Australian business may do well to tap a more diverse source of export markets and investment beyond China, writes Greg Earl.
As China’s share of Australian exports hit a new high of 40 per cent in the middle of 2019, business leaders were presented with an unexpected new corporate social responsibility (CSR) — reducing dependence on the country’s biggest export market in the national interest. Directors might be more focused on how to navigate ever-changing Chinese import rules or considering what to do if the country’s economy suddenly tanks. But international relations experts have been furiously debating whether those same directors should be playing an active role in implementing a more sceptical foreign policy towards China.
A sharp expression of this new CSR obligation came in a report on the state of the Australia-US alliance by the University of Sydney’s US Studies Centre in June, co-authored by John Lee, once a senior adviser to former foreign minister Julie Bishop. Buried in an otherwise straightforward discussion about diversifying trade ties was a major new challenge for business: “Private firms ought to be encouraged to consider themselves ‘responsible stakeholders’ within a rules-based system in addition to creators of economic wealth and value.”
In a blunt response, Lowy Institute international security program director Sam Roggeveen tweeted: “I see Aus (sic) strategists calling for diversification of our economy in order to reduce dependency on, and thus vulnerability to coercion by, China. But has anyone seriously thought about how it could be done? Seems totally implausible to me.”
If this new debate about international economic relations was only occurring among academic strategists, directors could perhaps relax. But it has already entered the political arena with Minister for International Development Alex Hawke taking up the same line in order to give some business heft to the government’s Pacific Step-up. Emphasising that in 2019 businesses had broader social obligations, he told The Australian Financial Review: “We think business has an obligation to this region as well. The Pacific region is our backyard, it’s our family, it’s neighbourhood.” He noted the government had put $3b into soft finance facilities focused on the Pacific and wanted business to take advantage of them.
How this will play out in practice is far from clear. During the past few years, intelligence agencies have been briefing businesses on cybersecurity risks to company secrets and inward foreign investment oversight has been tightened to protect strategic assets. The latest calls for some form of more direct action reflect growing frustration that dependence on China has risen despite government efforts to diversify Australian economic connections in Asia.
Lee’s report takes the optimistic view: “One virtue of a more open conversation about the comprehensive challenge China poses is that private firms ought to take into consideration the predatory, coercive and punitive actions China occasionally inflicts on other economies for non-commercial reasons as part of a firm’s normal risk management calculations… If Australia can identify and tap into a more diverse array of export markets and sources of investment, it would spread risk and enable greater economic and political resilience in the event of political displeasure from Beijing.”
But the Australia China Relations Institute’s James Laurenceson has produced a very different analysis of this diversification conundrum, which shows no other export markets have been growing as fast as China. Exports to China have increased by $78.5b during the past decade while those to old markets such as the US and Japan are up $0.2b and to emerging markets such as India and Indonesia, up $5b. He says while diversification is sensible, the debate about it has failed to acknowledge key differences between international business and security policy management. “Unlike security ties, the pattern of Australia’s external economic engagement is mainly determined exogenously by market forces — economic complementarities and purchasing power — not elected officials or bureaucrats sitting in Canberra,” he argues.
If Australia can identify and tap into a more diverse array of export markets and sources of investment, it would... enable greater economic and political resilience.
While Lee has provocatively told business to think about bigger responsibilities than profits, he is really counting on a more open debate about China’s economic practices to make business more wary of being dependent on it. The 2019 Lowy Institute foreign relations poll lends support to this approach with the first sharp downturn in warmth towards China for more than a decade. Only 32 per cent of Australians now think China can be trusted to act responsibly in the world compared with a previous long-running average of around 50 per cent. But this is a measure of general public opinion. The more granular polling of Australian business on the ground in China by AustCham Shanghai shows continuing relatively strong sentiment about the outlook for business in China despite a more authoritarian government.
Company directors face many new demands to take account of stakeholders apart from shareholders these days. But this new foreign policy debate — mainly about China — presents a novel challenge because it is not clear who really defines the national interest when it comes diversifying economic links. However, Perth USAsia Centre founding CEO Gordon Flake says there is too much cynicism about business only being interested in profits to the exclusion of what Lee has termed being “responsible stakeholders”. He argues: “Firms are led by people and people make decisions every day based on morality, principle, patriotism, and, yes, national interest. I would not be so quick to dismiss values.”
As Hawke’s comments suggest, the intense new focus by the government on increasing Australia’s presence in the South Pacific to offset China’s growing role may become the real cutting edge of business being pressured to play a greater role in foreign policy. The government has provided the old Export Finance Insurance Corporation — newly rebadged Export Finance Australia (EFA) — with an extra $1b in credit to fund commercial ventures in this part of the world. EFA’s increasingly important role in this strategic debate has been underlined by the way it has already been given responsibility for financing a rare earths industry in Australia and providing a loan to help fund the Papua New Guinea budget. Hawke has made it clear what is now expected from business: “We’ve got funds to buy down risk and we want to see Australian and NZ businesses really stepping up themselves to take advantage of the enabling infrastructure and the financing.” This comes as the ANZ Bank has just sold down its longstanding business in PNG, following a precedent Westpac set in 2015, by selling operations in five Pacific nations.
Greg Earl is the economic diplomacy columnist for the Lowy Institute’s The Interpreter, edits Asia Society Australia’s Briefing Monthly, and is former deputy editor of the AFR.
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