Australia’s opposition leader, Tony Abbott, who, if the polls are to be believed would win a handsome victory and become Australia’s next prime minister if an election were held today, has advanced some views that have baffled and disturbed the Australian policy and business community (including senior members of his own front bench) over the past week or two.

Among them, on foreign economic policy, he appears to be backing away from Australia’s key economic relationship with China in favour of ramping up the relationship with Japan.

There are so many inconsistencies in Abbott’s comments regarding Australia’s free trade agreements with China and Japan (as reported in the Sydney Morning Herald and The Australian) that it’s hard to know where to start.

But let’s start with the fundamental tenet of international trade theory: In a two-country world in which each country produces two goods (coal and cars, or iron ore and clothes, for example) in competitive markets, free trade is welfare improving for both countries, compared with the situation in which tariffs and other non-tariff barriers are imposed on trade. This follows from the fact that there will be winners in each country — namely, the producers of those goods in which each country has a comparative advantage and all consumers — and that the gains to these winners outweigh the losses to the losers — namely, the producers of those goods in which each country has a comparative disadvantage. It’s that simple.

Of course we don’t live in a two-country world and each country produces many more than just two goods, some in markets that are competitive and some that are less so. Yet this fundamental tenet is still very solid when there are qualifications to this model, and is one of the cornerstones of orthodox Liberal (and liberal) principles throughout time: free trade is welfare improving for nations on the whole. It is not clear whether this principle was in the back of Abbott’s mind when he stated that Barnaby Joyce (a figure with a reputation as coming from the ‘Tea Party’ side of Australian politics) is a ‘highly orthodox figure … [He] is conscious of the fact that other countries ruthlessly pursue their self interest, but he’s also conscious of the fact that without trade, we are dead’. This comment does seem to imply some understanding that free trade is a good thing, even if ‘ruthlessly pursued’ by others (while Australia presumably pursues it in more gentle ways). But Abbott undermines his economic credentials in his comment in The Australian — ‘I am all in favour of freer trade with Japan. I am all in favour of freer trade with China, provided it’s in Australia’s national interest’ — since the whole point of the free trade argument is that freer trade is in Australia’s national interest, no proviso required.

Give Abbott the benefit of the doubt that he does believe free trade to be in Australia’s national interests, but it remains very difficult to reconcile this with the simultaneous signal that he will favour Japan over China if the Liberal–National Coalition wins the next election. In particular, Abbott claims that Japan’s market economy and democratic system of government are ‘advantageous in any serious person’s view’, and this is one of the reasons why Australia’s free trade agreement with Japan would be given higher priority than the one with China.

Abbott did confirm, to be fair, that he was just making ‘the obvious point that it’s probably going to be easier to conclude a free trade agreement with a fellow market economy and a fellow liberal democracy’. The fact that the negotiations with China began back in April 2005, while those with Japan only commenced in July 2007 may lend some (weak) support to his point — but only if the deal with Japan is reached earlier or within 27 months of China’s. Yet if this turns out to be the case, it could just as easily imply greater political will (as Abbott himself has indicated), rather than any kind of ‘fellowship’ driving the outcome. The stalled progress on both negotiations, alongside decades of trying, and failing, to get Europeans to open up their agricultural markets, suggests that politicians world wide struggle to live up to their principles, no matter what kind of system they govern in.

More critically, there is a worrying lack of logic in favouring a free trade agreement with Japan over one with China — that is, freer trade with Japan over freer trade with China. According to the recent economic indicators for China and Japan provided by Department of Foreign Affairs and Trade, China recorded average annual real GDP growth of 10.9 per cent since 2006, compared with just 0.07 per cent for Japan, which unfortunately recorded negative growth in three of these years, if projections for 2011 are included. In 2010–11 Australia’s merchandise exports to China reached A$65 billion, compared with A$47 billion to Japan, while imports from the two countries were A$41 billion and A$17 billion respectively. Our major export to China (iron ore and concentrates) was valued at A$40 billion compared with coal, our major export to Japan, valued at A$15 billion. Our three major imports from China — clothing, telecom equipment and parts, and computers — were valued at A$12 billion, compared with A$8 billion worth of imports of passenger vehicles, refined petroleum and goods vehicles from Japan.

