Introduction
Thank you for the opportunity to deliver this keynote address.
Much has been made in recent times about the powerful drivers of change occurring in the world and in particular in our Indo-Pacific region.
Today I would like to touch on three issues.
First, the extraordinary transformation in the Chinese economy over the last 40 years and its integration into the global economy.
Second, the challenges and opportunities China’s transformation has created particularly for trade and investment.
And third, how Australia is advancing its national interest in both its relationship with China and the world.
China’s economic re-emergence
“To get rich is glorious,” said Deng Xiaoping as he set China on a pathway to economic reform and openness.
After the devastation of the Great Leap Forward and Mao’s Cultural Revolution, Deng’s “socialism with Chinese characteristics,” saw the lifting of price controls, the privatisation of assets and a more welcoming approach to foreign investment.
The subsequent transformation of the Chinese economy has been remarkable.
In the two decades prior to Deng assuming the leadership in 1978, the economy had grown by only two-and-a-half times.
However, in the two decades after 1978, it grew by twenty-one times.
Even as the annual growth rate has more than halved from a peak of 14.3 per cent in 2007 to around 6 per cent today, the Chinese economy is growing off a larger base.
It is adding an economy the size of Spain to itself each year.
Real GDP per capita in China is around twenty-five times higher than it was in 1980, helping to lift more than 800 million people out of poverty.
China’s share of global GDP has risen to around 20 per cent today.
With the IMF forecasting China’s economy to grow annually by more than 5½ per cent over the next five years it is transforming from its export and investment-led growth to a more services and consumption-based economy.
Since 1980, the share of the Chinese labour force working in services has tripled and today services contribute more than 50 per cent of GDP.
As its economy matures, China though will need to address a number of issues including rising debt levels in its SOEs and the implications of an ageing population.
With the proportion of Chinese aged over 65 projected to triple between 2015 and 2050 and the household saving rate today in China remarkably around one-third of disposable income, it will be critical that the government fashions policies that generate a better balance between the rate of savings and consumption.
Today China is the largest economy in the world on a purchasing power parity basis and second to the US on a market exchange rate basis.
However, it’s important to recognise that China does not see its economic strength as a historical first.
As Henry Kissinger has pointed out, China was the largest economy in the world for 1,800 of the last 2,000 years, only to be surpassed by the West with the advent of the Industrial Revolution.
Australia like so many other nations has played a part and been a great beneficiary of China’s rise with China the number one trading partner for more than fifty countries, as it is for Australia, and in the top three trading partners for more than 130 countries.
Our two-way trading relationship is worth more than $200 billion a year with one third of our exports going to China.
Over one million Chinese tourists annually visit our shores and two hundred thousand Chinese students study in our educational institutions.
It’s a mutually beneficial relationship.
In 2018-19, our iron ore exports, 80 per cent of which go to China, help create enough steel to build the equivalent of ten thousand Sydney Harbour Bridges.
Our exports to China make up 60 per cent of their total iron ore imports and around 45 per cent of their total LNG imports, helping to support their unprecedented urbanisation which has seen more than three hundred million people move from regional to urban areas in the last four decades.
Chinese foreign investment has also increased in Australia over time.
Between 2010-11 and 2017-18, over $268 billion worth of investments have been given approvals, which represents around 19 per cent of foreign investments subject to FIRB approvals.
Following entry into force of the Australia-China Free Trade Agreement in 2015, private investments in non-sensitive sectors up to $1.154 billion do not require FIRB approval.
While Chinese investment has increased, it has also broadened out beyond the traditional resources sector.
In 2017-18 commercial and residential real estate was the largest recipient of FIRB-approved Chinese investment with services also featuring prominently now representing more than double the amount invested in agriculture, forestry and fishing.
This continued flow of investment has seen China become the fifth largest foreign direct investor in Australia by value of total holdings behind the United States, Japan, the United Kingdom and the Netherlands.
Foreign investment in Australia is subject to a strict national interest test that takes into account a broad range of factors, including its implications for competition, taxation, the broader economy and national security.
We are also paying particular attention to investments in critical infrastructure, be they the traditional areas of energy, water, transport or telecommunications, or emerging areas like data management.
Australia is not alone in this regard with the United States, the UK, Japan and China itself also tightening their approaches.
Together with other capital flows from around the world, foreign investment has helped fill the gap between Australia’s domestic savings and what is needed to fund the continued expansion of our economy.
Just as 1 in 5 Australian jobs are related to trade, 1 in 10 Australian jobs are with businesses that have benefited from direct foreign investment.
