Donald Trump’s China ‘poison pill’ may hit Australia as US pressures allies

A China “poison pill” prescribed by Donald Trump for close US trade partners should send a shudder through Australian business boardrooms

The renegotiated North American Free Trade Agreement, tacitly agreed to this month, gave the US virtual veto rights over Canada and Mexico signing free trade deals with China.

After decades of generally supporting China’s integration into the global economy, Washington is now in the formative stages of trying to dislocate commercial supply chains between Beijing and America’s foreign partners.

The US is fed up with China’s theft of intellectual property from American companies, commercial cyber attacks, forced technology transfers, state subsidised firms and limited US access to Asia’s largest economy.

An extreme scenario mapped out by finance policymakers at the International Monetary Fund meetings in Bali last week was the possibility of Trump eventually escalating his economic attacks on China by pushing for Iran-style multilateral sanctions.

Such an acute move, however improbable, would force countries such as Australia to choose between doing business with China (our biggest trade partner) and the US (our largest foreign investor and security ally).

In parallels to the Cold War, it is already becoming clear the US will sometimes lean on allies to choose between the competing American and Chinese systems.

The difference today is the global economy is much more intertwined and China’s economy is bigger than the USSR was, so the economic ramifications could be wide-reaching.

Considering more steps

Derek Scissors, a US-China economic expert at the American Enterprise Institute in Washington, says the US is considering more steps “that would move closer to forcing countries to limit their trade and investment with either China or the US, especially in advanced technology”.

Australia has a free trade agreement with Beijing because – unlike the US – Canberra recognises China as a “market economy”.

The US-Mexico-Canada (USMCA) trade pact obliges the countries to tell Trump three months in advance before negotiating a free trade deal with a “non-market economy” – code for China.

If Canada or Mexico strike a deal with Beijing, the US could terminate the USMCA with six months’ notice.

Peterson Institute for International Economics senior fellow Chad Brown says the US is saying that, “When it comes to China, it is either us or them.”

While the China-Australia free trade deal will not be unwound, it is not hard to imagine the US pressuring Australia to more tightly scrutinise commercial relations with China in other areas such as technology and infrastructure.

The US may prefer Australia limit supplying China dual-purpose technologies that have both civilian and military uses.

Emerging technology

Australian university collaborations with China on research and development, particularly in emerging technology such as artificial intelligence and quantum computing, could face scrutiny.

Fergus Hanson, Australian Strategic Policy Institute head of international cyber policy, says the US seems to be pressing its allies to “muscle up to China”.

“Traditionally, the US has leant on allies on commitments for troops in Iraq and Afghanistan and it hasn’t really gone much into the trade space and the need to pick sides,” he says.

“On critical national infrastructure like telecommunications and software in critical systems, there will be growing interest around supply chain security.”

The Pentagon this month published a report that suggested Australia, Canada, Japan, the UK and US co-operate more on the defence industrial base – potentially limiting links to China.

Zack Cooper, a Republican-aligned Asia security expert who worked in the George W Bush White House, says business deals involving critical infrastructure and defence technologies will face “a lot of pressure” from Washington.

The US made it patently clear to the Turnbull government that it would be problematic for their intelligence relationship if Australia allowed China’s Huawei to supply technologies to 5G wireless networks in Australia. Huawei was blocked from participating on national security grounds.

In 2016 then-treasurer Scott Morrison stopped Hong Kong’s Cheung Kong Infrastructure and China’s State Grid Corporation buying half of NSW power distributor Ausgrid. Fairfax Media reported the electricity infrastructure was critical to support the joint US-Australia military surveillance facilities at Pine Gap in the Northern Territory.

Australia will not always submit to US preferences.

The Obama administration ultimately failed to dissuade Australia from joining the China-orchestrated Asian Infrastructure Investment Bank.

But Trump is a much more imposing leader, especially when he uses tariffs as leverage over uncompliant allies, as he has done with Canada, Europe, Japan, South Korea and Mexico.

The US is retaliating to China’s protectionism with its own attempt at “multilateral mercantilism” against Beijing, meaning Australian business and policymakers face harder choices.