How to deal with China’s economic statecraft by OYA Shin

“API Geoeconomic Briefing” is a weekly analysis of significant geopolitical and geoeconomic developments in the post-pandemic world. The briefing is written by experts at Asia Pacific Initiative (API) and includes an assessment of burgeoning trends in international politics and economics and the possible impact on Japan’s national interests and strategic response. (Editor-in-chief: Dr. HOSOYA Yuichi, Research Director, API & Professor, Faculty of Law, Keio University)

This article was posted to the Japan Times on February 25, 2021:

API Geoeconomic Briefing

February 25, 2021

How to deal with China’s economic statecraft

OYA Shin,
Senior Consulting Fellow, Asia Pacific Initiative (API)




As China increases its assertiveness in trade and security in Asia, it has become essential for Japan, Australia and the United States to create a united front to counter Beijing.

If the three nations, which share common basic values and strategic interests, work together on fields including security, energy and economy, it will be beneficial for the stability of the Indo-Pacific region. With the U.S. already a security ally, strengthening ties with Australia should be Japan’s top priority.

Darwin, the capital of Australia’s Northern Territory, is a small city with a population of about 150,000, but it hosts the U.S. Marine Rotational Force, as well as two liquefied natural gas (LNG) production plants involving Japanese firms.

Historically, Darwin has been strategically important. The Imperial Japanese Navy recognized this when, in 1942, it launched air raids on the city, killing more than 240 people.

Recently, the city’s strategic significance has increased again amid China’s military buildup in the South China Sea. During then-U.S. President Barack Obama’s visit to Australia in November 2011, he and then-Australian Prime Minister Julia Gillard of the Labor Party agreed on joint initiatives to enhance their alliance and announced a rotational deployment of the U.S. Marines to Darwin.

The United States places further expectations on Australia, which has fought together with the U.S. as an ally in major wars including the two world wars, the Korean War, the Vietnam War and the Iraq war.

Kurt Campbell, who serves as the coordinator for Indo-Pacific affairs on the National Security Council, a newly established post under U.S. President Joe Biden’s administration, stressed in his 2016 book, “The Pivot,” that Asia should be placed more centrally in the formulation and execution of American foreign policy, and called on the need to spread U.S. forces around the region.

He pointed out that U.S. military power in Asia had been overly focused on the northern part of the region, a legacy of the Cold War against the Soviet Union, and that American forces stationed in Japan are facing risks due to China’s increased missile capabilities.

He calls for the need to disperse U.S. forces to the south while maintaining presence in Northeast Asia, stating that the deployment of U.S. Marines in Darwin is a step in that direction.

He says Australia, given its favorable geographic position, long coastline and strategic depth, can play a bigger role which includes additional basing for U.S. naval vessels.


Deep ties

In July, at a meeting of their foreign and defense ministers, the U.S. and Australia agreed on establishing a bilateral Force Posture Working Group to promote security and defense cooperation.

Economically, however, Australia has deep ties with China, with China accounting for 40% of its exports.

In April 2013, Gillard visited Beijing and agreed on a strategic partnership with China.

It has been said that the Gillard administration had been reluctant to allow U.S. military aircraft greater access to Australian airfields over concerns that the move would make China uneasy.

After the conservative coalition took power in September 2013 and Tony Abbott became Australia’s prime minister, the deployment of U.S. Marines in Darwin rose to 1,100. The Abbott administration boosted defense spending and criticized China’s land reclamation in the South China Sea.

Malcolm Turnbull, who took over as prime minister under the same coalition in September 2015, had been regarded as a liberal, but did not lean toward China and further expanded defense expenditure to reach 2% of the nation’s gross domestic product.

Scott Morrison of the conservative coalition became prime minister in August 2018, and the number of U.S. Marines training in Northern Australia in 2019 reached 2,500 as initially planned.

The deployment of U.S. Marines in Darwin appears to have progressed smoothly, but the process was not without problems.

The Northern Territory Government, which was aiming to make the Port of Darwin the core of the region’s development, planned to build commercial facilities at the port using private-sector funds.

