Speech
at the launch of the Economic Analytical Unit Report - China's Industrial Rise: East Asia's Challenge, Hotel Intercontinental, Sydney.
29 October 2003
China's Industrial Rise: East Asia's Challenge
Introduction
Thank you, Nick (Nick Curtis, President, Australia China Business Council, NSW).
Distinguished guests, ladies and gentlemen.
It gives me great pleasure to welcome you here to launch my department's new report, China's Industrial Rise: East Asia's Challenge.
I congratulate Dr Frances Perkins and the Department of Foreign Affairs and Trade's Economic Analytical Unit on producing another high quality report.
I particularly want to thank BHP Billiton for their generous long-term corporate sponsorship of EAU research.
The report's authors could not have foreseen how opportune the timing would be, coming only days after the historic visit to Australia of Chinese President Hu Jintao.
Indeed it is an entirely apposite moment to consider the incredible transformation taking place in China and its implications for our region.
In essence this report sets out to answer the question of whether China's economic transformation is a positive or a negative for the region. And as I will underline in a moment, the report finds that is has clearly been a positive.
But China's rapid economic development is not the only change I would like to talk about today.
For not only have we seen great change in China in recent years, we have also seen our bilateral relationship change. And I would like to focus on some of these changes; from the transformation of our economic relations, to the evolution of our broader bilateral relationship.
China's transformation: a net positive for the region
As many of you might know, China is fast becoming the region's largest exporter of manufactured goods, from fully-assembled high technology to traditional labour-intensive products.
Chinese merchandise exports are now more than double what they were in 1996, and if recent trends continue, China will overtake Japan in the next couple of years to become the third-largest merchandise exporter in the world.
It is obvious that this growth is having a major impact on the region. China's restructuring economy, particularly its expanding manufacturing sector, is causing changes in production patterns and trade flows within East Asia and between the region and third markets.
Indeed it has led some commentators to express concern that it is "hollowing out" North and South East Asian economies.
Detailed analysis in this report shows that this is not the case.
Chinese competitiveness lies largely in labour-intensive production. China assembles imported components from developed East Asian economies to produce more technologically advanced products.
So rather than taking over the whole production process for items like computers, televisions and other electronic products, China is becoming integrated into regional production chains.
Its place in that chain - and the place of other economies - reflects the strengths of different regional economies.
Businesses across the region are in fact benefiting from each economy adapting and specialising in their areas of advantage.
China's huge, low-cost workforce means its relative strength, and hence its trade specialisation, should remain in labour intensive exports for some time yet.
Thus, alarmist scenarios of widespread 'hollowing-out' are clearly unjustified.
But encouragingly, the report also finds that North East and South East Asian economies have been, to date, sufficiently flexible to meet the challenge of China's industrial rise.
Some regional industries are moving out of labour-intensive sectors to compete less directly with China's export strengths, while others are holding their own by improving production efficiency and quality.
By developing new markets and maintaining old ones, most developing economies are achieving strong export growth, even in sectors where they compete with China.
The report also finds that China's industrial rise has been an engine of growth for the region.
Over the past five years, China has been the fastest growing market among the major East Asian economies for ASEAN, Japan, Korea and Taiwan. China's imports from all of East Asia have grown by more than 15 per cent annually.
In particular, China's growing appetite for raw material, components and capital equipment is expanding regional demand and providing opportunities for regional firms to gain from specialisation.
Consumers are benefiting from lower domestic consumer prices arising from cost competitive Chinese consumer good exports. Regional businesses are also benefiting from access to China's competitively-priced production inputs.
What the report underlines, and what many of us already suspected, is that China's industrial rise is clearly a major boon for the region, and the world.
A new economic framework
Significantly, the report does strike one note of warning with respect to the impact of China's economic rise on the region.
And it is that those countries with rigid policies and weak markets will not gain as much from China's rise as countries which have open and flexible economies.
In this respect Australia is one of the best placed of all regional economies to benefit from China's rapid industrial growth because of our strengths - our flexibility, our dynamism and the openness of our economy.
And as last year's Guangdong LNG contract and the recently announced prospective deals in natural gas and mineral have illustrated, we are benefiting.
Of course our trading relationship has a long history. Chinese traders were visiting the north coast of Australia from the 1750s, and some records suggest much earlier. Indeed I was intrigued by President Hu's reference to the expeditionary fleets of China's Ming Dynasty having reached Australian shores in the 1420s.
But it is only relatively recently, in the period since China's economic transformation that things have really begun to take off.
Since the mid-90s, two-way trade with China has almost trebled - making it by far our fastest-growing major trading relationship. Two-way merchandise trade now exceeds $22 billion annually, making China our third-largest trading partner, behind only Japan and the United States.
Investment links also are expanding, with Chinese enterprises becoming increasingly important investors in Australian primary commodity projects. Two-way investment between Australia and China expanded by an average of about 20 per cent annually over the past decade.
As the EAU report finds, the Australian economy and the Chinese economy are clearly a good fit. Australia is a competitive exporter of agricultural, energy and mineral resources and some higher value-added manufactures, while China is a competitive producer of labour-intensive manufactures.
This complementarity should strengthen in the short to medium term, providing direct benefits to Australia and China.
Just as Australian raw materials helped fuel the first wave of economic modernisation in Japan and South Korea several decades ago, we are now well placed to supply China's continuing rapid growth.
China's rising incomes, rapid industrial expansion, increasing openness and market orientation and growing demand for raw materials mean that its significance as an Australian export market will continue to increase.
They will also boost industrial efficiency and growth among our trading partners - further promoting Australian exports to the region.
