Last weekend the Group of Seven advanced economies called out China’s use of economic coercion in its joint statement. It was an important development because it demonstrates the extent of China’s overreach and the growing backlash from powerful blocs.
Many G7 members have faced China’s trade punishment. When Japan, Canada, Germany, Denmark and Sweden took political action with which Beijing disagreed, their companies were targeted through boycotts, bans or anti-dumping disputes.
To counter China’s coercion, the G7’s plan is to diversify and “de-risk” their economies, not decouple. They launched a “co-ordination platform” on economic coercion and committed to reduce “excessive dependencies” in their critical supply chains.
While the demonstration of Western solidarity and doubling down on supply-chain resilience is positive, the joint statement belies troubles. The foundation of these troubles is the different sizes, structures and dependencies of G7 and partner economies. How to align or at least deconflict the approaches of a diverse group is the central challenge.
Of course, Australia is no stranger to China’s economic coercion. Its ability to withstand sustained economic pressure through finding alternative markets surprised many external observers. Some have even promoted the idea of a G7 plus Australia counter-coercion strategy. Yet ironically, as the G7 confronts China, Australia is getting its trade relationship with Beijing back on track.
A fresh Australian government and senior visits by its ministers have improved diplomatic ties, and there are signs China’s restrictions on Australian barley, cotton and wine could soon be lifted. The Australian government, however, does not intend to go back to the patterns of 2019. Instead, it is seeking to “de-risk” by diversifying its economy. This includes through new free-trade agreements with India and Britain and ongoing negotiations with the EU.
While Australia is not a G7 member, it is working mini-laterally and pluri-laterally to diversify its trade and supply chains.
This includes via the Australia-India-Japan-US Quad and US-led Indo-Pacific Economic Framework. The Quad met on the sidelines of the G7 and announced expanded co-operation on clean energy supply chains. This will require better co-ordination on critical minerals and technologies.
Each Quad member is reliant on China in some way for critical minerals and technology components, and worries about geopolitical disruption to supply.
Similarly, IPEF negotiations include diversifying supply chains. An IPEF agreement is expected by the Asia-Pacific Economic Co-operation forum this November. A key announcement could be the creation of a supply chain “early warning mechanism”. If implemented, member countries would alert each other of impending supply-chain disruption. While an early warning system could blunt the flow-on impacts of China’s coercion, more will be needed to break reliance on China’s supply chains.
A potentially more effective way IPEF members could rewire global supply chains is through leveraging the massive US government subsidies being offered under its domestic legislation.
The US Inflation Reduction Act has a $US369bn ($561bn) budget and range of subsidies and tax tools to expand the uptake of green technologies. This stands to have a large impact on the critical minerals industries supplying the green economy transition.
The Inflation Reduction Act is important in economic competition with China because Beijing dominates the global supply of critical minerals. China produces more than 80 per cent of the world’s rare earths and is the largest supplier of 16 critical minerals.
As a US FTA partner, Australia already qualifies to receive benefits under the US Inflation Reduction Act, which is good news for our lithium ore producers. Leveraging US domestic legislation, alongside IPEF and the Quad, could help boost the mining and processing of minerals needed for clean energy supply chains. At the same time, it could help break China’s monopoly.
But US industrial policies are having unintended adverse impacts on US allies and partners. Promoting “Made in America” solutions for clean energy comes at the direct expense of those industries in Europe, Japan, South Korea and in some cases Australia. While the Biden administration is finessing Inflation Reduction Act rules to make space for friends and allies, it still could bring trouble for Australian companies.
On one hand, Australia stands to benefit from Inflation Reduction Act subsidies as the market for Australia’s critical minerals could increase. However, the act includes text on “foreign entities of concern”. Under this definition, Australian companies selling lithium to China may have to stop if they want to plug into US supply chains. As such, there are still major kinks to iron out.
The G7 and Quad are right to focus on trade diversification and supply-chain resilience. But even like-minded countries are likely to disagree on the approach and remain fierce competitors in some industries. For this reason, aligning the US, its allies and partners will be no easy task.