This combination of facts demonstrates clearly and simply that both trading relationships matter greatly, but one is bigger, stronger, and growing more rapidly. And it’s not the one with Japan. In the pursuit of national self-interest, ruthless or otherwise, why on earth would a believer in the benefits of free trade push first for a deal that is likely guaranteed to bring fewer aggregate benefits?

The answer, of course, lies in politics, not economics. The politics of trying to appease Australia’s waning manufacturing sector (a sector in which, in a broad sense, we lack comparative advantage and which has to transform itself dramatically to compete) by stalling on the trade agreement with China may make some sense to Abbott, despite the unnecessary tension it will undoubtedly cause between Canberra and Beijing. But for the rest of us, it should not be that surprising that The Australian newspaper ran the headline that ‘Abbott’s China policy ‘would baffle Howard”, Australia’s last conservative prime minister who initiated the negotiations with China. It should be baffling to just about anyone who takes Australia’s national interest more seriously.

Jane Golley is Associate Director at The Australian Centre on China in the World, the Australian National University.

This article first appeared here at The Conversation.

1. The state of the relationship with Japan
2. Australian versus Japanese approaches towards investor-state arbitration
3. Australia and China and the mutual benefits of the relationship

The first three decades of the 21^st century are almost certain to bring with them the completion of China’s rise on to the global economic, political and geopolitical stage.

The Chinese economy has contributed positively to world economic growth for decades, with a pivotal role during the global financial crisis (GFC). China’s integration into the global economy has brought one-fifth of the global population into the world trading system, which has increased global market potential and integration to unprecedented levels.

The global and national benefits of China’s economic rise are evident but there are also costs.  China’s integration into the global economy has forced a worldwide reallocation of economic activities, resulting in frictions in China’s trading, political relations, and several globally significant externalities.

China’s rising economic weight in the global economy is not only affecting its economic and political relations with the rest of the world, but is also changing the global and regional economic and political landscapes in fundamental ways. China faces the critical task of managing its rise in a way that is palatable to both the domestic and the world communities. For the world community, accommodating a rising China is likely to be the most important task of the first half of the twenty-first century.

The strategic policy objective of ‘rebalancing’ in China is a domestic policy framework by China’s leadership to a series of major structural challenges to China’s present industralisation path. These structural challenges include: its large current account surpluses, the composition of growth which is heavily concentrated in (heavy) industrial-led investment (measured by its share of GDP), at the relative expense of household consumption (especially of wages and rural incomes) and government services provision; the current and future trajectory of resource use and C02 emissions, and international economic welfare effects and political tensions over China’s rising share of global manufacturing output and trajectory of global resource use.

The next wave of rapid growth in China will therefore need to focus on higher value-added manufacturing, a shift towards the domestic market, a shift of the centre of gravity of growth from the coast to the interior, a vast expansion of the service sector, the dynamism of small and medium, predominantly private, firms and towards low-carbon growth while still in a highly energy-intensive stage of industrialisation . This is consistent with rebalancing the economy. Boosting domestic consumption will take time but there are reform options that will clearly play a positive role, including the development of the social welfare system and the urbanisation of the large number of migrant workers. China can also contribute to the task of rebalancing not by exporting less but by importing more. Moving towards a market-based exchange rate regime is part of the strategy to addressing the imbalance issues. This will require a full convertibility of the Chinese currency (RMB) and the liberalisation of China’s capital account. The rapidly increasing outward direct investment also constitutes part of China’s overall strategy of rebalancing.

Given the sheer size of the Chinese economy, in combination with the extent of its global integration, virtually any structural adjustments in China will have global consequences and importantly these challenges are also structural challenges for the world economy and world economic affairs. All the major trading nations, from East to Southeast Asia, from North America to Europe, from Africa to Australia, are readjusting their bilateral relationships with China. Consider as an example the question of how China should best manage its vast quantity of US dollar-denominated assets against the background of dollar depreciation. This presents a major financial risk for China given its massive stock of cross-border assets and its ongoing move towards international financial integration. Given these risks, the diversification of China’s cross-border assets away from US dollar assets and short-term assets issued by the US and other governments is inevitable. Cooperation between the two economic powers is no longer an option, but a necessity; and in many instances, this point extends across the entire globe.

