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Coronavirus and the death of Xi’s ‘China Dream’

Posted By on February 28, 2020 @ 06:00

Globalisation was ill. Coronavirus is killing both it and Xi Jinping’s ‘China Dream’. That’s big news for Australia’s economy and security.

Globalisation led people to believe that companies could build supply chains wherever there was a labour or other cost advantage. The result would be lower prices, higher profits and greater prosperity internationally. It was assumed that companies could manage supply-chain risks.

If that was ever true, it’s not now. Anaemic world economic growth following the global financial crisis undercut globalisation’s glamour. Populism and nationalism, which re-energised protectionist trade policies, damaged it.

Then great-power competition [1] between the US and China piled on, making it obviously not in either country’s national interest to have deeply entangled systems of research and production for their defence items and high technology—whether semiconductors, digital infrastructure or actual weapon systems.

Coronavirus, though, will probably change globalisation more. It adds a new set of risks associated with the concentration of global supply chains in China, and shows the ripple effect across the globe from the paralysis [2] of Chinese manufacturing centres. Now, when China sneezes, the world economy catches a cold [3]: global growth has started falling [4] and critical bottlenecks [5] in the production of many items [6] are being exposed.

US–China strategic competition already had a focus on high-tech products, and the political risks to businesses operating in China had already risen owing to Xi’s increasing authoritarian control.

Coronavirus is a hazard that is thought to have arisen from the sale of exotic live animals in meat markets. But its early spread and movement towards a global pandemic were stoked by the damaging effect the fundamental design of Chinese Communist Party rule had on early identification and containment. The party sees early reporting on a novel virus as rumour-mongering that might reflect poorly on its rule and cause ‘social instability’, so such information must be denied and repressed.

The virus is damaging and dangerous in itself, but so too is this fundamental element of the CCP’s exercise of power. Unfortunately, that means coronavirus is only an early example of what are likely to be rolling events flowing from environmental damage and the level of pollution in China, which have in large part been created by decades of government policy that primed rampant economic growth.

Given the strains from populism, nationalism, US–China strategic competition, and the growing risks from overconcentration of global production in China, a reordering of global supply chains is necessary. That’s good public and corporate policy [7].

Despite US President Donald Trump’s rhetoric, this reordering is not as simple as ‘onshoring’ of production back to the US. It’s likely to mean more dispersed supply centres in multiple parts of the world that are reasonably stable and reliable, and which, cumulatively, result in a more resilient global economy with fewer single points of failure. That will apply even more to national security research and production, as the risks [8] and vulnerabilities in current global approaches continue to be both noticeable and disturbing.

Such a shift works with the grain of technological change in manufacturing. The ideas behind ‘Industry 4.0 [9]’ make small-scale production in multiple dispersed locations not just feasible, but efficient.

What it means for Australia and our economy is quite profound. In one narrow but important way, Australia’s national security and our economy can benefit from the opportunities this reordering opens up.

In this world of growing risks, Australia’s low sovereign risk, political stability, rule of law, educated workforce, developed health system and natural resources make it an attractive place to make capital investments with a reasonable prospect of stable long-term returns. That’s increasingly a rarity internationally, so Australia can be one of the places to which production shifts.

Then there’s the fact that Australia is a US ally and has a government that has taken active steps to secure its economy and its politics from foreign interference [10] and disruption [11].

Along with that, Australia has critical minerals [12] that are essential to high-tech production chains, and a world-class resource sector with high levels of automation [13] that can be applied to this class of minerals. That’s a strong foundation for supply chains that end up in many high-tech civil and military products, from smartphones to guided missiles.

This isn’t some crazy dream about Australia displacing China as the global production centre. It’s about Australia becoming one of a number of new production centres that mitigate the risks of overcentralisation in China (or in any other single global production centre). And it’s about the death of Xi’s ‘China Dream’ [14], where the rest of the world agrees to China being the single centre of the global economy. It turns out that a Sino-centred world may not be something to wish for or work towards.

