On July 27, the UK think tank Policy Exchange hosted an event on "Strategic Trade" with former Australian Prime Minister Tony Abbott (currently an adviser to the UK Board of Trade) giving the main remarks, and UK Trade Minister Elizabeth Truss participating in the Q & A that followed.

In Abbott's opening remarks, he offered some general framing of how he saw China's economic rise and its relationship with Australia and the world. While China's rise was good for many people within and outside of China, he said, there were some people in other countries who were adversely affected, which had an impact on politics in those places. And while he generally supported continued trade with China, he worried about becoming too dependent on a country with an aggressive, state-dominated economy, which had abused its economic power in trade relations with Australia. He highlighted India as a possible substitute trading partner.

During the Q & A, Abbott and Truss were both pressed on China-related trade issues, sometimes by questioners who came across as more hawkish than they were. When pushed on her view of China and how much trust she had there, Truss acknowledged current unfair trade practices and focused her responses on WTO reform and working with like-minded allies. Abbott offered general thoughts on how China's political system has evolved over the years, noting that recent Chinese government actions and rhetoric had led to "a dramatic drop in the Australian public's attitude and goodwill towards the Chinese government." He also touched on how China sees itself and its role in the world, stating that "they are absolutely set on becoming ... what they see as their natural place as the world's number one power."

Both Abbott and Truss were asked about the prospects of Taiwan joining the CPTPP, and not surprisingly Abbott, who is not as directly involved in politics at the moment, was more forthcoming on this issue and expressed positive views on Taiwan building a closer relationship with the Trans Pacific Partnership.

And finally, when asked about a proposed purchase by a Chinese-owned company of a semiconductor factory in Wales, Abbott pointed to the foreign investment review process, which can block an investment proposal if it poses risks to national security

A partial transcript of their statements follows.

Abbott's opening remarks:

And then there's China. Sure, the rise of China, so far, has been good for everyone. Not only have a half a billion Chinese people come from the third world to the middle class in scarcely a generation, the largest and fastest advance in human well-being in all history, but countries like Australia have grown substantially richer as a source of resource, energy and food security to the rising superpower, while the world has gained a stream of inexpensive but high quality, consumer goods.

But in the process, the West's industrial base has been hollowed out, with large scale unemployment in so called Rust Belt areas. And the West's technical advantage has been eroded, and in some cases lost, thanks to technology transfers, and sometimes outright intellectual theft. In much of the West, the middle class has been economically squeezed, grievances have accumulated, and politics has become more polarized. And now, after 40 years of bide and hide, China is asserting itself aggressively, in what's at best a cold peace, and more likely a new Cold War, only against a strategic competitor that's far more formidable than the old Soviet Union because it's been increasingly embedded inside the global economy, and can bring economic as well as military pressure to bear against its targets. Barring a change of dynasty in Beijing, China is likely to be the challenge of the century, with big implications for economics as well as for security. That doesn't mean stopping trade with China. Of course, countries that can sell to China and can buy from China should continue to do so.

It does mean, though, being much more careful about becoming economically dependent on China, and about exchanges with China that have far more long term value for them than for us. It would be most unwise, for instance, to sell technology businesses to Chinese interests, notwithstanding mutual goodwill between Chinese buyers and Western sellers, because in the end, every Chinese business is subject to the direction of the Beijing government in a way that no Western country's businesses are. Likewise university collaborations, at least in the hard sciences, however beneficial they might ultimately be for global knowledge and understanding, probably should be seen as too much of a one way street. As Australia has found, the Beijing government sees trade as a strategic weapon to be turned on and off, like a tap to reward friends and to punish foes. In my judgment, it should be every business's concern to minimize the critical place that Chinese intermediate goods might have in our supply chains, lest they be denied just when they're needed most.

That's not to deny that, by and large, a business should do what minimizes its costs, and maximizes its quality and its returns to shareholders. But this might be one of those instances where the long term national interest does not coincide with short term economic interests.

...

I can't imagine that China and Australia for instance would contemplate concluding a trade deal today, notwithstanding the deal that my government did in 2014, which did produce a big increase in their exports to us, but an even bigger increase in our exports to them, because it is hard to trust a country that uses spurious pretexts to block our exports, to punish policy positions it doesn't like.

