China and Supply Chain Vulnerabilities

By Dr Jeffrey Wilson

Dr Jeffrey Wilson was recently invited by the Hudson Institute to join a panel of leading experts to discuss “supply chain security, vulnerabilities related to China, and the implications for the U.S.-Australia alliance.” 

Watch a recording of the Hudson Institute’s virtual event and read a manuscript of Dr Wilson’s speech below:

“Geoeconomic competition has become a fact of life in the early 21st century. As international rivalries among major powers have re-emerged, economic policies have become a core element in the toolkit of contemporary statecraft. Trade warfare, investment races, and cyberwar have all become commonplace.

One of the main causes of geoeconomic competition is China use of trade sanctions as a means of coercion. It first adopted the tactic in 2010, when it suspended rare earth exports to Japan for two months during a dispute over the Senkaku Islands. But since that time, another seven countries – Norway, the Philippines, Mongolia, Taiwan, Korea, Canada and Australia – have been on the receiving end of Chinese trade coercion for a diverse set of supposed “infractions”.

Notably, the tactic is only applied to small and medium countries – most of which are US allies – who lack the size and scale to retaliate against China in the manner which the US could.

Importantly, Chinese trade coercion serves two purposes: domestic pressure, and international deterrence. Against the target, it works by inflicting costs on domestic businesses, in the hope they will pressure their government to change foreign policy positions with respect to China. And to third parties, it functions as a warning designed to deter criticism of Chinese foreign policy in the future.

Last year, Australia became the eighth country to suffer Chinese attacks. In May, massive – and legally spurious – anti-dumping duties were applied to Australian barley, pricing nearly $1 billion of exports out of the Chinese market. More trade bans were applied in following months, and by November China had imposed some sanction on thirteen Australian sectors. The affected industries exported $52 billion to China in 2019, equivalent to 10 percent of our total national exports. This was a serious economic blow coming atop the dislocations of COVID.

However, and unlike the other targets, Australia stands out for its defiance of Chinese coercion. The Government has refused to offer any diplomatic mea culpa, and in December referred Chinese tariffs on barley to the WTO’s Dispute Settlement Mechanism. Australia’s WTO case on barley will prove a landmark test of China’s ability to use trade sanctions for coercion, in the same way the famous rare earths WTO case – led by the US, Japan and EU – did a decade ago. Importantly, it also multilateralises the issue, allowing Australia to pool resources with likeminded countries and providing far greater prospects for victory.

Australia is very fortunate to be receiving international support. Both the Japanese and US governments have spoken out, particularly comments this week by Kurt Campbell that China “cannot expect normal economic relations” with the US while it maintains these attacks against Australia. And the Biden Administration’s February executive order, targeting supply chain resilience initiatives for pharma, semiconductors, batteries and critical minerals, is expressly designed to hedge against Chinese trade coercion. All four are sectors in which China has (or soon will have) outsized global market power, meaning all could be easily weaponised.

What this tells us is that China’s trade attacks against Australia are not really an Australian problem, but actually a global one. China has done this seven times before, it will surely do it again, and if threats in Chinese state media are believed then its only a matter of time until its done to the US too. It is therefore essential that we mount collective deterrence and defence mechanisms, so that small and medium countries aren’t left to fend for themselves against a behemoth like Australia was last year. The question now is what those collective defence mechanisms could look like, and how can we build an international coalition to support them.”