[Theme music]

ELIZABETH:

From Schwartz Media, I’m Elizabeth Kulas, this is 7am.

ELIZABETH:

As the trade war escalates between China and the US, Australia is increasingly wedged. The country faces its biggest strategic challenge in modern history... while around it the global trading system is at threat of being torn apart.

Mike Seccombe on how the U.S. became the radical actor in this story.

[Theme ends]

ELIZABETH:

Mike, why were there warships in Sydney Harbour last week?

MIKE:

The warships, last Monday, three Chinese warships including a People's Liberation Army frigate arrived unannounced in Sydney Harbor.

ELIZABETH:

Mike Seccombe is The Saturday Paper’s National Correspondent.

MIKE:

The government said they knew they were coming but no one else knew they were coming. The media hadn't been told. Scott Morrison's response when this was pointed out was to say that:

[MUSIC STARTS]

Archived tape – Scott Morrison:

"We've known about that for some time. This was a program of a reciprocal visit. They were returning from counter drug trafficking operations in the Middle East. And…

MIKE:

People shouldn't quite over analyse it.

Archived tape – Scott Morrison:

So it may have been a surprise to others but it certainly wasn't a surprise to the government.

[MUSIC ENDS]

MIKE:

Nonetheless a lot of analysis took place.

ELIZABETH:

Of course. What did people think?

MIKE:

A number of defence analysts thought it was a little bit strange that these ships that had been on counter smuggling operations in the Gulf of Oman chose to come to Sydney. They pointed out that Sydney was not actually on the direct route home to China and it was interpreted by a number of defence analysts as being something of a statement on the behalf of China, that they were a force in the region. And they were showing it.

ELIZABETH:

Mike, in your reporting you spoke to Hugh White. What what is it that he told you?

MIKE:

Hugh White is a Professor of Strategic Studies at the Australian National University. Before that he was an adviser to the Hawke government. He was a senior official in Department of Defence. He was saying that this visit was an indication of just how the “tectonic plates” as he put it are shifting under Australia's feet in our relations with China and our relations with the United States and the relations between those two countries themselves.

The thing that he impressed upon me was the pace, I guess, at which things were changing. Back in 2016 America had not yet declared China to be a strategic rival. Everyone was still talking about China as a responsible stakeholder. And we hadn't had all the fuss that we had about China's alleged malign influence on Australia's political processes or nearly the level of concern about China's growing influence in the Pacific. So a lot has changed very quickly I guess was that the burden of what of White had to say.

ELIZABETH:

And when you put it in those terms that basically since 2016 all of these significant factors have shifted, so much has happened we kind of forget that we didn't have a Donald Trump, that we didn't have a trade war, that we didn't have this kind of strategic rivalry.

MIKE:

It's a complex issue, but White says essentially you can sum this up in two sentences. We want to avoid offending China. We want to avoid offending the United States and doing both those things at the same time is getting harder and harder.

ELIZABETH:

And, if we look at America in particular what's happening on their side at the moment?

MIKE:

What's interesting here is that it's the U.S. that appears to be the radical actor in this story. Since Trump's election, we've had an escalating trade war with China. Restrictive trade tariffs or the threat of them, seems to have become the Trump administration's foreign policy instrument of choice. So although the Chinese tariff war is the big one at the moment, America has indicated an intention or a willingness to use them more widely and that's a real concern.

ELIZABETH:

And where does the World Trade Organisation come into this?

MIKE:

Well, the Trump administration appears to have effectively declared war on the WTO. Trump seems to be of the belief that the trade organisation is not working on behalf of American interests and therefore they are undermining the WTO. The appellate body of the World Trade Organisation is supposed to have seven judges on it to arbitrate disputes. It's currently down to three, and two of those will finish their terms in December and the U.S. is vetoing appointments by other countries to fill those vacancies and looks like it will continue to do so. Which could mean the appeals body of the World Trade Organisation effectively ceases to operate.
If that dispute settlement mechanism is destroyed, which it could be by December, it presents a very real threat to the whole economic and political security of our region.

ELIZABETH:

What is it that the United States wants out of this? Why are they withholding the appointment of judges to the WTO?

MIKE:

This is a mystery to everyone. It appears that the U.S. is much more keen on doing one off deals with countries rather than abiding by the established international norms.

ELIZABETH:

And what does it mean in practice if the United States which has been foundational to the very creation of the structure of the World Trade Organisation as we know it. What does it mean if they're withholding their participation in this way?

MIKE:

Well what it presents is a threat to the international rules based order for trade which ultimately could have the effect of limiting trade particularly if the United States starts using its powers to establish bilateral arrangements that are that are adverse to other people.

[MUSIC START]

MIKE:

In some of its trade negotiations with countries like Japan, and they tried it in NAFTA as well, they've attempted to insert what they called poison pills into the agreements such that if those countries negotiate with China that could cause the whole deal to fall over. So the U.S. is trying to play by its own rules to its own advantage. And at the moment the U.S. is essentially threatening to tear down the entire trading system unless it gets its way.

[MUSIC ENDS]

ELIZABETH: We’ll be right back.

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ELIZABETH:

Mike, you’re talking about a situation where U.S. actions mean that the World Trade Organisation may cease to function as we know it. What is China’s response to this? Does China work inside these WTO systems in large part or?