In October 2015, the government announced that China’s Landbridge Group had been awarded a 99-year lease of the port in a deal worth 500 million Australian dollars.

Ye Cheng, who heads the company, is a member of the Chinese People’s Political Consultative Conference, an advisory body to the Chinese government.

Before signing, the deal was referred to the Foreign Investment Review Board which scrutinizes the sale or lease of Australian assets that might affect national interests, but it wasn’t given full assessment by the board since deals involving private firms or local governments were not subject to the process.

The following month, Obama reportedly told Turnbull in a meeting, “Let us know next time,” apparently expressing concern about the deal.

Following domestic criticism over the deal, rules were revised so that all investments in critical infrastructure must be approved by the federal government, regardless of the value of the deal.


Australia’s energy resources

Energy is also an essential area when thinking about the relationship between Japan, Australia and the United States.

Coal and LNG together occupy around a quarter of Australia’s total exports in terms of value, with the nation being the world’s top LNG exporter, having shipped 78 million tons last year.

Japan was the top importer of Australia’s LNG with 30.3 million tons, but shipments to China have been increasing sharply in recent years. Exports to China totaled 29.6 million tons in 2020.

The U.S. meanwhile has become the world’s biggest natural gas producer, driven by production of shale gas.

Although LNG exports from the U.S. are smaller than those of Australia, there are forecasts that the U.S. might overtake Qatar and Australia around 2025 to become the world’s top LNG exporter.

While the U.S. and Australia compete in LNG exports, they share a common principle that projects should be market-based and led by the private sector.

They have also built cooperative ties, including an initiative by Japan, Australia and the U.S. to jointly support projects to develop infrastructure such as LNG receiving terminals in the Indo-Pacific region to nurture LNG markets.

Japanese firms are involved in most of the LNG projects in Australia. Among them, two projects — Darwin LNG and Ichthys LNG — have onshore liquefaction facilities in Darwin.

The Ichthys project is operated by Japan’s oil and gas developer Inpex Corp. In November 2018, Prime Minister Shinzo Abe attended a ceremony held in Darwin to mark the official opening of the project.

Amid world efforts toward decarbonization, Australia is also focusing on hydrogen, in addition to LNG.

The Australian government released its National Hydrogen Strategy in November 2019, aimed at producing green hydrogen using electricity generated by renewable sources such as solar and wind power and making it a competitive export industry.

The strategy also discusses export potential of blue hydrogen, created through gasification of lignite with the associated emissions captured and stored underground using carbon capture and storage (CCS) technology.

Last May, the Australian government announced the establishment of a AU$300 million (¥20 billion) fund to support the hydrogen industry.

Hydrogen does not exist naturally. It is a secondary energy which needs to be produced from other sources such as solar and wind power, lignite and natural gas.

Coming up with ways to utilize hydrogen — including hydrogen direct reduction steelmaking and fuel cell vehicles — is definitely important, but these should be adopted on the premise that low-priced hydrogen produced without emitting greenhouse gases is available.

If Australia can create hydrogen at a low cost by using competitive renewable energy sources or CCS technology, massive shipments of hydrogen from the country might be able to contribute to Japan’s decarbonization.

Australia’s AGL Energy Ltd. teamed up with Japan’s Kawasaki Heavy Industries Ltd., Electric Power Development Co., Iwatani Corp. and Marubeni Corp. and started a trial of coal-to-liquid hydrogen conversion in 2018 in Victoria, Australia.

Iwatani announced last November that the firm and Australian power company Stanwell Corp. have begun a study into the production and liquefaction of green hydrogen using renewable power sources.

Mitsubishi Heavy Industries Ltd. also announced in November that it had agreed to invest in Australian firm Hydrogen Utility that develops green hydrogen and ammonia projects.

In January, Sumitomo Corp. and JGC Holdings Corp. announced they had signed a project aimed at producing hydrogen from electrolysis of water using electricity from solar power in Gladstone, Australia.

Also in January, Inpex announced it had begun a performance validation of a solar hydrogen production test facility in Darwin.