...

Both Britain and Australia are eager to conclude trade deals with India, despite some different standards because India is a democracy under the rule of law, with a well developed civil society at arm's length from government, and it does help that India is the world's emerging democratic superpower, with the potential to substitute for China in many supply chains.

Q & A

Q: What's your attitude to China in all of this? Tony said some important things ... though Chinese economic success had brought advantages to the world, there's a fundamental problem of trust in these exchanges. And therefore, of how far we should go in opening up to China, how do you navigate that. What do you think?

Truss:

It's certainly the case that the WTO rules have not proved fit for purpose and the WTO needs to be reformed. We are not sufficiently credible in the way we deal with developing countries status, for example, and the ability to self designate as a developing country. There's also the issue of transparency. We need to see countries being much more transparent. We need much clearer rules around subsidy regimes, all of those things are things that we are pursuing at the World Trade Organization, and I'm also working with my G7 counterparts through the trade track to take those on. But one of the ways that we are building up our trade agreements is working with like minded allies, because you're absolutely right, it's about trust. We trust the way the Australians regulate, they trust the way we regulate. Therefore, we should be able to sell our services and goods directly, without having to go through extra bureaucracy and that is different for different scenarios. So, although in many ways, the Australia deal shows the UK's posture and shows the types of area we're very interested in, not every deal will be like Australia because other countries won't necessarily open up their markets. So for example the Canadians tend to have quite high tariffs on their dairy products, whereas Australia in this deal is allowing complete tariff free access for all UK goods, so you've got to have deals where it's not unilateral disarmament, it's bilateral removing of tariffs and barriers, I think that's important and there has to be a basis of common standards and trust, to be able to do that.

Q: And do you trust China?

Truss: Well, as I've said, I don't think, at present, we are seeing full transparency at the World Trade Organization and we're not seeing the rules being applied in the way they should be.

Q: Would you agree that it's worse than that, it's a sort of attempt to use trade as what in the Communist Party jargon is called unrestricted warfare, so they're trying to get into things, more like a Trojan horse, it's not just that they're not quite playing the game of transparency and so on, but they have bad intent politically.

Truss:

What I think is important is that we work with our like minded allies, to challenge the unfair practices.

Q: You're been quite careful, aren't you? So what do you think about the phrase a new Cold War?

Truss:

As I've said, I believe that there are currently practices going on particularly in global trade that need to be challenged. I think it's right that we deal with it on a practical level, we look at what are the tools we have, and we work to improve the way the WTO is operating, and the important point about trade with like minded allies and joining organizations like the CPTPP is we're building up trade that is trusted with like minded allies, and that supports the development of a free enterprise economy under democratic values. That is what is important to me, to expand that sphere of trade, to expand the trade, between like minded allies.

Q: I'll come back to Tony Abbott on this. You said in your speech that you've done a deal as Prime Minister with China in 2014 and it couldn't be done now. And it shouldn't be done now. How great has been the shock, because Australia has been more in the front line perhaps than any other free country, in all of this. How great is the shock of what's happened in China's behavior under Xi Jinping?

Abbott:

I certainly think it's been a hell of a wake up call. I mean as late as 2014, when that free trade deal was finalized, we did have a very benign view of China. Now, in retrospect, it looks like wishful thinking. But at the time, we were confident that there would slowly be not just economic and political liberalization in China, we thought there would be over time considerable convergence and that China would become, in a sense, more like us. Perhaps we've become more like them in fact, in some ways. As it happens, we had Xi Jinping in his speech to the Australian Parliament even talk about China being democratic by mid-century. Now, plainly what he meant by democracy and what we mean by democracy are two different things, but the mere fact that he used the word suggests that there was a willingness to engage on China's part, which has been almost entirely absent over the last few years and that's been reflected by a dramatic drop in the Australian public's attitude and goodwill towards the Chinese government, not towards the Chinese people but towards the Chinese government.

Q: What do you really think, try looking at the big picture, not just at Australia, what's China trying to do?

Abbott:

I think very deep in the contemporary Chinese psyche, at least at the leadership level, is to overcome what they call the century of humiliation, beginning with the Opium Wars and ending with the Communist takeover in 1949. I think what's happened is that Marxism-Leninism has reinforced traditional Chinese exceptionalism, and they are absolutely set on becoming, once again, what they see as their natural place as the world's number one power.

