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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 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.

Just two years after the last one was published, Malaysia has launched a new foreign policy framework, aptly titled ‘Focus in continuity: a framework for Malaysia’s foreign policy in a post-pandemic world’. With the challenges brought about by both the Covid-19 pandemic and the brewing great-power contest in the Indo-Pacific, Malaysia may have felt a need for a greater sense of direction. The framework takes note of the resulting disruptions but traverses a rather safe route by avoiding any major detours from the previous framework.

Launched on 8 December, the framework is an official policy document that covers many foreign policy priorities for Malaysia. In addition to addressing the negative impact of the pandemic and rising regional tensions, it serves as a guiding document for Malaysian policymakers and practitioners to deal with a range of traditional and non-traditional security areas such as climate change, downward trends in globalisation and multilateralism, and the reversal of gains made on democratic and human rights fronts—particularly in Southeast Asia.

More importantly, it highlights the principles and approaches that Malaysia will be adopting. First, it pledges continued adherence to the principle of non-alignment, which keeps Malaysia’s diplomatic manoeuvring space wide but also signals the country’s reluctance to be drawn into the ongoing regional rivalries.

A second and equally significant aspect is its continued support for the rules-based liberal international order, with some proposed tweaks such as reforms to the UN Security Council, and greater sincerity on and support for multilateralism. Human rights is identified as a key guiding principle for Malaysia—which is hardly surprising since it has just been elected to the UN Human Rights Council, a position it will hold for the period 2022–2024. The framework clearly states where Malaysia’s priorities are: vulnerable groups, women, youth and addressing the impact of business and climate change on human rights. More collaborative action is likely to occur on these fronts with partners including Qatar, the United Arab Emirates, India and Kazakhstan.

The list of foreign policy priorities and strategies has been expanded, with more elucidation on existing ones in comparison to the previous iteration. For instance, the new framework shows a sense of responsibility and urgency in areas such as revitalising Malaysia’s links to the global economy, which have been severely curtailed due to bans on international travel and disruptions to international trade; pursuing health diplomacy to overcome public health challenges; and developing domestic vaccine production capacity.

Other priorities include facilitating the country’s digital economy goals, which include addressing regional digital economic issues, and attracting high-technology foreign investment into the country. Cultural diplomacy, which has been constrained in the past year, remains a permanent feature in Malaysia’s foreign policy toolbox. Strategies include promotion of cultural and sports diplomacy, though such efforts could be undermined by incidents like the recent axing of a world squash event due to Malaysia’s decision to not issue visas for Israeli competitors.

One area that the framework remains relatively silent on is the ongoing regional rivalry in the Indo-Pacific, a point we highlighted recently in our critique of Malaysia’s foreign and security policies. For the most part, the document skirts contentious aspects of this critically important issue, even though there’s no doubt that policymakers understand the impact these regional rivalries have on Malaysia, which lies at the centre of these developments, both literally and figuratively.

Certainly, Malaysia’s foreign policy interests go beyond the Indo-Pacific region. Yet the Indo-Pacific and the major developments there are of immediate and top concern. This could be a part of a cautious attempt not to flare up the US–China polarisation of the region. China looms large over Southeast Asia, which has undoubtedly shaped policy responses from countries across the region. Malaysia’s own conservative assessment of how China would behave with its smaller neighbours in case of heightened US–China rivalry is another critical factor.

The introduction of this new framework is timely. It comes at a time when Malaysia, according to the Lowy Institute’s Asia Power Index, has fallen in its power-projection capabilities. It is currently ranked 11th out of the 26 selected Indo-Pacific countries for comprehensive power, down a ranking, having been overtaken by Indonesia. Its overall score of 18.3 out of 100 is a 2.4-point or 11% drop from the previous year. In fact, Malaysia performed poorly in most of the areas measured by the index, with diplomatic influence experiencing the biggest drop of all (–8.9 points). Even in areas in which it usually performs best, like cultural influence, Malaysia experienced a 4.0-point drop from last year. It’s hoped that the new policy will address this fall.

Indonesia’s rise in the index is an outcome of President Joko Widodo’s bold and proactive foreign policy moves. Even though Indonesia and Malaysia have similar approaches on regional and international issues, it’s the clear articulation of preferences and priorities that is increasingly making the difference. From climate change to the Natuna Islands, Indonesia has been vocal about its rights and concerns.

Nevertheless, Malaysian foreign policymakers believe that the document’s guiding principles, approaches and strategies remain relevant. For instance, in launching the framework, Prime Minister Ismail Sabri Yaakob said that it ‘will serve as a reminder and guidance to all Malaysian foreign affairs practitioners that regardless of the evolving regional and international architecture, the cardinal principles of Malaysia’s foreign policy will remain consistent and unchanged’.

The new framework, like Malaysia’s current defence policy, essentially reflects a non-aligned policy with (albeit diminishing) elements of a hedging strategy. It is perhaps the genius of Malaysia’s foreign and defence policymakers that they have been able to continue to keep us all guessing. However, if Malaysia wants to stay ambiguous vis-à-vis the competing superpowers, adoption of opposite and counteracting measures along with a foolproof fallback position is a must. There is a smattering of evidence of this in this latest foreign policy framework but not enough.

