The Hon. Alexander Downer, MP
The Hon. Alexander Downer, MP

Speech to The Australia China Business Council, Victorian Branch

3 October, Melbourne

Australia China and East Asia into the Future

Ian McCubbin (President, ACBC, Victoria)

Distinguished guests, ladies and gentlemen,


It is a great pleasure to be here tonight. I want to commend the ACBC for its role in helping Australian companies make the most of opportunities in the fastest growing major economy in the world.

The ACBC provides invaluable networking occasions - like tonight. But it also plays a major role in strengthening our ties with China. I'm told there is an ACBC 'Road-show' to China later this month. This will be a good opportunity for businesses to build their understanding of China and expand their networks and I hope it goes well.

This evening I'd like to talk about our ties with China in the context of China's broader engagement with East Asia. China's rise presents enormous opportunities for the region and for Australia. But it also presents significant challenges - geopolitical challenges and economic challenges.

Geo-Strategic Factors Affecting China's Growth

Let me start with the geo-political issues and challenges for China and the world.

China's rapid growth, just like the growth of other East Asian economies, was sparked by the simple but long overdue move to a market economy. By getting economic policy right under Deng Xiaoping the country unleashed the great potential of its citizens.

But China's rise has also been facilitated by the relatively stable security environment in the region over the past 50 years. For 50 years there has been no major conflict in North Asia - since the Korean War armistice was agreed in 1953.

This is the longest period of stability going back to the end of the end of the 19th century when the China and Japan went to war in 1895. For the next 50 years, Japan and China were almost constantly at war with each other, their neighbours or in civil war.

The recent period of stability can be attributed in large part to the stabilising role of the United States in the region. United States strategic engagement and alliances still underpin the security of our region and help manage rivalries between its powers.

But we can't take this stability for granted. The Asian region does not have the benefit of a collective security framework such as NATO in Europe.

And unlike Franco-German reconciliation after World War II, the two great powers of Asia, China and Japan, have yet to reach an accommodation over their past. And the hostilities between North and South Korea are yet to be resolved through a permanent peace treaty.

While we are optimistic that our region will continue to be stable and secure, it certainly isn't assured. The recent coup in Thailand has shown us just how quickly things can change. And our region still has to deal with some major potential 'flashpoints'.

The DPRK's development of nuclear and other WMD programs is the major threat to peace and security in East Asia. And the ongoing situation across the Taiwan Strait is another. Outside the Middle East, these two issues pose the greatest risk to international security and stability.

This is why it is important to keep the United States actively engaged in the region. In doing so, we recognise that China's fast growth poses strategic questions for the United States. Some competition is inevitable, but conflict is not.

The challenge at the heart of the modern US-China relationship is to manage the sometimes contradictory elements of competition and mutual benefit. That is, pursuing cooperation which serves the interests of both parties and the broader international community, while recognising and addressing differences in a mature and sensible way.

I am pleased to note that both the United States and China have demonstrated over recent years a determination to deal sensibly with specific areas of friction in their relations on the basis of mutual respect.

For Australia, China's growing influence does not require us to make a strategic choice between the US alliance and our developing relationship with China.

Increasingly, Australia is pursuing important, but different kinds of relationships with both the United States and China.

Our relationship with the United States is built on a security alliance and shared interests and values. Our economic ties are also considerable. The United States is our largest source of investment and the destination for much of our manufactures exports. But what really binds Australia and the United States is the world view we share - a belief in democracy and freedom as fundamental to our way of life.

Our relationship with China is very important and fast expanding - but it is qualitatively different to the one we share with the United States. It is based much more on the complementary nature of our economies. And we are taking up the opportunities that these complementarities bring.

We also recognise the potential gains from our cooperation with China in regional forums such as APEC and the East Asian Summit. And we work together on issues such as stability on the Korean peninsula, trans-national crime and climate change.

But we also recognise that we have differing approaches to many issues, based on our different political systems, interests and values.

China's relations with Japan are also crucial for the stability of our region. Their historical differences and ongoing strategic competition have been the cause of recent tension.

