Special Report: Australia faces down China in high-stakes strategy

[September 04, 2020]  By Kirsty Needham

CANBERRA (Reuters) - Australia is standing up to China. Watch closely: It may be a harbinger of things to come, as the world's smaller countries respond to the increasingly coercive Asian economic superpower.

For years, the Australian political and business establishment had a paramount goal: protect and expand this natural resource powerhouse's booming exports to fast-growing China. Iron ore, coal, natural gas, wine and more: Until COVID-19 struck, Australia had a 29-year run without a single recession as it sent its signature goods to the world's voracious No. 2 economy. Canberra's diplomacy came to focus on balancing the Chinese trade relationship with the nation's equally important defense alliance with the United States.

But the paradigm through which the government of Prime Minister Scott Morrison now views China has shifted dramatically, people inside his government told Reuters. The relationship is no longer shaped just by trade, but by a stark view emerging widely inside this continent-spanning country – that Beijing poses a threat to Australia's democracy and national sovereignty.

Discussions about China inside Morrison's cabinet now revolve around the need to preserve sovereignty and fend off Chinese efforts to sway Australian politics, two government sources told Reuters.

Recent steps taken by the prime minister appear to reflect this thinking. He has warned the Australian public about a significant increase in cyber attacks, introduced a national security test for foreign investments, and announced a dramatic jump in defense spending focused on the Indo-Pacific region. Morrison didn't name China when announcing these moves, but government officials said they came in response to Beijing's actions.

Australia has also voiced concerns in recent weeks about what it sees as Chinese disinformation campaigns that seek to undermine democracies; suspended its extradition treaty with Hong Kong over China's imposition of a draconian security law in the city; and filed a declaration with the United Nations rejecting China's maritime claims in the South China Sea.

Of all the actions taken by Australia in recent months, though, it's the government's lobbying of world leaders in April for an inquiry into the origins of the COVID-19 pandemic that has most enraged Beijing. The world lined up behind the move, with 137 nations co-sponsoring a resolution at the World Health Assembly for an investigation into the pandemic, which first emerged in Wuhan. Beijing also ultimately backed the resolution. An independent panel, headed by former New Zealand prime minister Helen Clark and former Liberian president Ellen Johnson Sirleaf, will deliver an interim report in November.

Beijing lashed out angrily, imposing trade sanctions on Australia after the pandemic inquiry move. It suspended some beef imports on a technicality and effectively blocked a $439 million trade in barley by slapping tariffs of 80.5% on the Australian import. China has also launched an anti-dumping probe into Australian wine imports.

In August, a Chinese diplomat drew on Roman history to blast Canberra, comparing Australia's call for an inquiry to the betrayal of Julius Caesar by the assassin Brutus.

China's foreign ministry said Beijing had never interfered in Australia or used coercion against it. Responding to questions from Reuters, the ministry also called on Australia to "abandon the Cold War mentality," do more to "enhance mutual trust" and not "provoke trouble on issues involving China's core interests." A stable relationship, it said, was in the interests of both countries.

Reuters spoke to 19 current and former Australian government officials and two former prime ministers in examining how relations with China have deteriorated. They provided the first comprehensive account of how the government came to adopt its view that Australia must "speak up," as several ministers have said, about Beijing's actions.

This shift in Australia's position on China began in 2017, the interviews show, before the sharp deterioration in relations between Beijing and Washington, which threatens to trigger a new Cold War. The change has been led in part by a coterie of Australian officials, some with security and intelligence backgrounds, who hold deeply skeptical views of the Chinese leadership and its global ambitions.

In one sign of the times, a bipartisan group of anti-China hawks has formed in the Australian parliament, who dub themselves "the Wolverines."

Asked about this shift, Morrison couched his moves with diplomatic care. In a written response to questions from Reuters, he said his government's approach to China has been consistent.

"As with any bilateral relationship, Australia's approach is based on our values and principles, and on a clear-eyed assessment of Australia's national interest," he wrote. "We place great store on our relationship with China and we have not sought to put that relationship at risk."

Australia had been a great beneficiary of China's economic growth, Morrison said, but "as countries develop they have a responsibility to uphold a stable, prosperous strategic balance in our region."

Trade with China remains vitally important to Australia. The stakes are high: Australia has a $172 billion trading relationship with China, and a $51 billion surplus.

It's an uneasy balancing act. In response to Australia's push for a pandemic inquiry, Beijing accused Canberra of "dancing to the tune" of Washington. In June, after a fresh threat from Beijing on trade, Morrison said Australia wouldn't yield to "coercion."

