EXECUTIVESUMMARY

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Executive Summary

Australia and China: forging a comprehensive strategic partnership for change

AustraliaandChina,twovastlydifferentnations,alreadyhaveahugeandjointpolitical,economicandsocialinvestmentinthesuccessoftheirbilateralrelationship.

Takentoahigherlevel,asthisReportrecommends,thisinvestmentintherelationshipcanhaveadramaticadditionalimpactonbotheconomiesandsocieties.

Thisuniquepartnershipstemsfromadeepalignmentofintereststhat,shortofhighlynegativepolicymaking,cannotbeundone.

Therelationshipisalreadylargeandwillundergoahugechange.Thescaleandcomplexityoftherelationshipisgrowingbecauseoftheincreasedroleofservicesandinvestment,aswellasitspoliticalandsecuritydimensions.

Thesecircumstanceslaidthefoundationforsupportfrombothgovernmentsforanindependentjointstudyofdevelopmentsintherelationshipinthedecadeaheadandhowtostrengthenthebilateralframeworkandthepolicysettingsformanagingit.

ThisReportistheproductofanindependentstudyjointlyledbytheChinaCentreforInternationalEconomicExchangesinBeijingandbytheEastAsianBureauofEconomicResearchatTheAustralianNationalUniversity.Itsaimistodefineaframeworkforpolicymakersandforstakeholdersinbusiness,media,researchinstitutionsandthecommunity;aframeworkthatenablesAustraliaandChinatoharnesstheopportunitiesthatarearisingfromtheprofoundtransformationsintheireconomies.

Why Australia and china are important to each other

ChinahasforsomeyearsbeenAustralia’slargesttradingpartnerandoneofitsmostimportantbilateralrelationships.ItisnowwidelyunderstoodthatAustralia’seconomicgrowthandcontinuedrisinglivingstandardsarestronglylinkedtoChina’seconomicsuccess.

IntheChinesepolicycommunity,thereiswideunderstandingandclearacknowledgementoftheeconomicandpoliticaladvantagesofopen,secureandcompetitiveaccesstoAustralianironore,coalandotherrawmaterials.

AsChina’seconomymaturesanditsmiddleclassexpands,ChinaisalsoenjoyingtheaddeddividendofaccesstoAustralianagriculture,institutionsandservices—everythingfrominfantformulatovitamins,buttertobeef,educationtotourism,aswellasadvancedscience,technologyandresearchcapabilities.Australia’sopensocietyprovidesChineseinvestmentswithsecurityinastableandwell-functioningmarketeconomythatguaranteestransparentrecoursetopolitical,legalandregulatoryinstitutions.

Thesenewavenuesofcommercialexchangeareatwo-waystreet.BothAustraliaandChinagainfromgrowinganddiversifyingtheireconomicrelationshipthroughnewflowsoftourists,students,investorsandmigrants.Formorethanadecade,Chinahasbeentheworld’smaineconomicgrowthengine.Despiterecentslowdowns,Chinawillremainakeydriverofglobalgrowthinthecomingdecade.IfChina’sreformagendasucceeds,itcanachieveannualGDPgrowthofaround6percentayearoverthenext10years.

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ButitisobviousthattheimpactofChina’sgrowthonAustraliaoverthenext10yearswillbeverydifferentfrominthepast.Australiawillnolongeronlybearemotesupplierofrawmaterials.ItcanbeapalpableanddistinctivepresenceinChinesedailylife,particularlyfortheurbanmiddleclasseswhoseaspirationsandincomeswillcontinuetoexpandforseveraldecades.

ThenewlyemergingpartnershipbetweenAustraliaandChinahasasignificantandvaluableextradimension.AustraliaisnotonlyeconomicallyenmeshedwithEastAsia,givingitahighstakeinChina’ssuccess.Italsohasstrongeconomic,culturalandstrategiclinkstotheUnitedStates,andthereforeacompellinginterestinapositiverelationshipbetweentheUnitedStatesandChina.

Australia’sgeopoliticalandgeo-economicpositionanditsmulticulturalsocietyarethusuniqueassetsinshapingChina’slinkswiththeWest.