To assist with bilateral and multilateral cooperation, there is a pressing need for re-fashioning the institutions that govern the international political and economic system. This is because maintaining relatively open and fair, multilateral political, trading and financial systems is the only effective way in which the behaviour of rising powers can be constrained by a rules-based system, while those of incumbent powers become more accommodating and cooperative. In a world in which China is increasingly expected to play a leadership role, the multilateral framework will provide an important institutional basis from which the expansion of international trade can continue to be a positive-sum rather than a zero-sum game, and globally common goals such as macroeconomic stability, financial integration, poverty reduction, climate change and regional and international security can be achieved with success. The successful rise of China will depend on how well these goals are managed.

China’s rise is not just occurring in a changing world, it is significantly changing that world as well.

Jane Golley is Associate Director of the Australian Centre on China in the World at the ANU and Ligang Song is Director of the China Economy Program in Crawford School of Economics and Government at the ANU.  They are joint editors of ‘Rising China: Global Challenges and Opportunities‘, which was launched on Monday at ANU’s China Update.

1. Will Asia step up to the global challenges of 2012?
2. Global challenges from China’s rise
3. Sri Lanka: rising to the challenges after the war

It is difficult to try and project forwards by looking backwards, and yet that’s what economists often try to do. I have an old friend who once thought he knew a road he was driving along so well that he would be able to judge the turn ahead of him by looking backwards into the rear vision mirror. He misjudged it, and drove into a tree. He lived to tell the tale and provided some important lessons for us all. Don’t speed, watch out for bends in the road and wear a seatbelt. And be prepared that some of our predictions may well turn out to be wrong.

Every year, as part of the ANU Crawford School of Economics and Government’s China Update, a book is produced. This year’s China Update book is titled ‘China: The Next Twenty Years of Reform and Development,’ and is co-edited by Ross Garnaut, myself and Ligang Song. The book draws on China scholars from Australia, Japan, Thailand, the United Kingdom, the United States and, of course, China. One of the authors depicts the Chinese economy as a speeding car, which will face many potential hazards along the rocky road to prosperity. Certainly, if China is to continue along its remarkable path in the next two decades, it will need to steer its way skilfully through a number of challenges.

One of the key challenges facing China in the decades ahead is how to steer its way through the turning point – or more accurately, the turning period – in economic development. The turning period is characterised by the end of the labour-surplus economy and rising wages in some sectors of the economy, and there are some indications that China has entered this period already – although the precise timing is a topic of much debate. This has implications for the future industrial structure and composition of trade, as China loses its comparative advantage in exporting labour-intensive goods. This will impact on the hundreds of millions of ‘farmers-turned-migrant workers’, who have been a critical source of labour supply to China’s dynamic export sector and who stand to suffer the most when that dynamism passes. These migrant workers will require deeper labour market reforms if they are to become true ‘migrants-turned-urban residents’, which in turn will give them the flexibility to adapt to employment shocks and structural change in the decades ahead.

Another major challenge for China is the need to re-balance its growth pattern in a number of ways. In the past, China’s unbalanced growth has been fuelled by highly resource- and energy-intensive production, which has contributed to mounting demand pressures in global resource and energy markets. In order to alleviate this pressure, China must begin moving towards a low-carbon growth economy. Similarly, China must find effective ways to combat the dire consequences that its rapid growth and development has had upon the global and local environment.

Previously, China’s growth relied heavily on exports and investments. This overreliance contributed to rising global imbalances and to numerous structural problems, and there is now widespread recognition of the need to rebalance growth towards domestic consumption and productivity. Entering the turning period will in some part address this as higher wages naturally lead to higher consumption.  But more remains to be done.

In particular, China’s gradual and piecemeal approach to economic reforms – in which product markets have been completed liberalised while factor markets have not – has clearly been beneficial. But unless factor market reforms are completed, the stability, balance and sustainability of future growth will be threatened. Completing these reforms may take decades in some areas, but will have substantial payoffs for both the global and Chinese economies.