A visit Morrison paid to Beijing in 2017, when he was Treasurer, set the stage for his stance in the current feud. He came away from the trip convinced his country's trade with the world's second largest economy had two-way benefit. He'd heard from Chinese officials, he told a small group of reporters in Beijing at the time, that Australia's exports of iron ore, which the country produces in vast volumes and high quality, put it in a "unique position."

This conviction, that China needs Australia's iron ore, is now buttressing his government's position.

"It is a mutually beneficial relationship," Morrison said in his comments to Reuters. "China’s economy is stronger because they have access to high quality energy, resources, agricultural goods and increasingly services from Australia. And our economy is stronger because we have access to high quality manufactured goods from China."

So far, China hasn't mentioned iron ore as a potential target for reprisal. For good reason: Australia makes up 60% of China's imports of iron ore, crucial for powering an economy Beijing is trying to get back to full capacity after it was shuttered by the virus.

Despite China's "bluster," it needs Australia, says former Prime Minister Malcolm Turnbull, whose relationship with Beijing became increasingly icy during his tenure from 2015 to 2018.

"If China suddenly came across a huge supply of iron ore, at appropriate grades, that they could extract at competitive prices, that was closer to them, they would be all over it - but there's not," he told Reuters. "Chinese companies do not buy Australian commodities, goods or services because they want to do this struggling little island nation a favor - they do it because it's good value, good quality."

Responding to a question about its iron ore imports from Australia, China's foreign ministry said trade between the two nations was long established and based on market principles of supply and demand. China hopes Australia will "do more" that is "conducive to friendly exchanges and cooperation," the ministry said.

It remains to be seen whether Australia's tougher stance provides a broader model for other mid-sized powers reliant on exports to China, however. Australia's iron ore would be hard for China to replace; other nations may lack such leverage.

One former Australian leader, while supporting a firm position on China, questions the government's handling of the relationship.

Former Labor Prime Minister Kevin Rudd said China is difficult to deal with and respects strength, but he is critical of the Morrison government's "rolling crises" with Beijing. Being "hairy chested on China" has become a competition for advancement in Morrison's Liberal Party, Rudd told Reuters.

"China is never going to impose any economic measures against Australia which damage its own interests," said Rudd, a fluent Mandarin speaker and former diplomat in the Beijing embassy. But, he adds, Australia has vulnerabilities: Australian exports beyond iron ore that aren't essential to China could be targeted by Beijing, quickly adding up to an expensive toll.

"The atmosphere in Australia does not lend itself to a reasoned discussion on the China relationship, because you are automatically defined as either a hawk or a panda hugger," Rudd said in an interview.

SOURED SENTIMENT

When the pandemic hit, Australia had already decided it was dealing with a more authoritarian and assertive Chinese government under Xi Jinping, and in the long-term needed to reduce its trade reliance on Beijing, diplomats and government officials told Reuters.

The pandemic brought tensions into the open like never before, however. In previous bouts of friction, too, Beijing took punitive economic measures against Australia. But those penalties, such as holding up coal shipments or wine at its ports, were cloaked as customs technicalities.

This time, China's ambassador to Canberra, Cheng Jingye, was unequivocal, threatening in an April 27 newspaper interview that in response to Australia's call for an inquiry, the Chinese public could boycott Australian wine, beef and tourism.

Beijing then cautioned its students against choosing Australian universities, threatening a $27.5 billion market for educating foreign students. Morrison fired back with his strongest language on China since becoming prime minister.

"We are an open-trading nation, mate, but I'm never going to trade our values in response to coercion from wherever it comes," he told Sydney radio station 2GB in June.

Public sentiment toward China has soured. An annual poll by the Lowy Institute, a foreign policy research group, found that trust in China among Australians had plummeted to 23%, compared with 52% in 2018. The survey, released in June, found that 94% of respondents supported reducing economic reliance on China.

The government's approach of working with other nations in the region to deal with China enjoys bipartisan support. "In our relationship with China, as with any country, we must always assert our values and our interests – including transparency and sovereignty," the opposition Labor Party's foreign affairs spokeswoman, Senator Penny Wong, told Reuters.

The United States is Australia's major security ally. But with the election of Donald Trump on an "America First" platform, the officials who have pushed a tougher line on China have also called for Australia to begin seeking wider alliances with so-called middle powers – countries like Japan, India and Indonesia.

"America under Trump is being seen as erratic, less reliable, and he has the habit of turning on allies from time to time," said Turnbull, who endured a tense call with Trump after the president took office in 2017. Trump grew irate when Turnbull asked if Trump planned to honor an agreement with predecessor Barack Obama to accept 1,250 refugees held in Australian detention centers on Pacific islands.