Never before have China and Japan been strong states at the same time. So it is unsurprising that some friction occurs during this period of adjustment and mutual accommodation.

It is encouraging to see the recent signs that China and Japan are taking steps to improve relations. Both Governments place the highest priority on economic development.

And Sino-Japanese trade and economic links have grown enormously in the last 20 years. Two-way trade between China and Japan reached $US190 billion last year. 30,000 Japanese companies have set up in China, employing over 9 million people. And every week, more that 500 flights ferry passengers between the two countries.

So trade ties provide an enormous incentive for them to manage their tensions in a constructive and even-tempered manner.

China's future growth will depend in large part on its ability to maintain stable cooperative relations with Japan and its other Asian neighbours.

I think the prospects of this occurring are good. Remember that China is either the fist or second-largest trading partner of all the major economies in the region - South Korea, Japan, Taiwan - as well as Southeast Asia as a whole.

China's outward investment, although small at present, is growing fast. So China has an enormous stake in an open and stable global economy.

Similarly, tensions with Taiwan conceal close business ties across the strait. Taiwanese investment in China could be as much as US$100 billion and the mainland buys two-thirds of Taiwan's exports.

Internal Challenges Affecting China's Growth

China's challenges go beyond its regional relations. Domestically, it also faces a range of systemic problems that, if unresolved, could undermine its growth prospects.

A large economy doesn't necessarily mean a prosperous people. One of the biggest challenges facing China is the growing gap between rich and poor.

Other major problems include a fragile financial sector; the need for continued reform of its state-owned enterprises; an underdeveloped legal system; high unemployment; the lack of affordable health care; and large-scale environmental degradation.

What's more, China's increasing engagement with the world economy makes it more prone to external shocks such as high oil prices and falls in consumer spending in key export markets, such as the United States.

I think it is fair to say that China's economy has proven more volatile than headline growth figures of the past quarter century reveal. And a slowdown in China at some stage can't be ruled out.

Having said this, I know from my visits to China and meetings with Chinese leaders here that Chinese policy makers are very much aware of the challenges they face. And so far I think they have proven themselves up to the task.

Most analysts predict China's economy will grow at current levels for the next five to ten years. I agree with them. While the economy may hit speed bumps along the way, it is unlikely to run into a wall.

The Benefits and Challenges of China's Growth for Australia

China's economic rise has also been good for the region and the global economy. And of all the countries in the region, Australia has been one of the biggest beneficiaries of the China boom.

I first visited China with Prime Minister Malcolm Fraser in 1982. At that time, two-way merchandise trade was worth $1 billion and our exports were worth $776 million.

Last year, our merchandise trade totalled $37 billion. Exports reached $16 billion. Two-way trade with Victoria alone was worth $8.5 billion.

China's growth, and above all its voracious appetite for resources, has contributed strongly to our own economic health.

It has helped propel our terms of trade to a thirty-year high and boosted jobs and living standards for Australians. Access to affordable Chinese goods has helped keep inflation down at a time of rising oil prices.

But China's growth also presents Australia with challenges. With a seemingly endless supply of cheap labour, China's low cost manufacturing will continue to prove strong competition for Australian firms.

The Government recognises that China's competitive imports put pressure on local industries. But we do not believe that protecting industries against foreign imports is the long-term solution for this country. Protection only serves to insulate our businesses from competition and growth. It hurts exporters and it hurts consumers.

Fortunately for us, China's rapid industrialisation and processing trade makes it increasingly dependent on foreign inputs and export markets.

An increasing number of Australian companies are capitalising on China's massive construction boom. Bluescope Steel (who sponsored this lunch) is one example - the largest Australian investor in China.

Australian companies are closely involved in the preparations for the Beijing Olympics - designing stadiums, providing IT and telecommunications and working in event and sports management.

But Australia has many other assets that China needs as its economic development moves into a more advanced phase. We have technological and managerial expertise and a strong record in research and development.