Sharing the benefits of growth is not just an economic issue but also an ethical one. This is particularly the case for the CCP, whose legitimacy has long been based on egalitarian principles. Just one of the many types of inequality that shape China’s economic landscape is the vast regional divide, which the Chinese government is intent on ‘considerably reducing’ by 2050. On a different level, China’s health care system has become increasingly inequitable and costly, with those least able to pay bearing the brunt of ineffective reforms. Uneven access to healthcare, rising income inequalities, inadequate social welfare systems, and the slowdown in poverty alleviation are some of the most undesirable outcomes of China’s rapid growth in the past, and may pose serious threats to social stability in the foreseeable future.

Intricately linked to all of the economic challenges above is the question of political reform. Some scholars such as Yang Yao argue that democratisation will be essential for China to counterbalance the formation of strong interest groups. Others see it as a way of establishing effective central-local government relationships in China.

If successful, the next two decades are likely to see China elevated to a position of global primacy alongside the United States. Success is not guaranteed, however, and will require many changes from the status quo. If China has been a speeding car, it’s done a fantastic job so far; the Chinese leadership could be likened to a Formula 1 pro. But it may be time to slow things down just a little bit.  More importantly, it is surely time for all of the players in the Chinese economy to start wearing seatbelts!

Jane Golley is a senior lecturer in the China Economics and Business Program at the Crawford School of Economics and Governance, ANU.

Jane Golley co-edited ‘China, The Next 20 Years of Reform and Development’  with Ross Garnaut and Ligang Song, which can be downloaded here.

1. Avoiding economic crashes on China’s road to prosperity
2. Vietnam: Macroeconomic challenges and the road to prosperity
3. The long and rocky road to global recovery

In the three decades since Deng Xiaoping declared that China’s economic development would necessarily involve some people becoming rich before others, inequalities have risen steadily across (and within) China’s provinces and regions.

To some extent, this outcome has been the natural consequence of market forces in a large developing economy; the historical and geographical advantages of the east ensured industrialisation would occur there first. Deng’s Open Door Policy and Coastal Development Strategy compounded these advantages with a range of preferential policies explicitly promoting the development of the eastern region. Yet Deng insisted that there would be no polarisation of rich and poor in the longer term, and that people elsewhere simply needed a little patience, referring to the ‘two great situations’ in which coastal provinces would be given advantages during the early reform years but would subsequently be expected to subordinate their interests to interior areas.

Jiang Zemin’s Western Regional Development Program (‘WRDP’) aimed to meet Deng’s goals by eliminating regional disparities gradually, consolidating the unity of ethnic groups, and promoting social progress. The deadline for achieving these ambitious policy goals is the middle of the twenty-first century, by which time the intention is for regional disparities between the western and other regions to be ‘diminished considerably’. In 2002, the newly appointed Hu Jintao endorsed the WRDP as an important component of his drive for a ‘harmonious and balanced society’ and added his own ‘Revive the North-East’ (‘zhen xing dongbei’) scheme in 2004, then the ‘Rise of the Central Region’ (‘zhongbu jue qi’) scheme was officially pronounced in late 2005. With every province bar the most developed eastern ones being targeted in one way or another, the Chinese Communist Party appears to be taking the regional issue seriously—on paper at least.

Why is regional inequality such a serious issue?

Uneven development is not only an economic issue but an ethical one, particularly for a regime whose legitimacy has long been based on egalitarian principles. Deng Xiaoping might have succeeded in convincing the Chinese people that some would have to get rich before everyone else could, but if the gap between those fortunate some and the rest of the country continues to widen, and if the government fails to do anything about this, the moral foundations of the regime will be shaken. This makes the question of regional imbalance an issue of great political significance.

Will rapid industrial development in the less-developed centre and west reduce these inequalities in the next two decades?

This question permits an optimistic response: ‘yes, it is possible’. Recent analysis indicates the glory days of the east’s industrial dominance could be coming to an end, with the region no longer performing above the average across the broad spectrum of industrial sectors. In addition, there is evidence of rising costs in the east, which will provide the impetus for industrial upgrading there. In this context, a serious and committed pro-west (or at least non-pro-east) regional policy with substantial funding well spent on infrastructure and education could play a positive role in triggering self-sustaining industrial development outside the eastern region. Rising incomes in the east could provide a crucial source of demand for non-eastern products, with the east possibly becoming for western China what the industrialised world has been for the eastern region during its own industrial take-off – a stable consumer market.