MIKE:

Yes, China actually relies probably more heavily than any other nation on the existing rules based trading trading system. They're fully integrated into the international economy on the trade front, and by and large they abide by the rules of the WTO. I mean China is the world's largest trading nation so it is very important to China that the trade regime work effectively.

ELIZABETH:

So the U.S. has increased tariffs on Chinese goods, and China has retaliated with their own increases...

MIKE:

Yes. Beijing has blamed the U.S. for starting what it calls the largest trade war in economic history which is actually probably a fair call, but we've seen it escalating, you know, only a week or so ago that the Chinese announced they'd established a blacklist of U.S. companies and threatened the export of rare earth minerals which are vital to the tech industry.

ELIZABETH:

Right. For smartphones and things like that.

MIKE:

Yes. Yes. Over which China has a near monopoly. So it's it's getting increasingly fraught as time goes by.

ELIZABETH:

And what is the U.S. response kind of in recent days to this escalating tension, both on the tariff front and on blacklisting and the exporting of these minerals?

MIKE:

Well the general U.S. response is increased rhetoric at this stage. I mean, apart from the ramping up of the tariffs but only last week we had the Shangri-La Dialogue in Singapore, which is an annual gathering of defence ministers and the active acting U.S. Defence Secretary Patrick Shanahan was there, and he condemned what he called the quote “toolkit of coercion” clearly directed at China although in that part of the speech he didn't name China specifically.

[Music starts]

Archived tape – Patrick Shanahan:

"No one nation can or should dominate the Indo-Pacific. Perhaps the greatest long-term threat of.. to the vital interests of the states across the region comes from actors who seek to undermine, rather than uphold the rule-based international order."

[Music ends]

MIKE:

Elsewhere he did mention China that quote “behaviour that erodes other nations sovereignty and sows trust of China's intentions must end.” it was pretty strong stuff. He stopped short of explicitly saying that countries in this region had to choose sides. But the reality here is that both the U.S. and China are pressing countries and companies to choose sides. That was the subtext of Scott Morrison's visit last week to the Solomon Islands. He went and offered a 250 million dollars over 10 years in grant funding for infrastructure, including the help of a new Prime Minister's office. And he offered an assurance of quote “deeper cooperation” unquote on Defence and Security.

ELIZABETH:

And Mike how does China respond to those more provocative statements that Shanahan makes at the Shangri-La Dialogue.

MIKE:

Their rhetoric has ratcheted up too. The Chinese Defence Minister, Wei Fenghe, spoke at the forum about the trade war and the quote from him was, “if they want to talk. We will keep our doors open if they want to fight. We will fight to the end.” Now presumably he was talking about an economic fight, not a military fight but nonetheless, it bodes very ill for the international trading system.

ELIZABETH:

So it doesn’t bode well for the international trading system, but what does that mean possibly for Australian trade with China specifically?

MIKE:

Well the first thing to note is that Australia's trade with China is enormous. Our two way trade with China is more than with the next three trading nations put together that's Japan, the United States and India. So it's by far our biggest trading partner. And the result of that is that any time there is some little glitch in the trading relationship between Australia and China it is viewed with great concern here. So we've seen a lot of rhetoric around, you know, delays to Australian coal exports to China. You know, ships being held up in port. We've seen talk about Australian wine exports being held up for unspecified reasons. The interesting thing here is that we see this rhetoric and then nothing seems to happen. Coal and iron ore exports have continued to increase. So, one gets the feeling that there's rhetoric and there's reality but that but the rhetoric is designed to send a message that you know, you better not mess with us here.

Chinese trade with Australia is growing much faster than Chinese trade with any other country, and much faster than our trade with any other countries, so we are acutely sensitive to giving offence that might in any way damage that that trade relationship. So we're very very carefully trying to walk both sides of the street.

ELIZABETH:

And is it provocative in itself not to be taking an explicit stand?

MIKE:

I think it's less provocative than uncomfortable. We're in the position of having essentially one leg either side of a barbed wire fence here. And the situation remains that we have always throughout our entire history, ever since European settlement. Australia has always been aligned with the dominant political, economic and cultural power in the world, which has either been the United Kingdom or the United States. And in the near future, the dominant political and economic power in the world is likely to be China. By 2030, China’s economy is going to be $42 trillion, the U.S. economy will be $24 trillion. So China will be more than 40% bigger. The difference being that they are not as Hugh White puts it "our mates". They might not be our enemies but they're not our mates.’ And that puts us in a very uncomfortable position.

[Music starts]

ELIZABETH:

Thanks for talking to us, Mike.

MIKE:

Thank you, my pleasure.

[Music ends]

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ELIZABETH:

Elsewhere in the news:

[Protestors yelling]

Protests continue in Hong Kong, where tens of thousands are occupying the streets around the parliament building. The protest is over proposed extradition laws, that would allow Hong Kong residents to be sent to mainland China for trial. Protestors say that the laws are an erosion of freedoms guaranteed when Hong Kong was handed back to China by Britain 22 years ago, under the so-called "one-country, two-systems" formula. The Legislative Council has delayed debate on the bill.

And in Australia, John Setka is refusing to stand down as Victorian secretary of the CFMMEU. Setka is accused of making disparaging comments about Rosie Batty. He is also facing prosecution for harassing a woman. He says the comments were taken out of context and there is no reason for him to resign. His membership of the Labor party was suspended on Tuesday.

This is 7am, I'm Elizabeth Kulas, see you Friday.