Australia-China economic relations: a lesson for the U.S., not a threat

There are multiple similarities between Japan in 1991 and China in 2011: size, export prowess, commodity needs, long-term growth threatened by sharply weakening demographics, and declining return to capital due to continued attempts at short-term stimulus. China also faces sharp environmental deterioration-the economic returns from labor, capital, and land all signal an end to the PRC's rapid growth.

The Question of Leverage

So Australia is making money hand over fist by selling natural resources to China-hats off. The relationship benefits tens of millions of individuals in both countries. Why does it follow in this mutually beneficial relationship that the seller must accommodate political pressure from the buyer? That certainly does not appear to be what has happened in global oil markets for the past 35 years.

China's double-digit increases in defense spending, its aggressiveness in seas to its east and south, and its thousand or so missiles trained on Taiwan should greatly concern Australia's policymakers. There is no reason why Australia cannot speak its mind on these issues and others, including human rights, for fear of economic repercussions. China's economic growth provides no objective reason to lose faith in American leadership.

China's economic rise is an opportunity for Australia, not a threat. Neither is it a threat to the U.S. The China threat is political/military in nature, and it is growing as much from American hesitance as from Chinese action. The U.S. should make the most of its economic relationship with China, even as it pushes back on the political/security side of the relationship.

What the U.S. Should Do

Play the International Economic Game. China's economic development has caused serious dislocation, but it has also brought huge benefits to many, perhaps led by Australians. Some of the gains for Australia have been and continue to be available to the U.S. For example, the U.S. has more natural gas and far more coal than Australia, yet Chinese investment in American resources was nonexistent until just a few months ago. The American investment review process should be simplified, learning from Australia's Foreign Investment Review Board.

Get Back in the Asia–Pacific Trade Game. The problem with the U.S. economic position in Asia is not China's ties to Australia and others but America's own sclerotic trade policy. Conclusion of the U.S.–Korea Free Trade Agreement after three years of lost opportunity is welcome. Now the Administration should see it through to final passage and not leave the U.S. trade position in Asia hostage to protectionism aimed at Colombia and Panama.

The Administration also needs to show fruit from its negotiations on the nine-nation Trans-Pacific Partnership (TPP), which includes Australia. TPP currently appears unlikely to make a November completion deadline. Anything less than an agreement on the eve of an election year will be correctly perceived as empty.

Stay Fully in the Security Game. Investments should be made in America's military that are indicative of a long-term presence in the Pacific. The U.S. Navy is currently running at least 30 fewer ships than it says it needs and is heading lower. This must be addressed.

In addition, the American commitment to Taiwan's security should be kept in deed as well as word. There can be only one reason the Obama Administration refuses to sell Taiwan the arms it requested to address the imbalance across the Taiwan Strait: It fears China's reaction. It is understandable if friends and allies such as Australia believe they see in this the coming eclipse of America's power.

Nothing to Fear

Australian Prime Minister Julia Gillard, as evidenced by the tributes to the U.S.–Australia alliance that she is paying in Washington this week, seems to understand that there is nothing inconsistent in supporting an American-led order in the Asia–Pacific and close economic relations with China. This is a point that American policymakers should better understand.