ChineseandAustralianprosperityhasdependedontheliberal,rules-basedglobalsystem.Bothcountrieshaveacompellinginterestinthesuccessfuladaptationoftheinstitutionsofglobalgovernancetotheeconomicandsecuritychallengesofthe21stcentury.AdeeperpartnershipbetweenChinaandAustraliacanbeapowerfulforceforthestrengtheninganddevelopingoftheseinstitutions.Australia’slongstandingcommitmenttoglobalinstitutions,itsdeepengagementwiththeeconomiesofAsiaanditshistoricaltieswithEuropeandNorthAmericaarecomplementarytoChina’sstatusasamajoreconomicpoweranditsdeclaredwillingnesstohelpsupplyandshapetheinternationalpublicgoodsofthe21stcenturyinthetaskofreformingandstrengtheningtheregionalandglobalframeworksofcooperationandgovernance.

ThisaddssignificantweighttoAustralia’ssupportforChina’sgrowingroleintheprovisionofinternationalpublicgoods,suchastheAsianInfrastructureInvestmentBank(AIIB).BothcountrieshaveacommoncommitmenttoChina’sparticipationinglobalinstitutionsandrules.

Benefits of closer economic partnership

Chinaisshiftingitsgrowthdriversfrominvestment,exportsandheavyindustrytoconsumption,innovationandservices.China’sgrowthslowdowndoesnotthreatenthistransformation;itisasymptomofit.

Thistransformationwill,byitself,leadtofastgrowthintradebetweenAustraliaandChinainrealterms,muchofitinservices.Eveninapessimisticscenario,inwhichaverageChinesegrowthisbelow5percentoverthenext10years,ourestimatessuggestthatAustralianexportstoChinawouldstillgrowby28percentandChineseexportstoAustraliaby20percent.A‘baseline’scenariohasAustralianexportsgrowingby72percentandChineseexportsby41percentoverthesameperiod.

Thebiggestgains,however,wouldberealisedifAustraliaandChinaworktoimplementthesupply-sidereformsrecommendedinthisReport.Ifthisreformagendaisprosecutedsuccessfully,AustralianexportstoChinawillgrowby120percentinrealterms,andChineseexportstoAustraliaby44percent.ForChina,thisisconditionalontheimplementationofareformagendathatembracesfinancialandfactorreform,state-ownedenterprise(SOE)reform,increasedopennesstoforeigninvestmentandcapitalaccountliberalisation.ForAustralia,itmeansincreasedcompetitioninshelteredindustries,opennesstoforeigninvestmentandskills,andfacilitatinginvestmentinsocialandphysicalinfrastructure.

Increasedtradeandinvestmentwillmeanhighernationalincomes,moreemploymentandmoretaxrevenueforbothChinaandAustralia.

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EXECUTIVE SUMMARY

ThestructuralchangesintheChineseeconomypresageachangeinthestructureoftrade.TheprofoundcomplementaritystemmingfromAustralia’senergyandresourceabundanceandChina’sindustrialisationwillremainakeypillaroftherelationship,butwillbeincreasinglyaugmentedbyservicessuchaseducationandtourism,withinboundtourismfromChinasettotrebleby2025.Educationandtourismserviceswilljumpfrom8percenttoalmost20percentofAustralianexportstoChinain2025ineventhe“businessasusual”scenario.Machineryandequipmentwilljumpfromjustbelow20percentofChineseexportstoAustraliato28percent.

Chineseproductionisshiftingfromamodelbasedonadaptationandimitationofgoods,servicesandtechnologiesdevelopedelsewheretoamodelbasedondomesticinnovation.ThisisbeingdrivenbyasubstantialinvestmentinChina’sinnovationecosystem.Australia’shigh-qualitytertiaryeducationsector(alreadyamajorservicesexportertoChina)anditscommitmenttoitsownNationalInnovationandScienceAgendamakeitanaturalpartnerinthistransformation.Australia’sexperienceinbuildingahighlydevelopedfinancialsystemcanalsobeofvaluetoChina,whereasophisticatedfinancialsystemwillbecrucialforallocatingcapitaltothemostinnovativeandefficientfirms.ChinaseesspecialbenefitinthepartnershipwithAustraliafortriallingreformsininvestmentpolicyandservicesmarketsaswellasseekinggreateralignmentwithAustraliainitsgeopoliticalinterestsinAsiaandthePacific.