Strategic competition between China and the US makes research and production of relevance to national security a good place for Australia to start. That’ll take a new approach to the machinery of the Australia–US alliance that moves from mainly narrow, more traditional security to include economic security. And Australia can also deepen technological partnerships with advanced manufacturing partners like Germany, Japan, South Korea and Taiwan that have the skills and businesses to work with us in this new world.

Our bilateral and multilateral relationships and forums will need to change to make this possible.

A start with the US would be supplementing the annual AUSMIN [15] meeting between US and Australian defence and foreign ministers with a new forum that includes government, corporate and even university leaders. That would enable Australian leaders to make the case to their US counterparts—from Trump down—that it’s in both countries’ national interests for US and Australian firms to set up sites in Australia producing critical defence components, from semiconductors to missile systems. Australian leaders and companies will need to put their money where their mouths are to convince Trump and those who would brief him on the idea.

Finding money is never simple, but the underappreciated fact of our huge superannuation wealth [16] ($2.9 trillion as of last year) means the capital doesn’t all have to come from the treasury or the defence budget—whether in Canberra or Washington. With stable returns from a sensible policy framework and a chunk of demand from Australian and US national security agencies, private investment responding to joint US and Australian government policy can finance much of this shift.

A future in which Australia’s economy becomes one of a number of dispersed, reliable centres for global production—with an early focus on national security research and production that feeds into US and Australian defence forces—is not a bad path to complement Australia’s existing trade in resources and services.

Obviously, Australian policymakers need to stay focused on the absolute priority of managing the heath impact of the virus as it continues to spread internationally. But our leaders need to get beyond simply wishing for an early recovery of the Chinese and global economies from the effects of coronavirus.

It’s time to look ahead to the strategic implications and the opportunities that a changed global economy can bring.



Article printed from The Strategist: https://www.aspistrategist.org.au

URL to article: https://www.aspistrategist.org.au/coronavirus-and-the-death-of-xis-china-dream/

URLs in this post:

[1] great-power competition: https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf

[2] paralysis: https://fortune.com/2020/02/18/china-factories-coronavirus/

[3] when China sneezes, the world economy catches a cold: https://theculturetrip.com/north-america/usa/articles/where-does-the-phrase-when-america-sneezes-the-world-catches-cold-originate/

[4] falling: https://www2.deloitte.com/us/en/insights/economy/global-economic-outlook/weekly-update.html

[5] bottlenecks: http://theconversation.com/high-tech-shortages-loom-as-coronavirus-shutdowns-hit-manufacturers-131646

[6] many items: https://www.abc.net.au/news/2020-02-17/coronavirus-supply-chains-customers-economy-business-sales/11965874

[7] corporate policy: https://asia.nikkei.com/Spotlight/Coronavirus/Google-Microsoft-shift-production-from-China-faster-due-to-virus

[8] risks: https://www.aspi.org.au/report/china-defence-universities-tracker

[9] Industry 4.0: https://ec.europa.eu/growth/tools-databases/dem/monitor/sites/default/files/DTM_Industrie%204.0.pdf

[10] foreign interference: https://www.ag.gov.au/transparency

[11] disruption: https://www.minister.communications.gov.au/minister/mitch-fifield/news/government-provides-5g-security-guidance-australian-carriers

[12] critical minerals: https://www.industry.gov.au/sites/default/files/2019-03/australias-critical-minerals-strategy-2019.pdf

[13] automation: https://www.riotinto.com/en/about/innovation/smart-mining

[14] China Dream’: https://www.youtube.com/watch?v=BgB1LBQec08

[15] AUSMIN: https://dfat.gov.au/geo/united-states-of-america/ausmin/Pages/ausmin-australia-united-states-ministerial-consultations.aspx

[16] superannuation wealth: https://www.superannuation.asn.au/resources/superannuation-statistics

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