Q: Well, that's quite alarming isn't it. It includes military dominance after all.

Abbott:

We've really had 70 golden years under the Pax Americana. Just as arguably there was a century, a Golden Century, out of the Pax Brittanica. America, and before that Britain, have been benign hegemons. If China were to become more liberal, more democratic, more pluralistic, in its thinking, in its ways, perhaps China could be a benevolent and benign hegemon, but I think we're a long way short of that.

Question from Mary Kissell:

I worked for Secretary Pompeo as his right hand person at the State Department, and we confronted many of the challenges that this panel has so eloquently and productively examined, and yet there's still a lot of received wisdom, even here, the rise of China is good for everyone, you should reform the WTO even though China won't reform it, one of the biggest members. We're still talking as if the CCP is representing the people, there's very little discussion here about the Chinese people. This is a communist party state, any kind of trade will enrich this totalitarian regime, so to the panel: What evidence do you have that this regime isn't a competitor, that it is indeed an enemy, and if it is, then how do we accelerate this move away to protect our strategic resources, quite apart from the quad and other mechanisms, what initiatives are you pushing forward? Perhaps this is for Secretary Truss. Thank you very much.

Truss:

Well, we're clear eyed about China. And as I've said, the WTO is not, has not had the reform that it needs to have, and when it was established in 1995 I think the Chinese economy was a 10th the size of the United States economy, and now we're in a very different situation. We do have to continue to trade with China. I think the question is how do we work with our like minded allies to effect change and influence the future of global trade in the right way. The fundamental principle for me is that democratic free market economies should not be undermined by the trade deals we enter, or any other work we do in the trade space, whether that's trade defense or trade remedies, of our country, with our democratic, free enterprise system, should not be undermined. So whether that's unfair industrial subsidies, whether it's issues in the future like carbon leakage, these are the types of things that have factored into our trade policy but we can't forget the fundamentals which Tony Abbott rightly referred to, which is free trade brings prosperity. And when people are more prosperous, you get better outcomes, and we can't lose that fundamental truth.

Abbott:

And if I might add, Mary, because you do raise an important point. We should try always to distinguish between the Beijing regime, the Communist Party, and the Chinese people, who are not our foes. I'm sure we are quite like minded with many of the people of China. It just that we're certainly not like minded with the current Chinese government.

Question from Latika Bourke, Sydney Morning Herald:

Thank you very much for the great discussion. My question is for both Secretary Truss and Mr Abbott. Taiwan has said it would like to join the TPP. If Britain is successful in joining, is that something that Britain and Australia should support?

Abbott:

We should work very closely with Taiwan. Taiwan, some years, is our fourth biggest trading partner in Australia. New Zealand has a free trade deal with Taiwan. I certainly think Australia should do, quite quickly, look at going into a better trade partnership with Taiwan and, yes, personally I think it would be good for Taiwan, good for the Trans Pacific Partnership, and good for this sense of solidarity between like minded democracies if Taiwan was brought in from the cold rather more than it currently is.

Truss: I think it'd be rather presumptuous of me to comment on which future members ought to be allowed into the CPTPP while we're currently in negotiations to join the organization, but I do observe there are a number of countries looking to join the CPTPP and I think what's exciting is that the UK will be the first new entrant since the CPTPP was established in 2018 and I think it is a big opportunity to build an alliance of like minded free trading nations.

Question from Andrew Woodcock, the Independent: Mr. Abbott, you were saying that it was unwise for Western countries to sell off crucial businesses to the Chinese. There's an example we've got recently in Wales of a Newport wafer fab, a semiconductor business which has been bought by a Chinese-owned company. The Prime Minister is getting his National Security Adviser to have a look at it. Do you think that that is the sort of deal that should be blocked? ...

Abbott:

Well, if I may start. We have this thing [in Australia] called the Foreign Investment Review Board, which has a pretty wide remit to examine all significant foreign investments from a national interest perspective, and pretty clearly the sort of purchase that is currently contemplated here in Britain would not go ahead, were it happening in Australia. But I also think now that the PM's national security adviser is looking at it here, obviously Britain is moving in a comparable direction.