US investment restrictions, the benefits of broken guardrails, and wine predictions
Weeks of 7 to 27 August 2023
The Australian angle on US outbound investment restrictions
The Australian Department of Foreign Affairs and Trade (DFAT) in a statement to The Australian Financial Review on 14 August:
“The US government has engaged partners, including Australia, on their potential implementation of an outbound investment screening regime. … Australia is assessing the implications of the Biden administration’s proposal which is currently out for public consultation.”
Quick take:
This latest US salvo in intensifying US-China technology competition follows last year’s US export controls on leading-edge semiconductors and related manufacturing equipment. These two US initiatives are part of an effort to, among other things, maintain “as large of a lead as possible” over China in “certain technologies,” including “semiconductors and microelectronics, quantum information technologies, and artificial intelligence capabilities.” Their objective is to reduce Beijing’s assessed ability to “threaten the national security of the United States” via the development of China’s “military, intelligence, surveillance, [and] cyber-enabled capabilities.” Despite being part of the same overarching US response to the perceived security risks of China’s technology rise, the semiconductor export controls and proposed outbound investment restrictions have vastly different implications for Australia.
As with recent US government outreach on proposed outbound investment restrictions, Washington is seeking to bring US allies and partners into the fold on its semiconductor export controls. Semiconductor industry leaders Japan and the Netherlands have already joined these US efforts to starve China of certain chips with their own export controls and it remains unclear how much longer semiconductor powerhouses South Korea and Taiwan will be granted waivers to continue supplying China with advanced semiconductors and related manufacturing equipment. But as a minor player in the global chip industry, Australia is unlikely to be drawn into US efforts to cut off China’s access to leading-edge semiconductors. Sure, Washington might appreciate some (so-far not forthcoming) rhetorical endorsement from Canberra of its semiconductor export controls. But the United States has likely judged that Australia’s support for these export controls—whether rhetorical or practical—won’t move the dial. Beyond the United States, the heavy lifting on that front will be done in Japan and the Netherlands, and eventually South Korea and Taiwan.
Australia’s non-participation in US semiconductor export controls might be a non-issue for Washington. Financial flows are a different story though. Australia’s total stock of foreign direct, portfolio and other investments in China, Hong Kong, and Macau (the jurisdictions covered by proposed US outbound investment restrictions) was A$144 billion in 2022. Although just 4% of the total stock of Australia’s outbound investments, the dollar value alone means Australia matters financially in a way that it never did vis-à-vis semiconductors. By way of a (very, very, very) rough international comparison, the total stock of US foreign direct investment (FDI) in China, Hong Kong, and Macau in 2020 was US$218 billion, while Australia had approximately A$26 billion of FDI in those same jurisdictions. Australia might be dwarfed by some of the biggest investors in China, but it’s far from a mere rounding error. This presumably partially explains why Washington has gotten in Canberra’s ear about its proposed restrictions on outbound investment.
That said, it isn’t clear how much Australian investment—whether FDI specifically or portfolio and other investments more broadly—is landing in Chinese companies that the United States is seeking to starve of US capital. There might be A$144 billion worth of total Australian investments in China, Hong Kong, and Macau, but it’s entirely possible that very little or even none of that is in Chinese technology companies that are likely to be in the crosshairs of proposed US outbound investment restrictions. Yet that might not be the point. As well as seeking to restrict investments into select Chinese technology companies, the United States might also be seeking to ensure that China doesn’t have access to alternative sources of capital if US funds dry up. As with semiconductor export controls, Washington presumably knows that it can’t go it alone on outbound investment restrictions. The impact of select Chinese technology companies not being able to access US capital will be massively blunted if they can turn to Japan, South Korea, Singapore, Australia, and other major international sources of FDI and portfolio investment. President Xi Jinping might be seeking greater technological and economic self-sufficiency, but that doesn’t mean he wants to see other international sources of overseas finance for China’s innovation ecosystem evaporate as well.