Inshort,thereiseveryreasontobelievethattheAustralia–Chinarelationshipwillbecomemore,notless,importanttobothcountriesastheChineseeconomycontinuestochangeandupgrade.

ForAustralia,thismeansenhancedlong-termeconomiccapacitythroughopportunitiesfornewtradeandproductivity-boostinginnovationaswellasthroughimprovingnationalinfrastructureandthedevelopmentofregionalAustralia.

ForChina,thismeansasustainablepaththroughmiddle-incomestatusonitswaytobecomingahigh-incomeeconomythrougheconomicupgradinganddiversification.

towards a new policy framework

Theneedforanupgradedpolicyframeworkisbroadlyacceptedinbothcountries.

ThatiswhybothgovernmentshavefinanciallyandinstitutionallysupportedtheproductionofthisReportandprovidedthenecessaryaccesstoallowwideconsultationswiththekeyeconomicministriesandagenciesonbothsides,aswellaswithsubnationalgovernments,keyresearchinstitutions,businessleadersandcommunityfigures.

Creatinganupgradedframeworkisacomplextask:itwillrequirebuildinganewsetofnationalcapabilitiesinbothcountries.Thesewillbestbefoundedonpastexperienceandachievements.

Inthe1980s,AustraliaandChinaestablishedwhattheycalleda‘modelrelationship’betweentwoeconomieswithdifferentpoliticalandsocialsystemsandatdifferentstagesofdevelopment.Thiswasthetwocountries’firstsignificantjointeffortatbuildingaframeworkfortheirrelations.Thisprincipleshouldcontinuetoguidethebilateralrelationshiptohigherlevels.

AustraliaembracedChina’sopennessandreformasacriticalfactorinregionalprosperityandstability.ChinaembracedthepartnershipwithAustraliaasacrucialpartofitsopeningpolicy,andAustraliaassumedakeyroleinChina’sforeigneconomicstrategy.Thispath-breakingpartnershipopenedmarket-basedresourcestrade,foreigninvestmentandregionalcooperationwithChina—leadingtopositiveengagementwithChinainAPECandworkingtogetheronChina’saccessiontotheWTO.

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AustraliaandChinahavesinceworkedtostrengthenregionaleconomiccooperationthroughAPEC,theASEANPlusframeworksandtheEastAsiaSummitinordertosecuretheframeworkofpoliticalconfidenceandsecuritynecessarytoeconomicprosperity.

AustraliaandChinaalreadyhaveaComprehensiveStrategicPartnership,agreedin2014,whichguaranteeshigh-levelattentiontothebilateralrelationshipthroughanannualLeadersMeeting,StrategicEconomicDialogue,andForeignandSecurityDialogue.AustraliaandChinaalsohavetheChina–AustraliaFreeTradeAgreement(ChAFTA),whichdeliverssignificanttradeliberalisationandopensthedoorinbothcountriestonewandwideraccesstoinvestmentandtheservicessector.Indeed,ChAFTAhasthepotentialtoserveasakeyagentintransformingthecommercialrelationshipbetweenthetwocountriesinthecomingdecade.

Butthefullopportunityofthesearrangementsisfarfrombeingrealised—bothcountriesmustnowprovideforthecomprehensivesettingofstrategicbilateralobjectivesinaforwardagenda.Thiswilldependonnewframeworksforinstitutionalisingactivecollaborationonpolicydevelopmentandreform.

Chinaisnowbuildingregionalandglobalinstitutionsthatarecommensuratetoitsplaceintheinternationaleconomicsystem.China’sleadontheAIIBandtheOneBelt,OneRoad(OBOR)initiativesrepresentChinaembeddingitsinterestsjointlywithotherspartnerstobolsterinfrastructureinvestmentandregionalconnectivity.

AustraliahasworkedcloselywithChinaintheIMFandotherinternationaleconomicbodiestosupporttheseChineseinitiatives.AustraliaisafoundingmemberoftheAIIB,andparticipatesinOBORthroughprogramsincludingthedevelopmentofNorthernAustralia.TherehasbeenclosecollaborationintheG20onsharedagendasforglobalgrowthandreformingthemultilateraltradingsystem.

managing new dimensions of the relationship: policy framework and programs

HowareAustraliaandChinagoingtomanagetheirincreasinglycomplexrelationship—arelationshipinwhichChinaisbyfarthebiggesteconomyinAsia,isthesecond-largesteconomyintheworld,isdeeplyenmeshedinacomplexrelationshipwiththeUnitedStates,andisprojectinggrowingpoliticalconfidence?

