Taiwan election implications for Australian business good if we don't get too carried away

In the wake of the re-election of Taiwan President Tsai Ing-Wen for a second term on Saturday, many in the Australian business community are wondering what it might mean for China-Taiwan relations. And, more importantly for them, what might the implications be for Australian companies doing business with both Mainland China and Taiwan, or the People’s Republic of China (PRC) and the Republic of China (ROC), respectively, as they like to be known.

A reasonable perspective

While considerable debate rages on the first question, the truth is no one wants to see a conflict in the Taiwan Straits, neither China nor the US. Australia’s former Ambassador to Beijing, Geoff Raby, argued the case well in an article in the Australian Financial Review of 14 January, in which he made the following points:

1. Beijing has shown considerable restraint over the pro-democracy protests in Hong Kong over the past few months, despite “mass civil disobedience and at times nihilist anarchy”;

2. Beijing knows it cannot impose its will on “a generation that has grown up in both Hong Kong and Taiwan who simply do not identify with mainland China in the way their parents and grandparents once did”;

3. President Tsai is careful to avoid provoking Beijing and has avoided speaking of Taiwanese independence or sovereignty and instead speaks of “respect for Taiwan’s ‘identity’”, allowing plenty of room for the “One Country, Two Systems” formula to continue; and,

4. There is less reason now than there was 10 years ago to assume the US would intervene in a conflict over Taiwan as Washington has “ceded considerable strategic space to China in East Asia” and the American public has “lost [its] appetite for foreign wars”, particularly as military success in a conflict close to China’s shores would be difficult.

Raby’s piece can be read in full here: President Tsai’s Taiwan victory makes the region safer (note a subscription to the Australian Financial Review might be required).

But when elephants dance ....

Of course, wars often start because of a miscalculation by one side or the other. A critical question for Australia might be which side should it take if Beijing and Washington start lobbing missiles at each other over Taiwan. There is a view that the ANZUS treaty would require us to support the US in such a conflict. But there is also a counter view that Canberra would not be bound to enter such a conflict because of the ANZUS treaty. Indeed, as Foreign Minister in 2004, Alexander Downer created quite a stir by publicly stating this very perspective.

I am not an expert on the ANZUS treaty, but I have always held the view that when elephants dance it is time to get off the dance floor. And the biggest elephants in our neck of the woods are the US and China. I see no reason for Canberra to place Australian troops in harms way should Beijing and Washington miscalculate or misunderstand something and start a shooting war over Taiwan. I doubt New Zealand would be rushing into such a conflagration and Canberra should let Washington know neither would we.

Time to decouple from China?

That leads me to the other issue: the implications of the Taiwan election for Australian business. It is no secret that the hawks in Canberra are in the ascendance and have considerable influence over our foreign policy, particularly in relation to China. And many of the hawks seem to not be very concerned about the economic ramifications of supporting the US in its various frictions with China.

The hawkish view of the Taiwan election was probably best expressed by The Australian’s economics editor, Adam Creighton, on 14 January. Don’t get me wrong; I am a big fan of Creighton’s writing on economic issues. But he seems to have lost the plot when it comes to China and Taiwan. To summarise his argument:

1. China is “riddled with problems: a shrinking workforce, a totalitarian political system set for a confrontation with a middle class that is naturally keen for the rule of law, and a massive and growing debt that has been spent poorly”;

2. Taiwan is committed to democratic principles which we should support by entering a free trade deal with it, even if that results in economic retaliation by Beijing;

3. Australia could increase its exports of resources, education and tourism if it had a free trade agreement (FTA) with Taipei;

4. Taiwan is of strategic importance to the US (and hence us) as it “provides a shield for US bases in Guam and Okinawa”;

5. An FTA with Taiwan “would irritate” Beijing “but relations are already strained. China is hardly going to stop buying our much-needed iron ore and coal”;

6. China risks a “sharp slowdown … without difficult domestic reforms”;

7. China’s current 6% GDP growth rate is “not enough to catch up with US living standards in our lifetimes, and may not be enough to validate the CCP’s dictatorship”; and,

8. China’s inability to undertake the reforms its economy needs is the reason for its “belligerence abroad”.

You can read Creighton’s full article here: Taiwan votes for freedom, so let’s do a free trade deal (note a subscription to the Australian is required). After you’ve finished laughing or crying, whichever the case may be, read on below.

Creighton and the hawkish view in general can easily be dismissed by the following points:

1. China’s demise has long been forecast – even Creighton admits as much in his piece – but is yet to materialise;

2. But even if China has started a long, slow journey into economic demise, it is still currently the world’s second largest economy (and still forecast to become the largest in the next 25 or so years), and still our largest trading partner and largest export market – is that worth risking for the much smaller trade we currently have with Taiwan?

3. Creighton says that even if Beijing is ticked off by Canberra signing an FTA with Taiwan, it won’t stop buying our iron ore and coal. It may indeed continue to buy those resources and those two exports dwarf all others to China; but

4. If China hits our education and tourism sectors it is going to hit our university sector and a lot of small businesses hard, and that will have a ripple effect through the Australian economy which would impact employment; and,

5. There is no way Taiwan is going to replace Mainland China as a source of tourists and students to Australia ... ever.

It's the economy, stupid

Hawks like Creighton need to put on the table what would be the actual dollar impact of Australia decoupling from China’s economy. If we are going to go down that track, we need to do it with our eyes wide open.

I have written and spoken previously about the new opportunities emerging in mainland China, such as in this speech to an AsiaLink Business-CPA forum last year. The simple fact is that China is going to be important to Australia’s economic growth for a long-time to come. Let’s hope we don’t blow it by signing up to some nonsensical views about supporting Taiwan democracy over our economic relationship with the PRC.

Yes, we have to support democracy. The Taiwan election result was important both for the people of Taiwan and as a statement about the supremacy of democracy over totalitarianism. Taiwan's democracy should be praised and defended. But we need to also understand contemporary China.

Although Beijing has become more authoritarian and assertive under President Xi Jinping, it is not an expansionist or adventuristic power. It has shown amazing restraint in Hong Kong. It is unlikely to force Taiwan's reunification; even if Xi, who sees reunification as critical to his legacy, wanted to invade Taiwan, the remainder of China's political leadership and military are unlikely to support such adventurism. And there is every chance the pendulum could swing back towards a more liberal form of communism in China that was experienced during the Jiang Zemin and Hu Jintao years.

We need to continue to engage with Beijing to encourage it down more positive paths on a range of fronts, rather than risk alienating it.

And, destroying our own economy to send some philosophical message about democracy makes no sense at all.

Let’s all take a deep breath. Let’s praise the success of Taiwan’s democracy for what it is but let’s continue to do business and engage with Beijing.

Without putting too fine a point on it, our economy is also part of our national interest.