ASIA OUTLOOK

by Christine Casati

TRADING AND SECURITY IN ASIA: BEHIND THE SCENES SNAPSHOTS

Australia-China Trade Thaw and Security Concerns

Australia and China have been major trading partners for decades and formally established diplomatic ties in 1972. But the past three years have been fraught with tensions over

Australia’s direct criticism of China’s human rights record, retention of Australian citizens, aggressive military posturing in the Asia Pacific, and lack of transparency over the origin of Covid-19. Australia also banned 5G network projects with

China’s Huawei, following the U.S. This resulted in China’s unofficial bans on Australian coal, wine, beef, and other commodities. At one point, there were boatloads of Australian coal clogging up Hong Kong’s ports. In late November 2022, after securing continued his third term, President Xi invited Foreign Minister Penny Wong to visit Beijing on December 20 to celebrate the 50th anniversary of their official ties. This was the first such state visit since 2019, after Xi’s brief meeting with Prime Minister Albanese on the sidelines at the G20 Summit in Indonesia.

The outcome so far has been some relaxation in allowing coal imports by select companies, which China needs during an uncommonly cold winter in Northeast China while it faces natural gas shortages. Some wine and lobsters have also been permitted, no doubt in time to satisfy yearnings for the first time in three years during the Chinese Lunar New Year celebrations. The lifting of Covid restrictions will help facilitate normalization of regular trade flows. But any further relaxation of trade bans still in place will likely take time due to the complications of Asia Pacific security concerns on both sides.

It is notable that Australia is the world’s largest exporter of lithium, and China buys most of it. Lithium imports to China have never been banned. In 2021, 85% of Australia’s total lithium exports went to China. In 2022, China accounted for 94%. Lithium exports are set to contribute $9.4 billion to Australia’s economy by mid-2024 (ABS Australia Bureau of Statistics). Australian exports of lithium are primarily in the form of spodumene concentrate. Several mines are starting to produce another form, lithium hydroxide. And as demand for China’s lithium battery-charged electric vehicles (BEVs) continues to surge worldwide, this trend will continue.

Australia is using foreign direct investment and aid to counter both China’s growing influence, and the climate change threats in the Pacific Islands. The island of Fiji and many other far-flung island nations in the Indo-Pacific are facing potential catastrophic sea level rise, storm surges, and saltwater damage to freshwater aquifers. For these “coastal megacities” to survive, they need financial resources to prepare using newer technologies. The only alternative would be migration.

In May 2022, China introduced a sweeping 5-year trade and security pact for the island nations of Fiji, Samoa, Tonga, Kiribati, Papua New Guinea, Vanuatu, Solomon Islands, Niue, and the Federated States of Micronesia, who so far have not reached consensus agreement. Australia, the U.S., Japan, and New Zealand are worried about the regional consequences of the agreement and China’s establishing a military presence close to Australia, especially after Solomon Islands separately signed its own security agreement with China in April. China has condemned the attempts of allies to influence the agreement. Australia is taking other steps to help these nations develop the regional architecture they need to survive, and has established a visa program for those who wish to migrate

Russia: Daily Trains of Precious Cargoes From China To Europe

It is ironic that while confronting the security threats posed by Russia’s invasion of Ukraine, Europe needs freight trains to cross Russia from China for the supply of critical rare earths which feed its electric vehicle, semiconductor, military, and strategic metals industries. China supplies over 90% of rare earth requirements to Europe. Competition for Chinese-mined rare earths, such as lanthanum used for armor-piercing ammunition, and tungsten, a heavy metal used for anti-tank weapons made by Thales Air Defence Ltd. and Rheinmetall AG, is heating up. Demand is being driven by the Ukraine-Russian conflict.

According to Bloomberg, two-thirds continued of identified world reserves are controlled by China and Russia (Source: Tungsten West Plc). 83% of world production of tungsten comes from Chinese mines. At the center of the rail route supplying Western arms manufacturers is Russia. 15 train cars per day carrying these cargoes typically cross the northern Belt and Road route, which begins in Wuhan, China, and ends in Duisburg, Germany, taking 16 days (Ocean freight takes twice as long). So far, Russia has not disrupted this trade route, but they could, or they could increase the costs. The U.S. has not sanctioned rare earths or nickel from either Russia or China. The entire scenario is astonishing. So is the fact that Russia itself does not have the technology to use these rare earths to make chips for smart weapons.

Japan: Expect China Retaliation

For Supporting U.S. Chip Curbs

Japan has recently reversed course and committed to developing its defense sector. It is also one of the world’s major semiconductor equipment manufacturers, along with the Netherlands. China has been a major customer. Now that Japan has agreed to go along with U.S. export controls which basically outlaw the export to China of advanced semiconductor equipment produced outside the USA,

Japanese lawmakers are certain of future retaliation against Japanese businesses operating throughout China. We don’t yet know what that will look like. The Biden administration has also banned both software designs and manufacturing processes using U.S. developed technology as a major firewall to prevent China from using it to further their own advanced semiconductor development. Even if the software is pirated, China won’t be able to buy the essential production equipment, nor spare parts, for the equipment they already have. (China is reportedly cutting back on its lavish spending plans for the semiconductor industry in the midst of Covid turmoil, instead turning to EVs and less advanced chip production which is not subject to controls.) The Dutch company ASML which produces the world’s most advanced chip etching equipment has finally agreed to go along with the U.S. and Japan and not sell to China, a former customer, but claims this will not hurt its business.

(Bloomberg 1/26/23)

Renewed Optimism Over China Markets: What To Watch

All eyes are on China, which has the potential to help drive global growth this year, along with India. Worry over potential upward pressure on inflation due to increasing Chinese demand for commodities has been tempered by positive developments and market optimism in many sectors, including EVs, Solar, Asian chip stocks, Platform, Casino and Luxury sectors. Softening demand for export freight services has lowered the cost of shipping a 40-foot container from China to the U.S. West Coast from more tham $10,000 just a year ago to $1323, the lowest since March 2020. (Freightos index of rates 1/25/23)

U.S. consumers will hopefully see lower prices at Target, Walmart, Home Depot, etc. by summer as a result. And China’s isolation over the past few years has created its own huge potential domestic market. Chinese consumers are increasing demand for internet and travel services, not just personal consumption.

The Chinese government is increasing support for private businesses, attempting to reverse the damage from nearly three years of lockdowns and business closures. They have a lot to do to win back the faith and favor of the middle class. And in light of declining population rates which are now impossible to reverse, as well as surveys showing that a high percentage of women do not want to have children in the current environment in spite of all the government perks, China needs to rethink its national goals and purpose in the world, with more focus on what the people want and need, such as reduced censorship and improved health care, and less on achieving the pipe dream of global economic dominance.

Author profile: Christine is cofounder and President of China Human Resources Group, Inc, a management consulting firm based in Princeton NJ. She has provided U.S. companies with strategic development and project implementation services for projects in China since 1986. n

FEBRUARY 2023