Political Insights Series | COVID-19 – fuelling the rise of China and Fortress Australia

Steve Lewis, Senior Adviser at Newgate Australia, shares his thought-provoking look inside how China could use COVID-19 to change its geopolitical goals and its relationship with Australia. Lewis also looks into the rise of the ‘Fortress Australia’ argument, and how this may change domestic industry for the next decade and beyond.

Several weeks ago, senior Chinese officials held a series of phone hook-ups with Australia’s pacific neighbours including Papua New Guinea and Solomon Islands. The message was blunt: China stands ready to assist if and when COVID-19 strikes your nation.

It was just the latest example of pandemic diplomacy from China which has used the COVID-19 crisis to demonstrate its capacity to fast-track the delivery of medical equipment and other supplies to vulnerable developing nations.

But these offers of assistance from China – the very same nation that covered up the existence of COVID-19 until it was too late – has raised more than a few eyebrows in Canberra.

There is now a live debate, playing out in the shadows of this global pandemic, about Australia’s sovereign capability and our future relationship with our biggest trading partner, China.

Changes to foreign investment rules

There are concerns at the highest levels of the Morrison Government about Australia’s economic and industrial vulnerability as a result of the global pandemic. Which is why the Treasurer Josh Frydenberg announced a major crackdown on foreign investment laws.

For the foreseeable future, the Foreign Investment Review Board (FIRB) will run the ruler over all foreign investments, irrespective of size. Every acquisition, every new business with a foreign investor will require FIRB approval.

These are major changes and designed to prevent a fire sale of cheap Australian assets to marauding – and cashed-up – overseas investors.

Mr Frydenberg rejected suggestions that China was being singled out.

Instead, he said the FIRB overhaul “gives the Government greater visibility and enables greater scrutiny of foreign investment proposals to safeguard the national interest”.

The FIRB announcement comes as the Government works its way through the coronavirus crisis, desperately trying to keep open as many businesses as possible. But it has also saddled future generations with hundreds of billions of dollars of debt as the Prime Minister tries to avert a deep recession that could have as devastating an impact on social cohesion as the pandemic itself.

COVID-19 is also forcing a debate about broader investment and industrial policies. It’s not just Coalition MPs like former Nationals’ leader Barnaby Joyce and ex-Cabinet Minister Matt Canavan who argue that Australia has to build a greater self-reliance.

The case for self-sufficiency

Peter Jennings, the executive director of the Australian Strategic Policy Institute, argues that the national “agenda for building self-sufficiency will be much stronger” as a result of this crisis.

“My hope is that we will have a really hard strategic look at what we need to do in this country to be more self-sufficient,” Mr Jennings says.

This means assessing what Australia needs to build and manufacture at home, rather than having to rely on importing key commodities and services.

Mr Jennings admits that this will overturn the prevailing economic orthodoxy particularly among Canberra’s public service mandarins.

“This will offend every Treasury official in Canberra,” he says.

Australia, he argues, must become more strategic when it comes to mapping what industries and commodities it will need in the future, in order to survive and prosper.

As an example, he cites the Australian Government’s $89 billion investment in developing a sovereign naval shipbuilding capability. This massive program will see a new class of offshore patrol vessels, frigates and French-designed submarines built, as part of a “Made in Australia” strategy that will generate thousands of local jobs while (hopefully) reinvigorating our advanced manufacturing capability.

Mr Jennings says this massive investment in naval hardware must be accompanied by plans to build much greater self-sufficiency in areas such as fuel.

“There is not a lot of point in having a first-class Navy if we don’t have the fuel to put these vessels out to sea,” he says. To place this in context, the Department of Energy’s figures show that Australia has just 29 days’ worth of liquid fuel stocks at refineries and wholesale terminals — well under the International Energy Agency’s 90-day fuel security benchmark.

