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International relations

China-Australia clash: How it started and how it's going

As 'accumulation of mistrust' boils over, experts see plenty of blame to go around

Australian wines are displayed in Shanghai in November: Beijing's "anti-dumping" duties on the bottles are just one issue in a relationship that has turned increasingly frosty over the past year.   © AP

SYDNEY -- After a year of steadily worsening relations with China, it was a tweet that seemed to really get under Australian Prime Minister Scott Morrison's skin.

Chinese Foreign Ministry spokesman Zhao Lijian earlier this month posted a doctored image of an Australian soldier holding a knife to the throat of an Afghan child, trolling Canberra over alleged war crimes by its soldiers. Morrison called the tweet "repugnant" and demanded an apology. One has not been forthcoming.

The Twitter controversy followed Beijing's release of a 14-point list of grievances against Australia in November, and its imposition of restrictions on a host of Australian products, including 107% to 200% "anti-dumping" tariffs on all Australian wine.

While many observers point to Australia's call for an inquiry into the origins of COVID-19 in April as the critical turning point, others say the roots of the feud are much deeper. James Laurenceson of the Australia-China Relations Institute said what we are seeing now "is an accumulation of mistrust in recent years."

"Events this year have simply pushed things over the edge," Laurenceson said.

Here's what you need to know.

How have China-Australia ties evolved?

Canberra formally established relations with the People's Republic of China in 1972, switching recognition from Taiwan. Economic ties have flourished since the 1990s, although the two countries had their share of friction even back then.

John Howard, who became Australia's prime minister in 1996, supported U.S. moves in the Taiwan Strait around that time. He also met with the Dalai Lama and canceled an import financing program of which China was one of the main beneficiaries. But while Howard's relationship with Beijing got off to a rocky start, it improved after he met face to face with China's then-President Jiang Zemin.

In his memoir, Howard said he promised Jiang that the Australia-U.S. alliance would not be "directed at China."

Australian Prime Minister John Howard meets Chinese President Jiang Zemin at the State Guest House in Beijing in 1997. After a rocky start, their relationship improved and set the stage for economic ties to flourish.   © Reuters

Their meeting was hailed as the beginning of a new economic "strategic partnership" built on pragmatism and mutual benefits. The result? China is now Australia's No. 1 trading partner by far, accounting for 39% of exports and 27% of imports in 2019-20, according to the Australian Bureau of Statistics.

Howard's promise, however, began to crack in 2011, a few years after he left office. U.S. President Barack Obama emphasized his pivot to Asia on the floor of the Australian parliament. "I have directed my national security team to make our presence and mission in the Asia Pacific a top priority," he said. Obama's successor, Donald Trump, would later label China a "strategic competitor."

Canberra itself became increasingly vocal about Beijing's more aggressive policy in the South China Sea and alleged attempts to meddle in Australian political affairs. Following the resignation of an Australian senator embroiled in a political donations scandal involving a wealthy Chinese businessman, Australia passed foreign interference legislation in 2017 -- seen as an effort to counter Chinese influence.

What else contributed to the tensions?

Australia has blocked several Chinese investments on national security grounds in the past few years. Some analysts argue that while certain decisions were probably justified -- such as the rejection of Huawei Technologies' bid to help build Australia's 5G mobile network -- others might have been provocative and unnecessary.

ACRI's Laurenceson said the latter category includes China Mengniu Dairy's attempted takeover of an Australian drinks business, which had been initially approved by the country's regulator, and Yibin Tianyi's aborted purchase of a 12% stake in AVZ Minerals, an Australian lithium company.

John Hewson, a former leader of Morrison's Liberal Party, sees a contradiction in Canberra's strategy. Why were these takeovers rejected, while Chinese purchases of critical services including energy companies and ports were given the green light? Hewson told Nikkei Asia that Australia's "mixed messages" have damaged the relationship.

"If you were sitting in Beijing, you would be wondering what the hell is going on down there," Hewson said.

Australia is also the third-most prolific user of anti-dumping measures over the last six years, according to the World Trade Organization, though China is not far behind. Beijing officials claim Canberra has initiated 106 anti-dumping and anti-subsidy investigations against Chinese products.

But other experts, like Steve Tsang of the SOAS China Institute, say Australia is now feeling Beijing's wrath simply because it "dared to stand up for itself."

Tsang believes China is sending a message to other middle-power democracies, adding the validity of Australia's specific concerns is irrelevant: "You are talking about a party state which is used to believing it has a monopoly on truth and history."

Hewson and Tsang agree on at least one thing: that Canberra lacks a basic understanding of how China's one-party system operates.

How much will this hurt?

The Organization for Economic Cooperation and Development has warned that a further deterioration in relations could compromise Australia's economic recovery from the ravages of COVID-19. Some experts estimate an all-out trade war with China would cost the country 6% of GDP.

In addition to wine, a long list of Australian products have already been targeted, including timber, sugar, barley, lobsters and copper ore. China has also unofficially curbed imports of Australian coal.

But "the key is iron ore," said Nicki Hutley, partner at Deloitte Access Economics. As China buys 80% of the country's iron ore, Australia "would be in real trouble" if Beijing targeted its largest source of export revenue, worth over 100 billion Australian dollars ($74 billion) annually. Hutley believes that while "all the other components are important and of course restrictions will be problematic for the sectors concerned ... the overall economic impact will be more an aggravation than a calamity."

An iron ore processing plant in Western Australia: The steelmaking material is the country's most important export to China.   © Reuters

Because Australia is one of the few countries that runs a trade surplus with China, it remains especially vulnerable in a trade war with Beijing, noted prominent Australian economist Saul Eslake. He believes China has far less at stake. "The stuff we sell to China they can do without or can buy elsewhere ... except for iron ore and maybe [liquefied natural gas]," he said.

What's next?

More tariffs and restrictions are likely on the way, experts say. Wheat may be next in the firing line. But iron ore is expected to remain unscathed.

"The Chinese have virtually no alternative to purchasing West Australia's iron ore unless they shut down their own steel industry," Eslake said. The former chief economist at ANZ Bank also predicted there would be no changes to the China-Australia Free Trade Agreement, up for its five-year review later this month, due to the complete breakdown in communication.

Australia, meanwhile, is considering taking Beijing to the WTO over the various tariff disputes, and just passed a bill giving the federal government veto power over agreements between individual states and foreign countries. The first deal in its sights? The Victorian government's Belt and Road memorandum of understanding with China.

The tone of media coverage in both countries could make it difficult for cooler heads to prevail. Australia is the "urban-rural fringe of Western civilization where gangsters roam. If the U.S. wants to do something bad, it seeks thugs in such a place," said Hu Xijin, editor-in-chief of the Global Times, China's firebrand tabloid.

In Australia, the country's most-read columnist, Andrew Bolt, declared that Zhao's soldier image was "another act of war."

Can the frayed ties be fixed?

Hewson, who was one of the first Western leaders to visit China after the Tiananmen Square crackdown in 1989, warned against megaphone diplomacy. "[Morrison] hasn't got too many options, he has got to try and get back to using nuanced diplomacy," Hewson said.

He added that the prime minister must outline a clear statement about Australia's national interest. "We have not been consistent in our position."

Howard, for his part, has advised Morrison to seek a meeting with Xi, just as he met with Jiang.

At the same time, the SOAS China Institute's Tsang said Australia "has to be very careful it is not giving the impression that it has bowed under Chinese pressure, it has to take a firm position and hold onto its core values."

Still, Tsang is holding out hope that the countries can patch things up. History, the scholar noted, is filled with stories about conflict and resolution.

"There is no relationship in the world that cannot be repaired."

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