Hedging strategies like Malaysia’s can sometimes fail or, in the case of Southeast Asia, have variable effectiveness. Malaysia may eventually find itself having to make a choice between the superpowers. It has to decide too whether to act as an ‘interlocutor for regional peace’ or a ‘smooth self-defence operator’. As one of us recently commented, ‘Hedging is a luxury middle powers cannot afford for long, especially when the stakes are high, superpowers are pushy, and the rivalry is intensifying.’

The sad saga of the MRH-90 Taipan helicopter has been running for a long time. Back when I worked in the Department of Defence, we used to occupy ourselves from time to time calculating how much money the taxpayer would save in the long run if we just walked away from the MRH-90 utility helicopter and bought Black Hawk helicopters instead. The answer was a lot. And the sooner you did it, the more you’d save, by avoiding sinking more acquisition dollars into the MRH-90 and realising the substantially lower operating costs of the Black Hawk. But even though those numbers were shared with Defence’s senior decision-makers, the department couldn’t bring itself to take that step.

Now, however, after almost the entire $3.7 billion acquisition budget has been spent, the government has announced what should have been done long ago: it will retire the MRH-90 fleet early and acquire a new fleet of Black Hawks. That’s a good call. While on paper the MRH-90 has more capacity than the Black Hawk, in real life that’s irrelevant if the helicopter isn’t flying.

So, what’s changed? At some level it’s about China, just as everything in defence and strategic policy today is about China, but not in the way you might expect. Neither the MRH-90 nor the Black Hawk will have a deterrent effect in the way nuclear-powered submarines or long-range strike missiles will.

The first way that it’s indirectly about China is that Defence Minister Peter Dutton is trying to impart a sense of urgency to Defence’s lethargic acquisition system to meet Australia’s deteriorating strategic environment. He has also said he’s going to hold industry to account for underdelivery. The MRH-90 project has been going since 2004 and still hasn’t delivered what it was meant to. The days when projects could noodle along because we had all the time in the world are gone.

The second way is that the new strategic climate means there’s more willingness to accept the poor optics of retiring a $3.5 billion investment early—just as the government was willing to accept what will likely be a sunk cost of more than $3 billion once all is said and done in the cancelled Attack-class program.

The third way is that Defence is suddenly rich in cash—and that’s also because of China. A key reason that the government and Defence hadn’t replaced the MRH-90 is that, even though there would have been long-term savings through the lower operating cost of the Black Hawk, there would have been a big short-term acquisition cost. A private company could manage that by borrowing and paying it back with the operating savings (or the revenue raised by operating the new asset). Defence can’t do that; each year it has to live within its means. Buying a replacement for the MRH-90 would have meant deferring or cancelling another priority. And with Defence’s acquisition program historically oversubscribed, that would have had a ripple effect of further delays on other programs.

Now Defence has the opposite problem: it’s got too much cash. That’s partly due to the government increasing the defence budget (again, largely due to China), with much of that flowing into the acquisition budget. That steep increase combined with the impact of Covid-19 on industry and supply chains meant that last year Defence underspent its acquisition budget by around $1 billion. That’s likely to occur again this year, with further increases built into the budget and the pandemic lingering.

But the cash bounty is also due to the cancellation of the Attack class in favour of nuclear-powered submarines (and that’s definitely about China). Defence was planning to spend about $1 billion this year on the Attack class. That was to grow over the next few years to $1.5 billion and potentially $2 billion a year. While SSNs will cost more overall than the Attack class, little SSN-related spending will occur in the next few years. In the public sector it’s ‘use it or lose it’. In short, Defence now has the cash to get Black Hawks.

And there’s potentially other sources of cash to put towards them. One problem with the MRH-90 was the restriction on its ability to perform the special forces role, pushing Defence to investigate a dedicated fleet of light helicopters specifically for special forces. That requirement may now be redundant if the new Black Hawks can do that job.

What does the decision to buy off-the-shelf American helicopters mean for Australian industry, particularly coming hard on the heels of the cancellation of the Attack class which left a lot of Australian companies high and dry? I don’t think it means the government is walking away from Australian defence industry, but its sense of urgency is shifting its policy. Since the Coalition was elected in 2013, the industry pendulum has swung from the ‘Abbottist’ view that the defence budget is not an industry support program and we should go to the global market for capability to an unstated policy that everything that can be done in Australia will be done in Australia.

The pendulum is swinging back a little. The Howard government’s original decision to buy the MRH-90 went against Defence’s preference for the Black Hawk and was made due to the jobs involved in local assembly. But it’s been another case that shows that assembling systems designed overseas with largely overseas components doesn’t necessarily deliver better capability or make the system any easier to sustain. The reassessment of the balance of priorities between local jobs and capability is also being driven by the new realism created by China’s behaviour. Hopefully, we’ll reach that happy middle ground where the government will support Australian defence industry when it makes sense to do so but continue to buy off the shelf overseas when there’s the need and the opportunity to acquire capability quickly.