However, for this to translate into a reduction in regional income inequalities would require the western region to grow faster than the east by at least 2 percentage points.  It is unlikely that changing patterns of industrial development in response to market forces and the current set of regional policies will be sufficient for achieving this objective . Even when taking other non-industrial factors into account, such as the potential for out-migration and resource rents to raise the per capita incomes of those who remain in the western region, it is unlikely that the speed of growth in western China will drive Chinese regional incomes towards equality.

The pessimistic response is that; ‘no, industrial development in the less-developed centre and west cannot possibly reduce these inequalities in the next two decades’. Even if rising costs in labour-intensive manufacturing in the east produced industrial upgrading there, industry would relocate outwards to competitor nations such as India and Vietnam. Western China would then be characterised by substantial pockets of poverty and underdevelopment. The east would become increasingly integrated into the global economy, while the west would remain isolated from the rest of the world.

This outcome would pose a serious threat to the legitimacy of the Chinese Communist Party, especially if it fails to implement policies effectively that reverse the situation.

What, then, is the most likely outcome?

The balance of evidence suggests an outcome somewhere in between these two extremes. The next two decades are likely to witness limited improvements in the distribution of regional per capita incomes underpinned partially by limited re-distribution of industry towards some but not all of China’s non-coastal provinces.  Thus regional inequality between the west and the rest of China is likely to be diminished marginally at best.

Jane Golley is a senior lecturer in the China Economics and Business Program at the Crawford School of Economics and Governance, ANU.

This essay is a summary of an article published in Ross Garnaut, Jane Golley and Ligang Song (eds): ‘China, The Next 20 Years of Reform and Development’.

1. A regional solution to global imbalances: We need a Beijing Accord
2. North Korea’s mining prospects
3. ASEAN Regional Forum at 18: Dealing with regional flashpoints

With Copenhagen just under way, there will be much finger-pointing about who is responsible for reducing global CO₂ emissions, and China is likely to be the number one target.

Yet a significant portion of China’s emissions are generated in the production of exports, to the developed world in particular. Should we be shouldering some of the responsibility for reducing these emissions through financial or other means, rather than playing a blame game in which Australia is far from an innocent bystander?

A key question in this responsibility debate is whether emissions should be allocated to the firms that generate them in production or to those who ultimately consume the goods in which the emissions are embodied.

Recent research has found that around one third of Chinese CO₂ emissions can be traced to exports, compared with 12 per cent in 1987 and 21 per cent in 2002. And while China clearly imports goods that generate emissions elsewhere as well, according to one estimate, the emissions embodied in exports exceed those avoided by imports by over 1 billion tonnes – a figure close to three times Australia’s total emissions.

China’s National Development and Reform Commission argues that China should not be solely responsible for reducing these emissions, particularly if doing so would come at the expense of economic development.

Considering that China’s per capita emissions rank around 70th in the world, compared with Australia’s first place ranking, and that the average Chinese person’s per capita income is just one-tenth of the average Australian’s – a point that is often forgotten as we are dazzled by the bright city lights of Shanghai and Beijing, this argument seems fairly reasonable.

This is not to say that China should keep on emitting in an unconstrained fashion – and recent policy shifts indicate that they have no intention of doing so. Rather it suggests that we, as the relatively rich and high-emitting consumers of cheap Chinese goods, might consider it reasonable to share some of the costs of reducing Chinese emissions. An alternative to this would be to purchase fewer plasma TVs and to go without air-conditioning, although lower consumption seems to be an option that few Australians consider viable.

Of course, foreign trade and investment are not solely responsible for China’s emissions and China needs to reduce the carbon intensity of all of its goods, not just its exports.

Reducing the heavy reliance on coal is fundamental to this immense domestic challenge, requiring the installation of more renewable power and overcoming financial and technological challenges involved with adopting new technologies, like carbon capture and sequestration.

But surely this challenge would be made easier with foreign cooperation on, for example, low- carbon research and development, finance provision, technology alternative transfer and trade openness.

This may just enable emissions reductions and economic growth to occur hand-in-hand, with obvious benefits for all.