In March of this year, Australia signed an agreement with the United States to lease space in the U.S. Strategic Petroleum Reserve (SPR). This would allow Australia to store and access Australian-owned oil with the cooperation of its closest strategic ally.

Federal Energy Minister Angus Taylor hailed the deal as a “landmark” agreement that represents “our joint commitment to maintaining fuel security and improving Australia’s resilience, as well as strengthening the close bonds between our two great nations”.

But critics of the national fuel strategy point out that it would take up to 40 days for stored oil to reach Australia from the US, even if the sea lanes were open.

Big changes in Australia/China relationship ahead

Richard McGregor, a Senior Fellow with the Lowy Institute, is a former senior correspondent with the Financial Times in China and author of The Party: The Secret World of China’s Communist Leaders, which provides a searing insight into the CCP’s level of influence in the world’s most populous nation.

While he agrees our relationship with China will change in the post-COVID-19 world, he doesn’t believe Australia will seek to rebuild a substantial manufacturing sector.

“The idea that we go back to Fortress Australia – I really struggle with that,” Mr McGregor says.

But yes, he does agree there will be “big changes” in Australia’s relationship with China.

He cites two key export industries – education and tourism – which have been decimated by COVID-19 and the crackdown on overseas travel.

For instance, there are around 90 direct flights from China into Sydney each week. These have been put on ice – and Mr McGregor doubts that capacity will be restored, even once things get back to relative normality.

And on the education front, there is no doubt that some of our most prestigious universities are heavily exposed by their reliance on overseas students, particularly from China. There are about 160,000 Chinese students at Australian universities, making up around 10 per cent of total student numbers.

But with classes on hold, Australian campuses face a potential massive hole in their revenues. Last year, the Centre for Independent Studies warned that a downturn in the numbers of Chinese students could be “catastrophic” for the university sector.

While COVID-19 has brought these industries to their knees, Mr McGregor is more upbeat about the future trade opportunities for Australia’s farm sector.

“We might see some pick-up in agriculture (with China). The farm sector is on the upswing,” he says. And there is no doubt the Federal Government is willing to help in this regard. Just last week, the Government announced a $170 million exporter support package to airfreight Australian seafood, beef and dairy products to China and other key Asian markets such as Japan and Singapore.

Putting trade to one side, Mr McGregor says the public attitude towards China has “hardened” since COVID-19 started devastating nations. “There is a lot of rancour around. This is happening around the world, which is why China has its big diplomacy campaign underway,” he says.

And what about Australia’s future relationship with its biggest trading partner?

Mr McGregor says that remains uncertain. He believes that Australia’s “dependency” on China might be reduced in the future, but conversely it might be the case that China becomes less dependent on Australia.

“It is possible that China might want to decouple from us, if the China-American situation gets much worse,” he says.

ASPI’s Mr Jennings also believes that our future relationship with China will change. Under his helm, ASPI has been a strident critic of China, particularly its paramount leader Xi Jinping.

Paradoxically, Mr Jennings believes that COVID-19 will deliver a short-term boost to China’s global reputation, but he also argues that longer term it will be very negative for China and President Xi.

He says the coronavirus crisis is the “first crisis where there has been a country-wide social campaign against the Chinese leadership” and particularly the stranglehold that the Chinese Communist Party has on everyday life on China’s 1.5 billion population.

“This has exposed a widely-held dislike of the Party’s behaviour. The big question is whether this will weaken the foundation of Xi Jinping and the CCP? They certainly don’t come out of this with clean hands,” he says.

However, Mr Jennings argues that Australia should also rethink its strategic reliance on the United States. “Trump’s disastrous mishandling of this virus has to call into question our level of dependence on the US, particularly if he is re-elected.”

One thing is for certain: nothing will be the same after this COVID-19 virus is finally defeated.

Steve Lewis is a senior adviser with Newgate Australia. He worked for more than two decades for Australia’s leading newspapers and was a leading figure in the Canberra Press Gallery