It’s possible that the Black Hawk decision will be the first of several in which Defence puts its embarrassment of riches to use in making some rapid off-the-shelf purchases overseas. And as we all know, the real money for local industry comes through sustaining those systems for the decades they’re in service.

A final note. While it may be tempting to hang on to the MRH-90 in some kind of disaster-relief or bushfire-fighting role, that siren song must be avoided. The MRH-90 has been costing $35,000 per hour to operate. Last financial year that ballooned to $50,000 and it was probably the final straw. Even if that could be halved by stripping out military capabilities, it would still be orders of magnitude more than a civilian firefighting or emergency services helicopter. Despite the sunk cost, trying to repurpose the MRH-90 will merely extend the drain on resources. We’ve made the decision; walk away, don’t look back.

Should Australian officials and dignitaries travel with our athletes to Beijing in February for the Winter Olympics? Check the Department of Foreign Affairs and Trade’s Smartraveller site, which says that Chinese authorities have ‘detained foreigners on grounds of “endangering national security”’ and that ‘Australians may be at risk of arbitrary detention’.

Surely China’s Ministry of State Security wouldn’t detain people during the Games? Good luck if you think a sporting event will protect you. These are going to be the most stage-managed Olympics in history. Anyone who threatens to dent Beijing’s gloss will be at risk of rough handling.

US President Joe Biden has done the right thing in deciding on a ‘diplomatic boycott’ where the athletes participate but officials and politicians stay away. In the words of White House Press Secretary Jen Psaki, the Beijing Olympics ‘cannot be business as usual’ because ‘standing up for human rights is in the DNA of Americans’.

Given the Chinese Communist Party’s systematic repression of millions of Uyghurs, the crackdown in Hong Kong, the arbitrary arrests of other nations’ citizens including two Australians and the disappearance from public life of Chinese tennis star Peng Shuai, it’s surprising that there hasn’t been a more concerted global effort to totally boycott the Olympics.

It’s disappointing that the Biden administration didn’t make more of an effort to build an international consensus for a boycott. A coordinated international response would have pressured Beijing and perhaps succeeded in moderating the draconian restrictions China is putting on international press coverage of the Games.

Now, Beijing will redouble efforts to dissuade other countries from supporting a diplomatic boycott with threats of taking resolute countermeasures against ‘blatant political provocation and a serious affront to the 1.4 billion Chinese people’.

That said, the Australian government should agree to a similar diplomatic boycott and do nothing that adds lustre to Beijing’s political manipulation of the Games.

For Chinese President Xi Jinping, there is only one audience that matters, and that’s the people of China, who determine whether the CCP has sufficient legitimacy to sustain its hold on power.

Expect an Olympics unlike any in the post-war period. These games will be engineered to present an image of China that, as Xi announced in July on the centenary of the CCP, ‘is one of a thriving nation that is advancing with unstoppable momentum toward rejuvenation’.

To support that goal, the international media will be largely kept away from the Games. Coverage will be tightly managed to avoid even the slightest blemish. Under the guise of Covid-19 management, international visitors will be mostly absent.

Chinese audiences will be hand-selected party loyalists. Xi will dominate the ceremonial moments, benignly presiding over tightly choreographed flag-waving and applause.

All that remains, as Xi has described, is that China win medals: ‘[O]ur young people should make it their mission to contribute to national rejuvenation and aspire to become more proud, confident, and assured in their identity as Chinese people.’

If ever there was a moment for the world’s athletes to ‘take the knee’ in protest at the racism inherent in the CCP’s repression of Uyghur and Turkic minorities in western China, it should be at these Games.

Of course, the International Olympic Committee will presumably cite rule 50 of the Olympic Charter preventing athletes from taking part in any ‘demonstration or political, religious or racial propaganda’.

The IOC maintains that rule 50 is to ‘keep the field of play, the Olympic Village and the podium neutral and free from any form of political, religious or ethnic demonstrations’.

Except that, from the lighting of the torch in the Olympic stadium to the final closing ceremony, the whole show will be designed, broadcast, written and spoken about, memorialised and propagandised as a triumph of the CCP’s will and of Xi’s leadership.

One thing that might penetrate the propaganda veil in ways that ordinary Chinese people could see would be if athletes found ways to subtly show that they are there to celebrate sport, not be subsumed into a CCP disinformation campaign.

My hope is that athletes will take the knee or raise a fist or wear a black armband or look the other way when the flags are raised at medal ceremonies. In so doing they will be exercising the kinds of liberties that Chinese citizens are not permitted to show but are well able to recognise.

If enough athletes take this approach, the IOC will hardly be able to sanction them all.

An interesting Olympic footnote is worth sharing here. Peng Shuai’s allegation of sexual coercion was made against Zhang Gaoli, the most senior party figure to face such a public allegation of sexual assault.

Zhang reached the rank of vice premier and retired in 2018 after steering Olympics preparations for a couple of years. He has not been heard of since Peng’s online denunciation.

Zhang, it should be noted, was an acolyte of Jiang Zemin, a leader whose supporters Xi has assiduously purged since 2012. After the Olympics, watch what happens to Zhang. Xi could use this as a new catalyst for an anti-corruption purge of party positions. He is adept at turning others’ misfortunes to his own advantage.