Australia and South America: Toward Dialogue on China

by Dr. Adrian H. Hearn
CSC academic group: International Relations

Adrian is an ARC Future Fellow (2011 - 2015) with the Department of Sociology and Social Policy, Faculty of Arts and Social Sciences. His research examines the geopolitical implications of China’s deepening diplomatic and economic relations with Latin America. His focus most recently has been on the role of Chinatowns as political and economic bridges to Mainland China. Adrian maintains an active interest in issues of civil society, religion, and political rationalisation. His recent publications include China Engages Latin America: Tracing the Trajectory (Lynne Rienner 2011) and Cuba: Religion, Social Capital, and Development (Duke University Press 2008).

That emerging economies are becoming the centre of global economic dynamism is no longer disputed. More topical is the challenge of managing the boom in natural resource exports underpinning this transformation. Australia and South America are becoming increasingly reliant on selling their natural resources to China, and they therefore share a set of challenges in managing their economies. Their focus on primary sectors is generating pressure in both to ensure that the benefits of the commodity boom flow on to citizens and advance national interests, including support to manufacturing sectors.

My ARC Future Fellowship project explores lessons that Australian and South American researchers, analysts, and policymakers can learn from each other in relation to China. Some of these lessons relate to China indirectly, for instance, the design of carbon and mining taxes, the protection of ecosystems, and dialogue with indigenous communities as resource intensive projects expand. Others relate more directly to China, such as engagement with Chinese state owned enterprises and management of investments from Chinese sovereign wealth funds. Below I provide a sketch of China’s economic engagement with South America and Australia, and then briefly look at Chinese investment in arable land, a sensitive topic on both sides of the Pacific.

China and the Commodity Challenge

Over-reliance on primary sectors has long concerned forward-thinking policymakers in South America. The fault lines between the region’s industrialists and resource exporters are now deepening as accelerated commodity production ‘kicks away the ladder’ from underneath hard-won national manufacturing sectors. Natural resources now account for 75% of Chile’s exports (copper accounting for 53% of this figure), 60% of Argentina’s (oil seeds accounting for 67%), and 43% of Brazil’s (iron ore accounting for 27%). China has become the main global consumer of these outputs, its trade with the region exceeding USD $200 billion in 2011. That year mining and agriculture accounted for a staggering 90% of the region’s exports to China.

A similar trend is evident in Australia, where primary sectors have grown to 60% of total exports. With an expansive land area of 7.7 million sq. km and 17% of the world’s iron ore, Australia has long relied on primary exports to underpin its economy and provide for its relatively small population (currently 23 million people). Having serviced Japan and other industrializing countries since the 1960s, in 2009 China replaced Japan to become Australia’s largest trade partner. Bilateral trade with China reached $105bn in 2011, and Australia is the largest destination of Chinese FDI, with 220 Chinese investment projects approved as of 2011, worth over $62bn. Of Australia’s commodity exports, iron ore comprises 17%, coal 15%, and liquid natural gas 3%. In 2010 69% of Australia’s iron ore exports went to China, and total Australian commodity exports are expected to exceed $251bn in 2012. As Saul Eslake has written, Australia is ‘unusual for an advanced economy’ in its reliance on Asian natural resource markets, and in that only 16% of its exports are manufactured goods.

China’s unprecedented pace of urbanization is likely to sustain demand for agricultural products over the coming decade. However, three factors signal troubled times ahead for exporters of mining and metallurgical resources. First, as the Chinese economy becomes increasingly driven by domestic consumption, demand for metals will fall together with the Chinese government’s declining rate of investment in infrastructure and other resource-intensive projects (currently around 45% of GDP compared to around 21% in most developed countries). Second, recent discoveries of iron ore deposits in West Africa by Australian companies, backed by Chinese capital, will likely put downward pressure on the metal’s international price. Third, expanding commodity exports have driven up currency values in South America and Australia, negatively impacting the competitiveness of non-resource sectors. Both regions have seen a growing number of manufacturers close their operations or move to China to take advantage of more favourable margins. Consequently, the capacity of the two to adjust to a slowdown in Chinese demand, or a fall in international commodity prices, has narrowed.

To feed China’s increasingly urban population, the nation’s enterprises have sought to buy or rent arable land in Australia, South America, and elsewhere.

Lay of the Land

To feed China’s increasingly urban population, the nation’s enterprises have sought to buy or rent arable land in Australia, South America, and elsewhere. Investment in this sector is generally welcome, but the entry of Chinese sovereign wealth funds brings a new level of complexity to the management and regulation of FDI. Australia and South America need to update their legal frameworks for governing foreign land use, environmental impact, and outcomes for affected communities.