ClosecooperationwithAustraliashouldbeanintegralpartofthenextphaseofChina’seconomicreformandopening.Collaborationonservicesectorreform,financialrestructuringandcapitalaccountliberalisationwillhelpChinarealiseitsgrowthpotential.Asanadvancedregionalservices-basedeconomy,AustraliaisanaturalpartnerandapromisingtestbedforChinainitsreformeffort.

ThisReportoutlinesthekeyideasandprogramsfordealingwiththisquestion.Theconclusionsthatfollowareenvisagedasalong-termagendaofcooperationforbilateralrelations,andwillrequirecarefulconsiderationbybothgovernmentsandotherstakeholdersintherelationshipoverthedecadeahead.

ThisReportshowsthat,inordertorealisetheopportunitiesandcountertheriskstobilateralgrowth,theAustralianandChinesegovernmentsshouldsensiblyelevatetheirrelationshiptotheuniquelevelofaComprehensiveStrategicPartnershipforChange.Leadershipatthehighestlevelshouldsignalthepriorityattachedtodevelopmentoftherelationship.

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EXECUTIVE SUMMARY

Inparticular:

• ThenewComprehensiveStrategicPartnershipforChangethattheReportrecommendswouldbuildonChAFTAandthecurrentannualLeadersMeeting,andparallelministerialmeetings,throughestablishingjointpolicyworkinggroupsthatsupportthisworkandotherpolicyinitiativesstemmingfromtheleaders’dialoguesandadvanceongoingpolicydevelopmentandreform:forexample,inthenegotiationofanewAgreementonInvestmentwithintheframeworkofChAFTAoronaccesstoservicesmarketsandotherissues(seebelow).

• Jointpolicyworkinggroupscanwork,asneeded,withstateandprovincialauthorities,businesssectors,researchinstitutesandcommunity-basedinterestsonspecificinitiativestoadvancethetrade,investment,financial,regionalandglobalreformagendasofbothcountries.

– TheseworkinggroupscanassistineffectingthebilateralcommitmentstofurtherinvestmentliberalisationandexpandedaccesstoservicesmarketsmadeunderChAFTA.

– Thetwocountriesshouldalsoestablishaworkinggroupfordialogueandcooperationonthemaritimeeconomy,asthisisaparticularareaofpotentiallyproductivecollaborationbetweenAustraliaandChina.Bothcountriesaremaritimepowerswithcommoninterestsinseabornesupplyroutesandmanyothermaritimeissues.

• Bothgovernmentsshouldaim,overthedecadeahead,todrawonprecedentfromtheirotherbilateralrelationshipsandembedtheirnewpartnershipintoacomprehensivebilateralBasicTreatyofCooperation.

– Thistreatywouldlockinthepracticeandprinciplesforcooperation,and:committoregularhigh-levelgovernmentdialogues;setouttheprinciplesformanagingtherelationshipthatareenunciatedinthisReport;institutionaliseofficialbilateralexchangesandtechnicalcooperationprogramsbetweeneconomicandforeignaffairsministries,includingbranchesofthemilitary;includepolicyapproachesbetweenfederal–stategovernmentsinAustraliaandcentral–provincialgovernmentsinChina;provideforthecomprehensivesettingofstrategicbilateralobjectivesinaforwardagenda;enfoldtheagreements,mechanismsandreformsoftheChAFTAarrangement;andentrenchcooperationonimprovingeducational,culturalandpeople-to-peopleexchange.

• Bothcountriesshouldnurturethecapacitiesnecessaryfornewhigh-levelengagementthroughestablishingbytreatyagreementanewandwell-resourcedbi-nationalAustralia–China(Ao–Zhong)Commissionintheformofastatutoryentitythatoperatesindependentlyofbothgovernments.