The evidence is overwhelming; trade and investment equals more jobs and it is consistent with our fundamental values of openness and enterprise.
Australia is stronger, as a result of its economic relationships with China and the world.
The Challenges
However, China’s rise is not without its challenges.
As Napoleon warned nearly two centuries ago, “China is a sleeping giant. Let her sleep, for when she wakes she will move the world”.
China is now very much wide-awake.
The trade tensions between China and the United States have generated significant economic headwinds and uncertainty that is testing the resilience of the global economy.
With the International Monetary Fund estimating that trade tensions could reduce global GDP by as much as 0.8 per cent by 2020, the negative impact on trade volumes, capital inflows, and investment decisions has been real.
If the threat of additional tariffs are imposed by the United States, it will increase the amount of tariffs to USD $735 billion as a result of these tensions and further weigh on consumer and business confidence.
Managing the Challenges
Against the backdrop of these tensions, Australia’s message privately is the same as our message publicly.
Trade wars have no winners, just losers.
Differences are best resolved by negotiation and a commitment to a rules-based, transparent trading system.
Such a system is the best guarantor of the world’s future growth and prosperity.
That is why Australia is calling for reform to the World Trade Organisation to ensure it remains relevant and effective.
It is also why we have vigorously pursued both landmark bilateral free trade agreements with China, Korea, Indonesia and Japan, among others and multilateral agreements, including the Trans‑Pacific Partnership and most recently the Regional Comprehensive Economic Partnership.
The TPP was a missed opportunity for the United States and we still hope they will one day join.
Australia does, however, acknowledge the legitimate issues raised by the United States in their dispute with China including industrial subsidies, forced technology transfers, and the protection of intellectual property.
Importantly, these issues need to be seen through the prism of a broader relationship and a recognition that international cooperation has served us well.
It’s a point my counterparts from Indonesia, Canada, Singapore and I made in a joint opinion piece published recently when we said “pursuing confrontation instead of dialogue will only exacerbate risks, erode confidence and weaken the prospect of a global recovery.”
The relationship between the United States and China is so significant that it should not be allowed to be framed as a zero sum game, where in order for one to gain, the other must lose. It is not a binary narrative.
In an increasingly globalised economy characterised by integrated supply chains, the notion of decoupling the US and China economies is not only unnecessary and undesirable, but it would carry an enormous price.
It would also up-end the export-driven economic growth model which has delivered such prosperity to our region.
It doesn’t matter whether you’re a business or a consumer in the United States or China, you benefit from the reliable supply and lower cost of production that flows from global supply chains.
Take for example China’s exports of electronic goods, which include more than 40 per cent of foreign content and the Boeing Dreamliner assembled in the United States which is made with parts from over 20,000 companies representing over 150 countries.
Decoupling of these supply chains would be more than disruptive. It would have significant and widespread adverse consequences.
Some commentators have sought to draw an analogy between US-China relations today and the rivalry between the United States and the Soviet Union during the Cold War.
This is misplaced.
As Harvard Professor, Joseph Nye, points out, with three million Chinese tourists visiting the United States every year, three hundred and fifty thousand Chinese students studying in the US and a two-way trade relationship worth over US$500 billion, the level of connectivity and interdependence between the US and China is so much broader and deeper than anything that was seen during the Cold War.
There are unresolved tensions but they need not derail the broader relationship.
China and her growing role in the world is not going away.
With 1.3 billion people and an increasingly diversified economy, we need to work with China to shape the future so that our interests are advanced through regional rules and architecture that peacefully resolves disputes without the use of coercive power.
As the Prime Minister has said Australia does not need to choose between the United States and China.
The United States is our critical long-term ally with whom we have forged a friendship based on shared values and history.
China is also an important partner but we both acknowledge there are important differences including our political systems.
We have an ability to manage these two relationships, illustrated best over successive days in 2003 when the United States President George W. Bush and the Chinese President Hu Jintao addressed the Australian Parliament.
Then, as is now, we are best served by being clear and consistent in the policy positions we take in accordance with our values and national interest.
This may see us disagree at times with China on human rights, foreign investment and foreign policy but by being clear and consistent our differences need not undermine this important relationship.
Conclusion
China’s economy today is unrecognisable to the one Deng Xiaoping inherited in 1978.
The transformation has been profound and the benefits enormous.
However China’s rise is not without its challenges and it will take the world working effectively and cooperatively together to meet these challenges and ensure that global peace and prosperity continue.