The Australian workforce is highly-skilled and increasingly multilingual. And we have a reputation for innovation and reliability.

I think these strengths mean we are well placed to continue to share in China's booming economy.

Our Bilateral Efforts with China

It makes sense then, to put a great deal of effort into our relationship with China. And this is just what we are doing.

While the foundation of the bilateral relationship is the very strong business-to-business ties and the good people-to-people links, the nature of the Chinese system is such that the government-to-government relationship is also critical. In China, as you know, very little of significance occurs without some degree of government involvement, sanction or oversight.

To engage leaders on our common interests - such as trade and the need for a stable regional environment - we have an extensive program of high-level visits and our annual dialogues. These exchanges allow us to progress the economic agenda. They also allow us to recognise and address differences, to ensure that they don't become a problem for the overall relationship.

The Australia-China Joint Ministerial Economic Commission (JMEC) has been Australia's main avenue for pushing our economic and trade interests with China for some years. It remains an important means to engage China's Ministry of Commerce on a range of issues, including the Free Trade Agreement.

In fact, the 11th JMEC is being held today. China's delegation is led by the Minister of Commerce, Mr Bo Xilai (pron: Bwor See-lie), while the Australian team is captained by the newly appointed Minister for Trade, Warren Truss.

The Australia-China FTA

It is my very strong view that a free trade agreement with China would see our relationship develop even further. An FTA offers Australia a chance to create a framework for our future trade with China - to set out the rules of the game, if you like.

It will also tackle some of China's most difficult trade restrictions - notably in agriculture, services and investment.

Services are a key focus of our negotiations. It is a sensitive area for China and the going will be tough. Easing restrictions on investment, particularly by Australian services companies, is one of our main goals.

We will be working on these and other services issues to secure outcomes that go beyond China's WTO accession commitments.

As I'm sure you all know the sixth round of the Australia-China FTA negotiations was held in Beijing last month (31 August to 6 September). The discussions were useful, but market access negotiations on goods did not begin as planned. Both sides agreed that China would need to provide more detailed information to enable the negotiations to commence. No timeframe was set but we are pressing for an early start.

This situation is not surprising. As the Government has consistently said, the issues involved are difficult. These are China's first FTA negotiations with a major developed economy.

On services and investment, we put a proposal to China at the last round on how we might proceed to market access negotiations before the end of the year. China is considering this proposal. Our position remains that there should be no more than a gap of one round, between the start of market access negotiations on goods and those on services.

Much work needs to be done to reach agreement on the shape and content of the proposed FTA. While we are prepared to work with China on this, we have quite deliberately not set a deadline for negotiations. We will negotiate for as long as it takes to achieve real business outcomes in terms of new access to the China market.

Any agreement must be balanced and it must deliver gains for Australian business across the board. The Chinese side accepts that an agreement must be done as a single undertaking - that is, no major sector is to be excluded and no sectoral negotiation is to be agreed until everything in the FTA is agreed.


Ladies and gentlemen, let me conclude with a few general points.

Economic change in China is reshaping the region. Never before has the future of the region been so entwined with that of China. But it is also true to say that China's future has never before been so linked to that of its neighbours.

Of course, China's engagement brings with it certain responsibilities. As former US Deputy Secretary of State Bob Zoellick said, it is vital that China becomes a "responsible stakeholder" in the international community.

And as I have said, China's growth will inevitably place some stress on the international system. But to see China's emergence in zero-sum terms is simply wrong. It's not a case of: "if China wins, we lose". While it will involve issues of competitiveness, these can be managed through dialogue and a willingness to explore new approaches and ideas.

We welcome China's increasingly constructive engagement in regional and international affairs. I strongly believe that a stable, prosperous and constructively-engaged China is a positive force for the region and Australia.

It is the role of government to facilitate and manage these relationships at the broader level, and to establish the frameworks that allow business to operate. But it is the role of the people in this room to actually get out there and put the meat on the bones, by identifying opportunities and pursuing them with all the skill and determination that you have.

And in this effort, I wish you all the very best.

Thank you.