenon, which is the ability of so many in Australia to deny what is obvious about Beijing’s intentions.

Writing in the Australian Financial Review, former foreign minister Gareth Evans judged that ‘no Chinese political or military preparations suggest an invasion is remotely imminent’. That is an astonishing misjudgement.

On 24 April Xi presided over a ceremony commissioning three major warships for China’s southern fleet. Communist party newspaper the Global Times declared: ‘These vessels will play important roles in solving questions in places like the island of Taiwan and the South China Sea.’

Hardly a day goes by without PLA aircraft, often in large numbers, encroaching Taiwanese airspace. CCP rhetoric about taking Taiwan by force if necessary is increasingly being used in speeches and editorials.

Xi will hope this show of strength will deter the US and the allies from stepping in and that his aims can be realised short of war, but we all need to understand that the risk of conflict is sharply growing.

In Washington last Thursday, US Secretary of State Antony Blinken and Foreign Minister Marise Payne held talks and gave a press conference, underlining the closeness of the alliance relationship.

The secretary of state stressed the Biden administration’s interest in ‘reaffirming and revitalizing America’s alliances and partnerships’ and, in the 70th year of the ANZUS Treaty, finding ways for the alliance ‘to evolve to meet the challenges we face’.

Blinken said ‘the US will not leave Australia alone on the field, or maybe I should say alone on the pitch, in the face of economic coercion by China. That’s what allies do. We have each other’s backs.’

Understand that the US has every expectation that the requirement for support runs in both directions. Washington wants Australia to do more, is telling us that the alliance needs to be revitalised and that challenges will be faced together.

This will include working out how to jointly respond to CCP belligerence over Taiwan, which wasn’t mentioned once in the Blinken–Payne press conference. Sometimes you can judge the significance of an issue by the way it isn’t mentioned publicly.

Back to the defence budget. The Morrison government has delivered everything that it has promised to do in the 2016 defence white paper and more, including two additional P-8 Poseidon maritime surveillance and anti-submarine warfare aircraft and four extra CH-47 Chinook heavy lift helicopters. There is also an accelerated plan to establish a missile manufacturing capability in Australia.

While these are positive steps, the uncomfortable truth is that the bulk of the $270 billion allocated over the coming decade to build ships, submarines and other military equipment will only come into service well after the riskiest period for Taiwan.

Defence Minister Peter Dutton’s most pressing challenge is to strengthen the Australian Defence Force in the shortest time frame possible. An immediate candidate will be to move quickly on the ‘life extension’ and upgrade program for the Collins submarines. The government should also explore options to add yet more P-8s to the current 14 airframes but there are limits to what can be done quickly.

A faster way to strengthen deterrence would be to re-open a discussion with the US about increasing the US Marine Corps presence in northern Australia and getting some US Navy ships operating out of our west coast base, HMAS Stirling.

When the US marine presence was being negotiated a decade ago, the initial American offer was to deploy a 7,500-strong ‘Marine Air–Ground Task Force’. The Australian government of the day baulked, and instead we had a decade-long slow growth to the current annual contingent of 2,500.

A larger marine presence ultimately hinges on access to a port facility. Consider the thought that if Beijing wanted to slow down the growth of Australia–US defence cooperation in the Top End a clever way to do it would be to take control of the area’s most viable port, which is exactly what happened in 2015 when Darwin Port was leased to a Chinese company for 99 years.

The world has fundamentally changed since then. Now, the opportunity to strengthen a shared US and Australian deterrent posture in the Indo-Pacific needs to be urgently reconsidered.

A conflict over Taiwan would be a disaster for all concerned, but disastrous conflicts happen all the time. At this point the best hope to keep the peace is to change Xi’s calculation about the level of risk China would face if it initiated such a crisis.

The only short-term way to strengthening deterrence is by lifting the defence readiness of democracies. If US President Joe Biden does visit Australia for the ANZUS anniversary, you can be assured this will be the number one item on his agenda.