If the above is roughly right, then expect the pressure to mount on Canberra from both Washington and Beijing. To maximise impact, the United States will look to bring its allies and partners on board with its efforts to staunch financial flows into select Chinese technology companies. And Australia will matter financially in a way it never did with the semiconductor export controls. Meanwhile, China will object to moves by other countries to join what it perceives as a US-led effort to undermine its legitimate technological and economic development. And Beijing might be watching Canberra especially closely for signs of Australia signing up to (in China’s view) malicious US-led containment, which could be seen by the Chinese government as an especially egregious insult given its ongoing efforts to repair the bilateral relationship. Per the studiously noncommittal messaging from DFAT, the best option for Australia will probably remain a non-position on US outbound investment restrictions, which for now avoids rankling either Washington or Beijing. Yet that kind of diplomatic equivocation might not suffice long term. Just as Washington is likely to push Canberra harder for support on outbound investment restrictions, Beijing can be expected to deliver stern warnings about the dangers of following the US lead.
Could adversarial US-China ties be good for Australia?
The Chinese Ministry of Foreign Affairs responding on 10 August to US President Joe Biden’s executive order:
“China strongly deplores and firmly opposes the US’s single-minded rollout of restrictions on investments in China. … The move’s real aim is to deprive China of its right to develop and selfishly pursue US supremacy at the expense of others. This is blatant economic coercion and tech bullying, an act that seriously violates the principles of market economy and fair competition, undermines the international economic and trading order, destabilizes global industrial and supply chains and hurts the interests of both China and the US and the global business community.”
Quick take:
The US embrace of semiconductor export controls and the likely outbound investment restrictions against China create obvious challenges for Australia. As well as the ticklish issue covered above of how to thread the needle of not disappointing Washington or antagonising Beijing on outbound investment restrictions, these US measures are likely to continue creating extra turbulence in US-China ties. Given how closely Australia is linked in security terms to the United States and how intertwined the Australian economy is with the Chinese market—to say nothing of Australia’s deep cultural, people-to-people, institutional, and other ties with both countries—it’s easy to see how the splashback from deteriorating US-China relations could scald Australia.
But I’ve also started to wonder whether the inverse might equally be true. It’s a bit of a contrarian point to make and there’s good reason why no Australian official would ever publicly admit it even if it were true. Still, it seems plausible that more adversarial US-China ties could actually lift Canberra’s stock in both Beijing and Washington and thereby serve at least some elements of the Australian national interest. With Washington adopting harder-edge China policies, Beijing might have more reason to play nicer with Canberra to try and incentivise the Australian government to not embrace what it sees as US technological and economic containment. These tough US actions might also make Australia’s enduring enthusiasm for economic engagement with China look comparatively benign and friendly, while targeted but expanding US-China decoupling might also make Australia more appealing to Beijing as a partner for additional trade, investment, and technological cooperation. At the same time, the United States might see Australia as ever-more critical to US statecraft as its competitive relationship with China turns truly adversarial. This seems to be true in both the hard power domain—where Australia is an essential regional staging point for US force posture and a source of capital for the US military industrial base—and the economic domain—where Australia can help diversify critical mineral supply chains and limit China’s involvement in regional telecommunications infrastructure.
So, for all the responsible talk from Prime Minister Anthony Albanese and his ministers of the benefits US-China “guardrails,” maybe some Australian interests are advanced by heightened levels of distrust and mutual hostility between Beijing and Washington? When Washington has Beijing up against the wall with export controls and investment restrictions, Canberra looks positively friendly by comparison, and it becomes even more important for China to not get Australia further offside. And when the United States is locked in “extreme competition” with China, Washington will need to hold its allies closer by doing things like furnishing them with more advanced military capabilities and supporting them to bring alternative critical minerals processing online. To be clear, none of this is to make a values judgment of whether it’s good for Australia to have a deeper security relationship with the United States or repair bilateral ties with China. The point is just that to the extent that Australia wants these things, it might be useful for Canberra to have Beijing and Washington taking aim at each other.