The Rio Negro-Beidahuang agreement in Argentina epitomizes the complications that can arise. Under the agreement, the provincial government of R'o Negro plans to lease large tracts of fallow land to China’s Heilongjiang Beidahuang State Faros Business Trade Group for the production of soy and other export staples to China for twenty years. Despite its potentially negative environmental impact (resulting from questionable irrigation practices and the introduction of genetically modified products), the agreement was signed - without the consent of the region’s residents. As well as causing uproar about the entry of Chinese workers, the proposed project has left the R'o Negro government open to legal reprisals under national and provincial transparency and environmental laws.

In response to the growing interest of foreign (mainly Chinese) clients in arable land, Mercosur is exploring the feasibility of registries as a basis for regulating land purchases and leases. Many in Australia (galvanized by the National Party) are in favour of establishing such a registry, but the Federal Trades Minister is reluctant, arguing that this “monumental task” is too difficult to achieve. Australia should stay abreast of Mercosur’s advances and setbacks in this endeavour.

The Australian Bureau of Statistics reports that 11.3% of national land is foreign-owned, though this figure is widely believed to be underestimated. The Foreign Investment Review Board (FIRB) presides over a relatively open trade regime that permits foreign individuals to purchase Australian land up to the value of $244 million. As most tracts of farmland sell for considerably less, FIRB’s approval rate for purchase applications is high. Nevertheless, Australia is exploring policy initiatives to ensure that agricultural produce (particularly from foreign-owned farms) remains available to global customers at market prices, and does not become diverted to pre-determined foreign markets (including China) at concessional prices. Shanghai Zhongfu’s proposed 50-year lease of 30,000 ha of irrigated land stretching across the Northern Territory-Western Australia border is a case in point in terms of its possible impact on the price of sugar (likely to be exported to China for biofuel), environmental approvals, taxation and native title. The formulation of legislation to deal with such cases could harbour useful insights for South American agriculturalists in their pursuit of market diversity, competitive pricing, and food security. Faced with common challenges in the management of foreign land titles, South America and Australia could fruitfully compare notes on several questions:

Shanghai Zhongfu’s proposed 50-year lease of 30,000 ha of irrigated land stretching across the Northern Territory-Western Australia border is a case in point in terms of its possible impact on the price of sugar (likely to be exported to China for biofuel), environmental approvals, taxation and native title.

• Does the entry of Chinese and other foreign state enterprises into the land market carry unique implications for national food security? How do the priorities and objectives of state enterprises differ from those of private firms?
• As foreign interests increasingly seek access to South American and Australian land, how can the two ensure that their agricultural produce remains bound for competing markets, rather than for predetermined customers at concessional prices?
• How can work-visa schemes evolve to accommodate and regulate the size, length of stay, and activities of foreign agricultural workers?
• Should foreign land titles be subject to trial periods that enable monitoring and assessment of impact on the environment, soil, water, and local communities?
• How might restrictions on foreign land titles impact present and future Free Trade Agreements? For example, would such restrictions affect Australia’s existing FTA with the United States and proposed FTA with South Korea, both of which permit land purchases of up to $1 billion?

Let's talk about it

The presence of Chinese SOEs in foreign primary sectors raises important challenges for resource exporting nations. Beyond the potential distortion of agriculture markets and associated food security concerns, there is a broader risk associated with "pushing back" against Chinese interests. This risk stems from the Chinese government's influence across a range of industrial sectors. For instance, shortly after Argentina pursued anti-dumping measures against Chinese manufactured goods in 2009 and 2010, Chinese importers boycotted Argentine soy oil, wreaking havoc on the latter's economy. In Australia, following Chinalco's failed attempt to become the dominant shareholder in mining giant Rio Tinto in 2009, and subsequent unsuccessful iron and steel pricing negotiations, one of the latter's executives was arrested in China. He was convicted and sentenced to 10 years for bribery and revealing state secrets. While the causality of events was clearer in the Argentine case, the coordination of trade, investment, and civil law enforcement under the Chinese state remains a concern for recipients of Chinese investment.

Resource exporting nations have a shared interest in managing the above challenges, and would benefit from deeper inter-regional dialogue about them. Chinese researchers and advisers should be included in this debate, for which reason APEC and the G-20 are well positioned to shape its parameters. Academic and policy workshops that bring together scholars and analysts from stakeholder countries can help to canvass the key issues and prepare the way for official dialogue. In this regard, workshops on China's relations with South America, Australia, and the world-including those organised by the China Studies Centre in 2010 and 2011 in Australia, the UK, the United States, Mexico, and China-play an important role in crafting inclusive approaches to these critical challenges.