Over the past decade, China has made noteworthy strides towards drawing Eastern Europe into a web of cooperative relations. Through a cheque-book diplomacy approach, Beijing promised lucrative financial investments in the region. After the implementation of the so-called 17+1 platform, Eastern Europe’s ties with the emerging superpower intensified and appeared largely friction-free. China’s courting of this part of Europe even rattled Brussels bureaucrats who worried that the Chinese Communist Party could use its financial and technological prowess to drive a wedge between EU member states. As time has worn on, however, three countries of this cooperation forum—Estonia, Latvia and Lithuania—have visibly stopped rowing in Beijing’s direction.

The growing wariness of the People’s Republic of China in the Baltics can be tracked through the countries’ annual national intelligence reports. Traditionally, these strategic documents have almost exclusively fixated on their larger eastern neighbour, Russia. Today, however, paragraphs and pages are also reserved for the threat posed by China. Recently, in a rather bold move that caught the headlines of global news agencies, senior Baltic leaders snubbed the annual 17+1 summit and Chinese President Xi Jinping personally. Leading the way, the Lithuanian parliament agreed to exit this forum and politicians advocated for closer links with Taiwan. Why exactly did this once seemingly promising economic partnership sour so quickly?

To begin with, the Chinese leadership has given something of a masterclass in how to alienate potential partner governments. It has reacted harshly to even the slightest questioning of its human rights record. Local Chinese embassy websites in the Baltics often read like a manifesto of a misunderstood superpower, filled with statements with a propagandistic flavour demanding that Baltic governments abandon their Cold War mindset. To give one illustration of this, in reaction to an intelligence report issued by Estonia, the Chinese embassy in Tallinn declared: ‘The Estonian Foreign Intelligence Service is requested, based on facts and truth, to correct its wrong expressions.’

In a similar vein, after the Lithuanian parliament had debated China’s human rights abuses, Chinese representatives sprang into action by denouncing the debate as ‘an anti-China farce choreographed by some anti-China individuals intended to smear China’. Such boorish public diplomacy displays have only backfired and pushed the Baltics deeper into the sceptics camp. Where initially Baltic officials, in the name of economic benefits, appeared to be somewhat willing to compartmentalise their differences on human rights issues, today they visibly no longer want to merely gallop along. In response, China has sanctioned a number of Baltic diplomats.

What’s more, the Chinese side may have miscalculated the role that its main geopolitical rival, the United States, plays in the region. Washington’s strategic imprint on NATO’s eastern flank is hard to overestimate. The foreign policy ethos of the Baltic states for the past two decades has been to align themselves as closely as possible to the alliance hegemon. It was, therefore, no coincidence that Estonia was among the first EU nations to ink a bilateral declaration with the US government essentially blocking Huawei from operating in their territory. Latvia and Lithuania soon followed suit. Closely wedded to the US in strategic matters, the Baltics are often willing to pay heed to its geopolitical interests. This makes it all the harder for China to make inroads in the region.

In 2019, the New York Times ran a major exposé of leaked internal Chinese government documents. Curiously, the materials revealed that Xi was well versed in the history of the Baltic countries. In one of his speeches he reportedly warned that, while economic development ‘is the top priority and the basis for achieving lasting security’, it’s wrong to assume that ‘with development every problem solves itself’. As the best illustration for this, Xi cited the Baltic republics, saying they ‘were among the most developed in the Soviet Union but also the first to leave’. Given this, it probably shouldn’t come as a surprise to the Chinese leader that the Baltics are potentially seeking a way out of the Beijing-sponsored 17+1 initiative. Economic inducements alone do not create lasting partnerships.

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.

China’s economic embargo of Australia helped to persuade several OECD members, including the United States and Canada, to back Australia’s Mathias Cormann as the organisation’s new secretary general, according to the Center for Strategic and International Studies, a Washington-based think tank.

‘Cormann’s selection sends a clear message that the OECD is not willing to cede the Asia–Pacific region to the influence of authoritarian states,’ a CSIS report says.

Although no one suggests that the former Australian finance minister will turn the 37-nation Organisation for Economic Cooperation and Development into an arm of US President Joe Biden’s crusade for global democracy, Cormann will be in a position to influence its agenda on issues highlighting China’s departure from global economic norms, such as state subsidies, intellectual property protection, labour standards, policy transparency and competition policy.