Needless to say, there are likely to be limits. If US-China hostility veers out of control into military conflict, Australia and the whole world stand to lose a great deal. And even in less dramatic scenarios, there are likely to be costs for Australia. Although indirect and hard to precisely measure (or at least, I don’t have the technical skills to do so), the aggregate global economic costs over time of even targeted US-China decoupling combined with the economic inefficiencies of US and Chinese industrial policies are likely to negatively impact Australia’s long-term prosperity. Nevertheless, the possibility remains that heightened US-China tensions might also serve key Australian objectives by increasing Canberra’s importance to both Beijing and Washington. The Albanese government apparently wants working US-China guardrails. But viewed from the pragmatic perspective of Australian statecraft, perhaps it’s possible to have too much of a good thing?
BCB forecasts: A focus on wine duties
Australian Prime Minister Albanese speaking to journalists on 11 August:
“When I spoke at the Shangri La Dialogue a couple of months ago in Singapore, we had one of the most interesting tables for my keynote speech that I've ever sat on: myself, the Acting Prime Minister of Singapore, the United States Defence Secretary, Lloyd Austin, the British Defence Minister, the Chinese Defence Minister and the Cambodian Defence Minister all enjoying a meal together. And there in Singapore, like in many parts of Asia, when the wine was poured, guess what? It was Australian wine, because it’s such great produce. And I asked the Chinese Defence Minister, was he enjoying it? And he certainly said that he was, it was good quality. And I said, well, what we need to do is to get more of it into China.”
Based on the last three weeks, I still rate a visit to Australia by Minister of Foreign Affairs Wang Yi and/or Minister of Commerce Wang Wentao in 2023 as almost certain (circa 95% chance). I also still rate a prime ministerial visit to China in 2023 as highly likely (circa 90% chance) and becoming incrementally more probable. But I tend to think that recent developments point to a higher likelihood of an announcement this year of a pathway on China’s wine duties.
Announcement of a pathway for the removal of China’s duties on Australian wine in 2023
Probability
Highly likely or circa 85% chance (up from likely/circa 70% chance in the last edition)
Background
When the pathway for the removal of barley duties was announced in April 2023, Minister for Foreign Affairs Penny Wong said: “the Australian Government would expect a similar process to be followed in relation to the trade barriers which exist on Australian wine.” Since then, we’ve seen a series of positive, though admittedly inconclusive, indicators. With barley duties removed, announcing a pathway for the removal of wine duties is one of the next major milestones in the ongoing stabilisation and repair of the Australia-China relationship, which is a process that Beijing seems confident will continue.
Recent developments
As well as Prime Minister Albanese’s upbeat anecdote about China’s Defense Minister Li Shangfu quaffing Australian wine, the Minister for Trade and Tourism Don Farrell has also been bullish that “we can completely stabilise this relationship, and get all of the wonderful food and wine that Australia produces back onto the kitchen tables of Chinese consumers.” To be sure, Minister Farrell has also flagged that removing wine duties would be a “a more difficult process” than barley. Still, Beijing’s re-registration of two of Australian barley exporters on 9 August and Australia’s return to China’s Approved Destination Status scheme for outgoing group travel on 10 August point towards the ongoing progressive dismantling of trade restrictions. Of course, the announcement of a pathway for the removal of China’s duties on wine in 2023 won’t necessarily mean an end to these trade impediments this year. Still, such an announcement seems likely to eventually yield a similarly successful pathway to the barley duties.
As always, thank you for reading, and please excuse any errors (typographical or otherwise). Any and all objections, criticisms, and corrections are very much appreciated.
I am inspired by your optimism regarding a China-Australia rapprochement, but find little evidence to support it.
Australia continues to threaten China with war, to slander and calumniate China, to harass and insult China at every opportunity.
Why on God's earth should the Chinese want to see Antony Albanese, a dimwitted imperialist lickspittle if ever there was one.
What does he have to offer? What is he bringing to the World Peace & Prosperity Table?
What has he done for China since his predecessors knifed Huawei?
Nothing and nothing.