The principle of ‘common but differentiated’ responsibilities essentially recognises the different capabilities of developed and developing countries with regard to tackling climate change. In the lead-up to Copenhagen, China was asking developed countries to give careful consideration to this principle, while emphasising the need for developing countries to take ‘appropriate action’ in light of their own national situation. President Hu Jintao has recently promised to reduce the carbon intensity of the Chinese economy by 40-45 percent by 2020 compared with 2005 and China’s fiscal stimulus package has already included measures to invest in emission-reducing structural change and cleaner technologies.

Who’s responsible for the emissions generated on Chinese soil?

Hu’s responsible, but he’s not alone. As a developed country, Australia should be aiming beyond China’s efforts by making our own commitment to emission reductions credible and binding and by supporting an international agreement, whether it is reached in Copenhagen or not.

Furthermore, specific measures to assist China in meeting its commitments would signal a cooperative approach to solving a shared problem and would be beneficial to our bilateral relationship in the process.

This article first appeared in the Canberra Times on 07 December 2009

1. China and climate change in the post-Copenhagen era
2. Dispelling illusions on China and climate change
3. Bush wrong on India and China and climate change

In their recent paper on Trade, Technology and the Environment: Why have poor countries regulated sooner?, Mary Lovely and David Popp observe that late developers have tended to regulate coal-fired power plants at much lower levels of per capita income, because of technological advances made by the pioneers of environmental regulation.

They go on to examine how the availability of new pollution-abating technology speeds up the adoption of environmental regulation in developing economies, focusing in particular on the role of international trade and trade policies in knowledge and cost transmission. The good news – for free traders and greens alike – is that trade openness increases access to environmentally-friendly technologies, which results in earlier adoption of regulations to limit environmental damage. This implies that such technologies may well provide the key to sustainable development, so it’s good news for scientists and innovators too.

The not so good news is that numerous forces may prevent the door from being opened. Openness itself, despite easing access to technology, also makes it harder for firms to pass on the associated costs to domestic consumers and therefore increases the likelihood that they will lobby against environmental regulation and in favour of trade protection. Successful lobbying for protection will result in stricter environmental standards, but will simultaneously reduce innovation incentives and global economic efficiency. Lobbying will be stronger in countries with larger coal reserves, where abatement standards are likely to be weaker as a result – not good news if China alone proves this prediction right. This regulatory weakness will be compounded by governments that value political contributions over consumer welfare – a force that will vary in strength across different political structures, although not necessarily in a predictable way.

Returning to the good news, the findings that more densely populated countries will regulate sooner (because of the proximity of residents to power plants and therefore the value they place on abatement) and that a 10% increase in per capita income growth increases adoption rates by 36% bodes well for the densely populated and rapidly growing economies of China and India. Moreover, political rights are found to be an insignificant determinant of regulation, despite the expectation that these might strengthen consumer voices.And the dirtier the coal, the greater the pollution problems, and hence the earlier that regulations will be adopted. That’s two (small) silver linings for two of China’s clouds, and hence two (small) silver linings for the world. As for saving the planet, perhaps it’s more like pie in the sky.

1. Government guarantees: technology to avert climate change?
2. Beyond Copenhagen: How to cool the planet
3. Bringing India in from the cold – and selling them nuclear technology

Henry Paulson Jr.’s article in the September/October 2008 issue of Foreign Affairs provides a timely and insightful analysis of how strategic economic engagement is strengthening the U.S.-China bilateral relationship. Paulson, U.S. Secretary of the Treasury, starts with the premise that engagement is the best path for the next American president to choose in response to China’s emergence as a global power. While recognising that there will inevitably be tensions between the two countries – particularly in the realms of China’s military modernization, its enforcement of intellectual property and its human rights record – Paulson argues that nothing should stand in the way of cooperation, based on mutual understanding, equality and trust. To illustrate, he focuses on the successes of the U.S.-China Strategic Economic Dialogue (SED), launched by President George W. Bush and President Hu Jintao in 2006. As joint leader of the SED (with his Chinese counterpart, Vice-Premier Wang Qishan) Paulson has a wealth of firsthand experience to demonstrate how effective the SED has been in promoting cooperation on a wide range of economic issues, including exchange rate policies, energy security, environmental degradation, trade, investment and foreign aid.