The trilateral partnership

In terms of both security and energy, cooperation between Japan, Australia and the U.S. is the key.

The three nations have frequently conducted joint military exercises. Last November, the three countries and India held the Malabar joint offshore military exercise in the Bay of Bengal.

In the same month, during Morrison’s visit to Tokyo, Japan and Australia agreed in principle on the Reciprocal Access Agreement to facilitate cooperative activities between the Self-Defense Forces and the Australian Defence Force, further deepening the two nations’ quasi-alliance.

As for energy, while it depends on competitiveness whether hydrogen is really the right choice or not, the potential of hydrogen increases as Japan works together with Australia instead of on its own.

In the bilateral summit in November, Suga and Morrison agreed to advance hydrogen cooperation.

Because decarbonization and electrification lead to increased demand for rare earth metals, it is also important for the three countries to cooperate to reduce excessive dependence on China’s rare earths.

The U.S. Department of Defense announced earlier that it would offer funds to Australia’s Lynas Rare Earths Ltd. to build a light rare earths separation plant in Texas.

Such moves are significant from the viewpoint of strengthening supply chains for essential commodities.

The three countries have also been cooperating to develop high-quality infrastructure.

Under the Trilateral Infrastructure Partnership signed in November 2018, the Japan Bank for International Cooperation, the U.S.’ Overseas Private Investment Corp., which is now called U.S. International Development Finance Corp., and Australia’s Export Finance and Insurance Corp. have dispatched joint missions to the Indo-Pacific region.

The first project under the partnership was to jointly finance the construction of an undersea fiber optic cable for Palau.

Robert Blackwill, a leading authority in geoeconomics, considers financing and aid as well as trade policies and economic sanctions as geoeconomic tools.

In coming up with a proactive approach to geoeconomics, we should not focus only on negative measures including trade restrictions and sanctions that could bring about adverse effects or that could lead to violations of World Trade Organization rules.

It is important to utilize positive measures such as financing and aid, and it goes without saying that they should be high-quality projects.


Speaking out

Australia has been speaking up clearly against China, whose economy is more than 10 times bigger than Australia’s, regarding issues including democracy, human rights and rule of law.

Japan should raise its voice too as a nation that shares common values with Australia and the U.S.

In an interview with the Asahi newspaper published in January, Foreign Minister Toshimitsu Motegi expressed grave concerns over China’s national security law imposed on Hong Kong, saying, “Human rights are a universal value and protecting human rights is a fundamental responsibility of all countries, regardless of cultural differences.”

Motegi sent out a strong message in the interview, condemning the arrests of 53 democracy activists in Hong Kong as “unacceptable.” This is an appropriate message for Japan to be conveying.

Furthermore, China’s economic coercion against Australia — the weaponizing of trade — damages free trade and rules-based international order.

In addition to strengthening international rules such as WTO rules, as well as reducing excessive dependence on China in trade, it is necessary for like-minded countries to stand together to highlight China’s coercive actions.

When trade is weaponized, major powers like China are in a stronger position compared with middle powers such as Australia and Japan.

Moreover, generally speaking, authoritarian governments like China are more immune to domestic criticism compared to democratic governments which cannot ignore voices of industries directly hit by economic coercion.

In order to overcome such double asymmetries, it is indispensable for like-minded nations to unite, with Japan, Australia and the U.S. at the center, to create a framework, jointly issuing a clear message.

Japan and Australia are the mainstay of important frameworks for freedom and peace such as the “Quad,” a strategic forum of the three countries plus India, and the Free and Open Indo-Pacific vision.

The two nations should also call on the U.S. to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, no matter how long it takes.

If Japan and Australia, which share common basic values and strategic interests, work with the U.S. and strengthen cooperation in various aspects including security, energy and economy, it will definitely benefit them and also contribute to the stability in the Indo-Pacific region.

Strengthening the relationship with Australia is Japan’s top policy priority.


The views expressed in this API Geoeconomic Briefing do not necessarily reflect those of the API, the API Institute of Geoeconomic Studies or any other organizations to which the author belongs.