The U.S. Embassy in Canberra declined to comment.

Australian Prime Minister Scott Morrison speaks during a joint press conference held with New Zealand Prime Minister Jacinda Ardern at Admiralty House in Sydney, Australia, February 28, 2020. REUTERS/Loren Elliott/File Photo

THE ERA OF WIN-WIN

Australia established diplomatic ties with Communist China in 1972, seven years before the United States fully recognized the People's Republic of China.

Trade links with Beijing grew as Australia shipped iron ore, coal and liquefied natural gas to China, fueling the Chinese boom.

The economic relationship peaked with the signing of a free trade agreement at the end of 2015 that lowered Chinese tariffs on agriculture, dairy and wine, and promised to open the door for Australian banking and other professional services to China's restricted market.

But Australia was jolted within months of the signing when Beijing refused to recognise a 2016 international court ruling that China had no historical claim over disputed islands in the South China Sea. The Turnbull government joined Washington in rebuking China.

Canberra was also becoming concerned by growing Chinese attempts at influence in Australia, particularly through political donations from Chinese businessmen to local politicians that had come to light. In December 2017, Turnbull introduced foreign interference laws to parliament. Among the activities the law aimed to curb were the Chinese Communist Party's covert influence over Chinese students on university campuses, interference by Beijing in local Chinese-language media, and attempts by China to shape decisions by Australian politicians, from local councils to federal members of parliament.

A report on these and other Chinese activities prepared by the Australian Security Intelligence Organisation (ASIO), the country's national security agency, had "galvanized us to take action," Turnbull said at the time.

Beijing reacted furiously to the foreign interference legislation and responded by freezing diplomatic visits. This included an end to annual leaders' visits.

After the 2017 report by ASIO, defense and security agencies took over running China policy, along with key advisers in then-Prime Minister Turnbull's office, three former diplomats said. The foreign ministry, which preferred a lower-key approach, was sidelined.

Cyber intrusions were becoming a major concern. Alastair MacGibbon, Turnbull's special adviser on cyber security and former head of the Australian Cyber Security Centre, told Reuters that China was probing companies to gather intelligence about resources or investment areas to benefit its state-owned enterprises.

"China has very significant capability, and was making strategic grabs of what competitors, friends and foes were doing," said MacGibbon, who is now the chief strategy officer at CyberCX, a private cyber security firm.

China's foreign ministry said cyber attacks are hard to trace and Australia needed to show evidence of Beijing's involvement. "In the absence of evidence, it is very irresponsible to unilaterally hype up cyber attack issues against other countries," the ministry said.

RISE OF THE CHINA HAWKS

In August 2018, Australia became the first country to effectively ban Chinese tech giant Huawei from its next-generation 5G telecom network on national security grounds.

Turnbull, who co-founded Australia's first major internet service provider, explained the logic behind the move. "If Huawei were to provide your 5G network, or a large portion, does that give Huawei the capability to disrupt large parts of your economy? The answer is yes," Turnbull told Reuters. "Do you want to give a foreign state whose attitude to you may not always be benign the capability to inflict harm? The answer is no."

Mike Burgess, then the head of the nation's technology intelligence agency, the Australian Signals Directorate, had advised Turnbull that the technology risk posed by Huawei couldn't be mitigated, Turnbull said. Burgess previously had worked at the defense intelligence base Pine Gap, a top secret U.S. satellite tracking and missile launch detection station in the Australian desert. Burgess declined to comment.

Australian security officials raised their concerns about Huawei with Washington, which followed Canberra's lead, imposing a ban on the Chinese firm in May last year. Officials also traveled to Britain to explain Australia's position. The British were focused on Russian interference, MacGibbon said, but the Australian officials argued they also needed to understand the risk from China.

Having initially decided Huawei would be allowed a limited role in its 5G network, the UK government reversed course in July, announcing it would ban the company from the country's 5G network by ordering telecom firms to remove its equipment by 2027.

Huawei Australia said it did not engage in any efforts to interfere in the country's telecommunication networks and was taken by surprise when Turnbull moved against the company. "Up until that point we were in the process of competing for 5G business with all Australian network operators," Jeremy Mitchell, Huawei Australia's chief corporate affairs officer, told Reuters.

China's foreign ministry said the Australian government banned Huawei "under the pretext of national security without any factual basis."