– TheCommissionwillboostthelevelandrangeofpolicy,research,scientific,technology,education,culturalandpeople-to-peopleexchangesbetweenthetwocountries.ItsnearestparallelinAustralianexperienceisthetreatyarrangementbetweenAustraliaandtheUnitedStatesthatestablishedtheAustralian–AmericanFulbrightCommissionafterWorldWarII.

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• WithintheframeworkandprovisionsofChAFTA,AustraliaandChinashouldmovetonegotiateacomprehensiveAgreementonInvestment—incorporatinga‘negativelist’approach,effectivenationaltreatmentofforeigninvestors,respectforruleoflaw,resourceaccessguarantees,andgreatermobilityofpeople—aheadofChineseagreementswiththeEuropeanUnionandtheUnitedStates.TheAgreementonInvestmentcanserveasamodelforaregionalinvestmentregimeinEastAsia.InvestmentflowsfromChinatoAustraliaandfromAustraliatoChinawillplayacriticalroleinthedevelopmentoftheneweconomicrelationshipfromexchange,toinvestment,andnowtopartnership.

– ThiswillnotbeachievedifthebroadercommunitydoesnotgraspthebenefitsofforeigninvestmentinbothAustraliaandChina.InAustralia,thismeansacceptingequaltreatmentforChineseinvestmentandreconsideringattitudestowardsstate-ownedinvestorsfromallcountries.InChina,itmeansbuildingrespectforruleoflawtomakeinvestmentssecureandpredictableforalldomesticandinternationalparties.

• ThereengineeringofthebilateralarchitecturethatisproposedshouldbealignedwiththeAustraliangovernment’sNationalInnovationandScienceAgendaandtheChinesegovernment’sinnovationpriorityinits13thFiveYearPlan.

– Thiswouldseetheprioritisationofbilateralcooperationinfutureopportunitiesinresearchanddevelopment,capitalsourcing,STEMcollaboration,researchcommercialisation,techlandingpads,thedigitaleconomy,andexchangesbetweenAustralianandChineseentrepreneursandinvestors.

• AustraliaandChinashouldattachtopprioritytotheconclusionofahigh-standardagreementontradeandinvestmentliberalisationandongoingeconomiccooperationarrangementsintheAsiaPacificundertheRegionalComprehensiveEconomicPartnership.

• Thetwocountries’sharedinterestintheG20andconstructiveparticipationinglobaleconomicgovernanceshouldfocusonChina’sroleinmutualsupportamongthemajorcurrencies;securingtheinternationalfinancialsafetynettoprotectagainstthespreadoffinancialcrises;connectingreformtoeconomicgrowth;andintensifyingeffortstoreformthemultilateraltradingsystem.

• Importantly,ChinaandAustraliashouldinstigatetop-levelregionaldialogueswithJapan,SouthKorea,India,theUnitedStatesandotherkeyplayersintheregionontheenergytransformationthatisnecessarytomitigateclimatechangeandotherenvironmentalissues.ThisisafruitfulareaforregionalcoalitionbuildingonanissueinwhichChina,asitseekstoreconcileincreasingenergyusewithitsenvironmentalambitions,andAustralia,asamajorenergysuppliertotheregion,haveamajorstake.ItisalsoanareainwhichcooperationwithotherAsiaPacificcountriescouldbeveryproductivepolitically.

Ifthesestepsaretaken,theAustralia–Chinarelationshipwillbetakentoawhollynewlevel.Whilefullyrespectfulofeachother’sexistingrelationships(suchasAustralia’sANZUSrelationshipwiththeUnitedStates),thenewpartnershipwillbeapowerfulforceforthestabilityandprosperityoftheregion,andindeedfortheglobalsystem.ItcanserveasaprincipalvectorofAustralianandChineseengagementwithinarapidlychangingworld.Nurturedcarefullyandimaginativelybygovernments,businesses,researchinstitutionsandotherstakeholdersonbothsides,thisdeeperpartnershipcouldbecomeoneofthemoststrategicallyvitalandproductivebilateralrelationshipsthateithercountryhasintheworld.

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This text is taken from Partnership for Change: Australia–China Joint Economic Report, by East Asian Bureau of Economic Research and China

Center for International Economic Exchanges, published 2016 by ANU Press, The Australian National University, Canberra, Australia.