Over time, as some developed economies continue to move out of resource-intensive industries, some Australian exports will shift from those economies to China.
As last week's visit to Australia by President Hu demonstrated, both governments are firmly committed to taking our economic relationship to the next level.
Over the past 18 months, our governments have been discussing how best to enhance the already strong commercial relationship.
To that end, last Friday, Minister for Trade Mark Vaile signed a new Australia-China Trade and Economic Framework with Vice Minister Yu from the Chinese Commerce Ministry.
The Framework is a bold and important step in strengthening commercial links.
It commits each side to pursue bilaterally comprehensive trade facilitation and liberalisation and provides for intensified cooperation in a wide range of important sectors. It also provides for improved consultative mechanisms between our two countries, and most significantly, commits Australia and China jointly to undertake an FTA feasibility study, to be completed by October 2005.
The Framework is an ambitious, far-reaching platform, setting the course for Australia-China commercial relations for the next ten years and beyond.
There are, however, some critics who say that such a bilateral trade arrangement, if we were to conclude it, would diminish support for the WTO.
Not-so: FTAs can complement - and even help drive - our wider multilateral trade objectives, as long as they are WTO consistent.
Some have also argued that an FTA with China would discriminate against our other East Asian trading partners, yet many of those same countries are discussing or negotiating FTAs with one or more countries, including China.
In short, it would be irresponsible of the Government not to examine the option of negotiating a free trade agreement with one of the world's largest and most dynamic economies.
In doing so, the Government has also prudently preserved all its options at a time of rapid change both in China and in the international trading system.
A mature and practical relationship
Just prior to the visit of President Hu to Australia the world was given another reminder of China's on-going economic and technological transformation.
China's successful 21-hour manned space mission puts China alongside the United States and Russia as the only countries that have demonstrated such a capability. It is yet another sign of China's historic emergence as a leading Asia-Pacific nation and a force in world affairs.
Australia views this emergence positively. And we do it confident in the broader relationship we have with China.
In his speech to Parliament last week, welcoming the Chinese President to Australia, the Prime Minister characterised Australia's relationship with China as mature and practical. And I think this description is particularly apt.
As I have already detailed, our economic relationship has been transformed and given new direction. But at the same time our political relationship has experienced a less dramatic, though no less significant evolution in recent years.
The best demonstration of that steady consolidation of political relations was the very fact of President Hu's visit, coming as it did in his first year in office as President. That speaks volumes about China's assessment of Australia's importance as a regional and international player.
President Hu's address to a joint sitting of our Parliament was only the fourth such address by a foreign leader - indeed, the first ever by an Asian leader - and the first by any leader other than a US President. It was also the first time a joint sitting has been addressed in a foreign language.
At the ministerial level our political relationship is more vibrant than it has ever been. Almost every member of the Federal Cabinet and nearly every State and Territory leader has visited China in office - the Prime Minister four times.
Similarly, every member of China's Politburo Standing Committee has been to Australia. Official Chinese visitors to Australia are now so frequent that my Department's China watchers could easily focus all their attention on Chinese visitors to the exclusion of policy issues.
As the Prime Minister said last week, such an event as President Hu's address might have been highly improbable twenty or even ten years ago.
Just as improbable would have been the notion that China and Australia could work on the same team on major international security issues.
Yet today China and Australia are partners in efforts to bring about a non-nuclear Korean Peninsula. And we are working with a will together in fighting terrorism, people smuggling and many other common challenges.
The Australian Government supports a one-China policy. Taiwan was part of our discussions with both the Chinese and US Presidents' last week.
In outlining the Government's support for a one-China policy we made clear to President Hu that any of the issues related to the Taiwan Straits should be resolved through constructive dialogue.
We also made the point that if Taiwan were to declare independence that would be a major mistake, because it would have profound implications for the stability of the region. This was a concern which we discussed with the US leadership as well, who agreed such steps would have negative outcome for regional stability.
The substance of these discussions on a wide range of security issues indicates we now have a more fruitful dialogue with China. This change has not been accidental. It is the result of careful, methodical work over several years, at the highest levels of government.
The Government's approach to the political relationship has been based on three key elements: high-level contact, frank dialogue, and a shared commitment to constructive relations on the basis of mutual respect.
I have already referred to the vigour of our high-level contacts. Matching those contacts, the Government, since 1996, has built a web of bilateral dialogues at the working level covering many issues, including regional security, disarmament, human rights, consular issues and other areas.
These dialogues have allowed China and Australia to lay the ground-work for better understanding of each others' perspectives and policies, to look for new areas of cooperation, and to discuss and work through those issues on which we differ - and, speaking frankly, must continue to differ, at least until further changes become evident in China.
On human rights, for example, we have been one of the few nations to have successfully engaged the Chinese authorities, at a practical level, on how to improve the legal and police systems to reduce the potential for abuses. We have done this without resorting to megaphone diplomacy.
That example bears out the third key to our approach - a commitment to relations based on mutual respect. That does not mean shelving issues where we differ - that would be unrealistic, not to mention inconsistent with our values and with the notion of mutual respect. But it does mean agreeing to manage those issues in the context of a total relationship.
Conclusion
In concluding I would again commend this report to you.
It coherently demonstrates that China's industrial rise is a positive sum game for the region and Australia, invigorating domestic industries, and providing new export opportunities.
And it is an important contribution to Australia's understanding of the profound changes in China's economy, providing a valuable resource for business and government alike.
It also brings intro further relief Australia's relationship with China; a relationship that is confident, vibrant and mutually beneficial.
Thank you.