Should Cormann wish, he could raise the use of economic coercion as an issue of global concern, including by placing it on to the agenda of the G20.

Cormann is expected to encourage the expansion of the still heavily Eurocentric membership of the OECD into Asia, potentially including India, Indonesia and Malaysia.

The OECD’s origins were as an institution assisting European economic reconstruction in the wake of World War II, with its membership opened to non-European advanced nations in 1961.

It offers policy advice to its members and is also the architect of international agreements, conventions and guidelines on issues such anti-bribery, tax administration, development assistance, multinational investment and environmental policy. It also provides benchmark statistics in many areas, including pensions, health, school education standards and budget policy.

The OECD secretary-general has a seat at G20 meetings alongside the managing director of the International Monetary Fund and the body has sponsored other pivotal global agencies, including the International Energy Agency and the Financial Action Task Force.

With a staff of around 3,500, including 2,500 researchers, and an annual budget equivalent to $610 million, the Paris-based institution exercises a powerful influence on global economic policy.

Cormann was an outsider for the post. He didn’t have a history of engagement in global economic policy issues, besides occasionally representing Australia at IMF and G20 meetings, when Scott Morrison, in his former role as treasurer, was too busy to attend.

By contrast, his final rival, Sweden’s Cecilia Malstrom, had spent five years as the European Union’s commissioner for trade and had also been its minister for EU affairs and home affairs.

Australia’s reluctance to adopt ambitious targets on climate change and its continuing commitment to coal counted against Cormann’s candidacy. Malstrom supported tougher action on climate change, including Europe’s proposed carbon taxes on imports. There was also a view among some members that the job should go to a woman.

On the other hand, Cormann had much more enthusiastic support from his home government than did Malstrom, who was from a minor party in the Swedish opposition. The CSIS argues that Australia’s strong conviction that a key multilateral institution required leadership in the Asia-Pacific found favour with the Biden administration.

At the heart of Biden’s foreign policy is a belief that a revival of multilateralism, which had been shunned by his predecessor Donald Trump, is required to manage the rising power of China.

The OECD is distinct among multilateral institutions in having a membership composed of advanced and (relatively) democratic nations. It does not include either China or Russia.

Former World Bank president and US trade representative Robert B. Zoellick argued that China should be encouraged to become a ‘responsible stakeholder’ in global organisations, following its accession to the World Trade Organization in 2001.

China has, indeed, taken on leadership positions in many international agencies since then, including United Nations agencies: the International Telecommunication Union, the International Civil Aviation Organization, the UN Industrial Development Organization and the Food and Agriculture Organization. Last year, China won a seat on the UN Human Rights Council.

However, its engagement has not brought any shift in its values or led to any moderation of the state-led capitalism which the US believes brings unfair advantage to Chinese enterprise.

The CSIS argues in another report that ‘China’s growing interest and influence in multilateral organizations may preclude accountability mechanisms—specifically those associated with good development practice—from operating transparently and appropriately.’

It suggests that the OECD, as an exclusive group of the world’s most advanced free-market economies, has the opportunity to develop improved accountability standards.

The OECD’s outreach program includes China among five ‘key partners’ alongside India, Brazil, Indonesia and South Africa. They have observer status on OECD committees and agree to be bound by OECD legal instruments, such as the anti-bribery convention.

In principle, being a ‘key partner’ is a step along the pathway to membership. The OECD has expanded membership in recent years to include Latvia, Lithuania and Colombia. Brazil and Argentina are both in discussions about membership.

There has been debate within the OECD over whether membership should be extended to China, given it is by some measures the world’s largest economy and has committed to key OECD agreements.

‘Within the OECD, advocates of inviting China to full membership argue that it would result in China committing to the practices of OECD countries and working further towards an open market structure while expanding access to the OECD for policy work in the region,’ the CSIS says.

However, membership requires commitment to the OECD values of ‘democracy based on the rule of law and human rights, and adherence to open and transparent market economy principles’.

The US and, it is to be presumed, Cormann, believe China falls far short of these minimum standards.