Why the decision to reject China’s bid for Lion dairy matters

Treasurer Josh Frydenberg ended the prospects of Japan’s Kirin group selling its $600 million Australian Lion Dairy and Drinks business to Chinese dairy firm Mengniu when he gave his preliminary view that the sale ‘would be contrary to the national interest’.

It was a good decision, even if the officials who advise the Foreign Investment Review Board may not have been as clear-eyed as the treasurer was on the matter.

Mengniu’s primary shareholder is the huge Chinese state-owned enterprise China National Oils, Foodstuffs and Cereals Corporation. France’s Danone group also has shares in Mengniu.

Why might the treasurer have made this decision instead of letting a big commercial transaction go through? And who cares if this enterprise is in Japanese or Chinese hands? I can’t read his mind, but the decision logic does seem likely to have had a particular flow.

Neither Kirin nor the Japanese government has been threatening and coercing Australia with trade and economics. They are unlikely to start doing so any time soon.

In contrast, the Chinese government is engaging in public and coercive trade measures against Australian companies to pressure the Australian people and government to stop acting in our national interests. So, not all foreign owners are created equal, despite our government’s ‘country agnostic’ talking points.

Chinese government officials in Beijing and Canberra have made open threats to use trade and economics as weapons against Australia because our government has made decisions that the leadership in Beijing doesn’t like, but which have influenced international debates—from 5G to the Covid-19 pandemic. Wine and barley exports to China have been early and obvious victims.

Much of the recent debate has been about China’s trade power with Australia. However, Australia has leverage in trade and economics too, because we’re a high-quality producer of competitively priced goods and services that China really needs—not just iron ore, LNG and coal.

Food security is a pressing and growing problem for Beijing, as its population ages, as demands from its wealthy middle class increase, and as its arable land becomes less productive because of pollution, development and climate change.

Along with food security, food safety is a priority of Chinese consumers. China’s dairy industry has had safety scandals—from polluted baby milk formula to melamine in liquid milk (Mengniu Dairy was one of the companies involved in the latter scandal).

Aside from the Lion purchase boosting Mengniu’s business, the Chinese Communist Party leadership would see it as making political, strategic and economic sense because it’s about both food security and food safety.

Overall, then, this is more important than a simple commercial transfer of ownership from a Japanese to a Chinese company, particularly if it’s an indicator of further changes in the same direction.

For Australia, the economic benefit from the ownership transfer isn’t clear. In fact, there’s potential for Mengniu to simply not increase prices paid to Australian dairy farmers and other suppliers but instead use its growing market position to keep pressure on prices and take the profits from sales to wealthy middle-class consumers in China.

Leverage on our trade and economic engagement is not a one-way system controlled in Beijing. Frydenberg’s handling of the transaction sends a message that Australia has leverage and is willing to use it. It’s a demonstration that Beijing’s continuing coercion of Australia and Australian companies can have consequences that matter to China, as well as for its companies’ global growth ambitions.

Australia has a long track record as an advocate for free and open trade and investment, so the fact that our economic and trade calculations are changing in the face of Chinese economic coercion is a signal to others trading with China that they too need to reassess their previous policy assumptions.

If Beijing’s decision-makers are as rational on economics as David Uren suggests in a recent Strategist piece, the powerful logic of preventing further deterioration in China’s access to Australia should help reduce Beijing’s willingness to threaten and act against other Australian companies and industries.

Fortunately, the Chinese government’s leaders don’t have to be as economically rational as Uren describes to think more carefully from here.

Even under a ‘limited rationality’ scenario, it’s just possible that the simple benefits to China’s pandemic-hobbled economy from returning to positive engagement with Australia will make more sense in Beijing than insisting on the ‘troubled marriage that is all your fault’ line we heard most recently from Deputy Ambassador Wang Xining.

The other possibility, of course, is that none of this matters as much to Xi Jinping as being seen to be punishing the Australian government as a lesson to others. He and his advisers may see the pressure they’re creating on Australia as empowering advocates for a return to our longstanding policy of increasing economic engagement with China while setting aside strategic differences.

If so, Xi may be discounting four things: the now solid public sentiment in Australia that the Chinese government cannot be trusted to act responsibly; the healthy bipartisan political understanding about the dangerous strategic direction China is taking under his leadership; the fact that coercion has the reverse effect on Australians to the one Beijing seems to expect—it provokes resistance and counteractions, not acquiescence; and that the approach China is taking against Australia and others is hardening attitudes towards Beijing internationally, notably in countries with similar interests and values to us.

So, Frydenberg has been smart in two ways—making a decision on Mengniu’s takeover bid while letting others explain the logic that is most likely to have driven it, and leaving Beijing with the task of joining the dots.

The next steps from Beijing will be clarifying moments, and not just for Australians and Australian policy on China.