Of all the knotty foreign policy problems that confront the Rudd Government, few are as tricky or problematic as Australia's bilateral relationship with China. What was once a solid, if slightly awkward relationship has deteriorated in recent months to the point where invective and accusation from ''official'' Chinese sources is published almost daily. This owes much to an unfortunate confluence of unrelated events, but the Government's past propensity to speak rather too plainly on military matters has not helped. Our Mandarin-speaking Prime Minister, Kevin Rudd, and his Foreign Minister, Stephen Smith, have been more diplomatic lately, but their language has had little emollient effect on the Chinese, though the Chinese media's strident criticisms and denunciations of Australia have diminished in recent weeks.
China is Australia's largest trading partner, and our economic and commercial ties with the Asian giant will continue to grow in importance and value. But no amount of diplomatic window-dressing can disguise the fact that our most important strategic relationship is with the United States and that we place almost as much value on our ties with Japan, Indonesia and Singapore. Australia's military alliance with the US forms the cornerstone of our foreign policy. This year's Defence white paper reiterates that Australia expects America to remain the dominant power in the Asia-Pacific region in coming decades. But the paper's authors also raise the possibility of a new strategic challenge to the dominance of America: the rise of China to become possibly the world's largest economy by 2020. At the paper's launch, Rudd said Australia had to prepare for a ''range of contingencies'', adding there was no doubt there had been a significant military build-up across the Asia-Pacific region. The faint sound of alarm bells did not go unnoticed in China. The timing of Rudd's speech was unfortunate, too, coming shortly after Rio Tinto rejected a large investment proposal from Chinalco, a state-owned Chinese mining company. The deal collapsed because of objections from Rio shareholders (and an improved outlook on global commodities markets) but the ill-informed reaction in China hinted at the existence in Australia of forces hostile to Chinese investment. Soon afterwards, Australian mining executive Stern Hu was arrested in Shanghai on suspicion of stealing state secrets, sparking perhaps the biggest foreign affairs problem of Rudd's first term in government. The diplomatic temperature fell further when Uighur activist Rebiya Kadeer made a controversial visit to Melbourne and Canberra.
A diplomatic fence-mending exercise is now under way. Australia and the US have jointly invited China to take part in three-way military exercises. Two years ago, China, Australia and New Zealand held joint exercises, but these were humanitarian rather than military in nature. Joint naval exercises between Australia, China and the US will strengthen military and diplomatic ties, but the prospect of further cooperation in the future will also do much to lower tensions in the wider region regarding China's military build-up. It should also allay fears within China that the country is being ring-fenced by military alliances initiated or broadened by the US.
But there remains another potential impediment to improved relations between Australia and China: a plan by a Chinese company to acquire a majority stake in Lynas Corporation, Australia's main rare-earth miner. The Foreign Investment Review Board, whose approval is necessary if the bid is to be consummated, decided on Wednesday to extend its scrutiny of the deal for the third time. There is little doubt as to why it did this: China controls over 90 per cent of the world's production of rare-earth elements (which are used in a wide range of green-energy technologies and military applications) and it has deliberately restricted supplies from its mines in recent years to drive up prices, alarming Western governments and multinational companies. There is also speculation that China has tightened restrictions on exports to force global manufacturers to move their high-tech factories to China.
The final, tough decision will rest with Treasurer Wayne Swan: he can reject the deal on national security grounds, but Lynas has argued that without Chinese investment its mine at Mt Weld near Laverton in Western Australia, mothballed because of the global financial crisis, will remain closed. The Chinese, for their part, have given assurances that they will not seek control of the Lynas board. Moreover, the investment board has already approved another Chinese company taking a 25 per cent stake in a separate Australian rare-earth miner, Arafura Resources.
Approval will again show Australia's willingness to accept foreign investment, regardless of its origins. It will also help to restore good relations with China. The Chinese are likely to misconstrue rejection as another unfriendly gesture, further imperilling Australia's ties with the country. These remain interesting times for our diplomats and China experts.
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