What does the deterioration of Australia's relationship with its major trading partner mean for companies caught in the crossfire of Chinese economic coercion?

    Australia’s relationship with China, its largest trading partner, is at its lowest point since diplomatic relations resumed in 1972. It is unlikely to improve in the near term, a panel at the 2021 AGS heard. Although the relationship has deteriorated rapidly over the past year, the genesis of the current tension started some years earlier.

    Allan Gyngell AO, national president of Australian Institute of International Affairs and a former adviser on China to the Keating government, outlined three diplomatic missteps that led to the current low point. Firstly, while it was legitimate for the federal government to pass a bill banning foreign interference by any nation in Australia in 2017 — the National Security Legislation Amendment (Espionage and Foreign Interference) Act 2018 — it was a mistake for then Prime Minister Malcolm Turnbull AC to introduce it to parliament with a quote in Chinese, apparently targeting the bill specifically at China.

    Likewise, the government was justified in stopping Chinese telco Huawei from building Australia’s 5G network, but cabinet minister Peter Dutton antagonised the Chinese by travelling around the world touting its success, said Gyngell.

    Finally, the federal government’s call for a World Health Organization (WHO) inquiry into the Chinese origins of coronavirus was poorly handled. “The collateral damage that Australia incurred didn’t seem to be anything like worth the end result of all of this,” said Gyngell. The result has been the introduction of non-tariff trade barriers and increased tariffs on a range of Australian exports to China, discouraging Chinese students and tourists from coming to Australia, and an end to ministerial contact.

    Dr Merriden Varrall, director of the Australia Geopolitics Hub at KPMG, said governments and business leaders must view the relationship in the light of the fact that China feels that it has been humiliated by the West since the Opium Wars of the 1800s. In this light, actions such as Australia’s push for the WHO inquiry are seen as a continuation of attempts to keep China down and of “victimisation” and “humiliation”.

    John Lee, a senior fellow at the Sydney University US Studies Centre, said there is a mismatch of expectations from each country and Australia cannot satisfy the list of 14 grievances China issued last year without compromising its sovereignty or democracy. He said relations were at their lowest point “so far”, but could get worse. There was little Australia could do on its own to improve relations, although he added we should push to resume ministerial-level contact.

    Lee added China’s actions will have unintended consequences for its relationship with other countries, which will be steeling themselves to increase their resilience against China — for instance considering foreign interference legislation. “If other countries completely sit on the sidelines, then Australia is in for a much harder time, but if other countries respond in a way that’s against Chinese interests then, over time, China has to gradually reconsider the extent to which it continues this coercion against Australia,” he said.

    Varrall noted that directors need to understand the local Chinese environment, the bigger trends in the bilateral relationship with China and where it’s heading. “If we think it’s only about this COVID-19 inquiry, we think it will be over in a year. If we understand it in the broader context, we realise this will be here for a lot longer,” she said.

    Secondly, directors need to build geopolitical uncertainty and resilience into their planning. Finally, Australian businesses need to diversify into other markets that were of interest before Australia signed the free trade agreement with China in 2015.

    Gyngell said business should lead the way in improving the relationship with China, just as it did with Japan from a starting point of extreme bitterness in the wake of World War II.

    Access further information with the AICD AGS21 Reader here.

    Director liability penalties ramp up

    ASIC is continuing to run negligence cases against individual directors implicated in continuous disclosure failures, said Professor Pamela Hanrahan, UNSW Professor of Commercial Law and Regulation. Recent cases include iSignthis (alleged breaches of continuous disclosure obligations and false and misleading representations), Murray Goulburn (continuous disclosure breaches) and Antares (continuous disclosure breaches). In the past decade, ASIC has focused on situations where individual directors face liability for breaches of company disclosure obligations. “That’s really where the regulatory action is focused at the moment.” Under new civil penalty provisions in the Corporations Act, directors can be fined more than $1m for supplying inaccurate documents in reporting.

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