One of the officials engaged with London over Huawei was Andrew Shearer, who moved from the Office of National Intelligence to be Morrison's cabinet secretary last year. He has become a powerful voice on China policy in the prime minister's inner circle and has urged closer engagement with Japan and India, government sources told Reuters. In June, Australia sealed a strategic partnership with India that granted the two countries access to each other's military bases and allowed for Australia to provide India with rare earths, metals that are crucial to defense and space programs.

Shearer worked in Washington at the Center for Strategic and International Studies (CSIS), an influential defense and security think tank, between 2016 and 2018. It was a time when attitudes towards Beijing were hardening among U.S. Republicans and Democrats, said CSIS senior vice president for Asia, Michael Green. Appearing before the U.S. House Committee on Armed Services in 2017, Shearer told members China was intent on undermining the liberal world order and the institutions that underpinned it.

Shearer worked on issues including China's "gray zone" interference in the East and South China Seas - aggressive moves that stopped short of war, such as erecting and fortifying artificial islands. "We were looking for ways to harness alliances and partnerships to deter Beijing from escalating further," said Green, who formerly served on the U.S. National Security Council.

That thinking was evident in Morrison's recent announcement that Australia will boost defense spending by 40% over the next decade. Morrison said his defense strategy would bolster Australia's ability to respond to "operations in the 'gray zone' - falling below the threshold of traditional armed conflict."

Shearer declined to comment for this story.

Richard Maude, a senior fellow at the Asia Society Policy Institute, led the government's 2017 Foreign Policy White Paper, a major rethink of a world where China and the United States were more likely to clash.

"Working with other middle powers, in our own region and globally, makes a lot of sense for Australia in the current environment. It helps show China we are not alone in our concerns," said Maude, a former intelligence agency director-general, who left the department of foreign affairs last year. "It is also a helpful rebuttal of China's narrative that Australia simply does what the United States asks of us."

The sharpest public criticism of China has come from a bipartisan group of parliamentarians who call themselves the Wolverines, inspired by a group of teenagers who resist a Soviet invasion in the 1980s movie Red Dawn. The group, none of whom are in the cabinet, coalesced in 2019.

The most prominent Wolverine is former special forces soldier and Liberal Party lawmaker Andrew Hastie, who chairs parliament's intelligence oversight committee. In August last year, Hastie compared the West's approach to an authoritarian China to the failure of France to stop the advance of Nazi Germany.

China's foreign ministry said that some Australian politicians and think tanks had for some time been "spreading rumors to discredit China and severely poisoning the atmosphere of bilateral relations."

Australia has pushed back against Chinese diplomats who object to public criticism of Beijing. Chinese envoys have been told by their Australian counterparts that domestic political debate and the media are beyond the control of the government in a democratic political system.

'AN AWAKENING'

When China threatened economic retaliation over Australia's call for a coronavirus investigation in April, the phones started ringing in Trade Minister Simon Birmingham's office as industry heads called to express concern. But publicly, Australian business leaders stayed largely quiet.

Iron ore miners have also been largely restrained, as they continued to ship Australia's most valuable resource, extracted from the red, dry dirt of the Western Australian Pilbara region, to Chinese steel makers. In June, Australian iron ore shipments hit a record AU$9.9 billion ($7.2 billion), pushing annual exports past AU$100 billion ($73.2 billion) for the first time, as the only rival supplier, Brazil's Vale, suffered COVID-19 shutdowns.

"China needs our commodities - we do have some of the best iron ore in the world. It does mean Australia comes from a position of strength," Chamber of Minerals and Energy of Western Australia chief executive Paul Everingham told Reuters. At the same time, he added, the iron ore industry is uncomfortable with the newly "adversarial climate."

In the wake of the 2018 diplomatic freeze, the national security agency and the ministry of foreign affairs held briefings for executives in industries exposed to China. The executives have been told that complaining would provide ammunition to Beijing for propaganda against the Australian government, said an agriculture industry source. Companies were advised instead to work with Australian officials to comply with the minutiae of Chinese red tape and expose Beijing's trade retaliation for what it was.

The government also told industry it was seeking alternative markets for Australian goods, had negotiated access to Indonesia, and was in talks with Britain, Europe and India.

The muted response from the business community is in contrast to 2018, when chief executives complained loudly that the Turnbull government's dispute with China risked damaging trade, and implored him to fly to Beijing to fix it.

"So much of the Australian business community, faced with criticism or a difference of opinion between Australia and China, will side with China," Turnbull recalls of the situation he faced as prime minister. But, he adds, "there has been an awakening."

(Reporting by Kirsty Needham in Canberra. Edited by Peter Hirschberg.)

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