This is music to the ears of the ‘engagement camp’, while those favouring containment instead will be hard pushed to find fault in the logic of his message (although I’m sure that won’t stop them from trying). Paulson closes by hoping that the next U.S. president will expand on the SED and take U.S.-Chinese relations to the next level. If only both presidential candidates and their foreign policy and economic advisors can find the time to read his article, I’d say he has good reason to hope. The future of one of the world’s most important bilateral relationships will look even better if all U.S. Congress men and women can find the time as well.

1. The state of Sino-American relations – Weekly editorial
2. Reason for optimism in Sino-American relations
3. Indo-American defence ties: a reality check

China faces huge challenges in striving for a balanced, sustainable development path, and Australia has a big role in promoting open trade and investment in China.

While China’s progress in the past three decades is striking, the Chinese leadership still faces huge challenges in steering the economy and its people towards a more comprehensive, balanced and sustainable development path, the three keystones of President Hu Jintao’s ‘Scientific Outlook on Development’. All of these challenges are substantially more difficult in light of the fact that China is still a reforming economy, with incomplete reforms in the banking sector and financial markets, labour markets and state-owned enterprises, to name a few.

These challenges often seem to be overlooked by Western leaders and the media, particularly in the United States, when it comes to criticising China: the country should improve its human rights record; its markets are not open enough; it must relax its capital controls, float its currency and allow the RMB to appreciate; subsidies to state-owned enterprises need to end. The list goes on. These criticisms are starting to rankle with Chinese officials, who are becoming willing to criticise in return, for example, suggesting that the Chinese style of economic management may well be superior to the US model, not only for China but for other developing countries as well. Despite having their share of problems, the Chinese have reason to feel confident in making such assertions, given the current economic climate in the US compared with that in China.

Perhaps it is time to give Chinese leaders some credit for their achievements, if only because a Chinese leadership that is made to ‘lose face’ in the international arena will use this to its advantage in drumming up nationalistic support at home. A rising tide of nationalism and xenophobia in China can only be detrimental to an emerging new world order in which China will play an important role. It is critical that the West play a positive role in reducing the likelihood of this outcome.

Australia has a role to play in the US-China relationship. The enormous benefits of the China-driven resources boom have left Australians feeling more positive than Americans about China’s rise. Australia’s Mandarin-speaking Prime Minister, Kevin Rudd, is highly respected in China, and the alliance with the US remains strong.

Still, there are signs of nervousness as Chinese investment pours into Australia, with Treasurer Wayne Swan saying that the government will increase its scrutiny of investments from overseas. This may appear to China as Australia wanting to have its cake and eat it too: benefiting from China’s growth in ways it deems fit while denying the Chinese opportunities to invest where they see fit. The worst-case scenario is that budding xenophobia in Australia will feed into tighter investment laws. This will frustrate the Chinese leadership and prove detrimental to a relationship that is at its strongest point in history.

It will be better if Australia can play the respected partner of both the US and China by promoting open trade, investment and dialogue across the Pacific, while focusing on policies to improve competitiveness at home. This strategy will not only best serve Australia’s economic interests, it will send a crucial signal to China and the US as well.

1. More comments on the ‘great balancing act’
2. Australia: balancing the long with the short
3. The role of macroeconomic management in the Great Crash

While it seems obvious that households in China with higher incomes will emit more – both directly through their consumption of coal, gas, petrol and electricity, and indirectly through their consumption of other goods, all of which require energy in their production processes – it is less obvious whether rich households will be more or less “emissions-intensive”, that is, emitting more or less carbon per yuan spent. My chapter with Dominic Meagher and Meng Xin in the China Update this year investigates variations in energy requirements and carbon emissions across urban households with different income levels. We find that poorer households are more emissions-intensive and that this is mainly due to their relatively high levels of coal consumption, the least “green” form of energy.

In terms of China’s future emissions trends, policymakers need to find ways to reduce the coal dependence of poorer urban, and presumably most rural, households. Income growth may partially solve the problem, given that richer households tend to consume less coal. However, appropriate investments and infrastructure will also need to be directed towards cleaner energy alternatives in the near future. See chapter for further details.

1. Are there practical substitutes for coal in China?
2. Making China’s coal clean?
3. China running out of coal?