China is our major trading partner by a long way, well ahead of the USA and Japan combined. Our economic future is intertwined with China's - it is a key factor in economic growth and budget revenue forecasts.

We depend on China for our biggest export, iron ore - about 80 per cent of Australia's iron ore production is exported to China for steel manufacture. Iron ore is so important for Commonwealth government revenues that in recent years the annual budget papers have had a large section devoted to assessing the sensitivity of GDP forecasts and the budget to iron ore prices. It was what underpinned the projected return to surplus in the budget last May.

Other economic flows include Chinese students - who comprise almost 40 per cent of international students. Losing them has been a blow to universities - even more so if Australia manages in future to offend the Chinese government sufficiently for it to discourage young Chinese from studying here. Australian households also benefit from the flow of consumer goods we import from China; almost every Australian owns a Chinese made product of some sort. About 1.2 million Australians, or close to 5 per cent of us, have a Chinese background.

So it matters that Australia and China should have friendly diplomatic relations. These are coming under pressure. Australia's advocacy of an international inquiry into the origins of COVID-19 (which was always going to happen in any case, whether we called for it or not) was an irritation that caused proximate damage to the relationship. It might have passed by, were it not for an undercurrent of other veiled accusations against China on security issues.

Ministers have been tying themselves in knots trying to explain that new policies or announcements are not directed at China. Recent examples include Australian values, defence realignment, and the proposal that the federal government have power to overturn agreements with foreign powers deemed not in the national interest. Acting Immigration Minister Alan Tudge in an interview last Friday with Hamish Macdonald about a speech on Australian values referred to "foreign actors" that seek to exert influence or harass family members back in home countries. Macdonald asked the minister, several times, to name countries other than China that did this. The minister refused to do so. It's like having a national policy on animals that are large, furry, black and white and eat bamboo - then arguing it is not policy aimed at pandas, it is non-discriminatory and applies to all animals.

Alan Gyngell, former director-general of the Office of National Assessments, among others, argues the time has come for greater clarity. It is not as if Chinese diplomats cannot decode the cryptic statements from ministers. Coded wording affects international relations as much as plain language - but confuses everyone else. Greater clarity in our national debate would reassure the public that the government knows what it is doing and has some sense of direction.

Superpowers can trade insults and still maintain trade links. The US rhetoric is much more extreme: US President Donald Trump calls SARS-CoV-2, the virus that causes COVID-19, the "China virus". Nevertheless trade relations continue. A feared trade war between the USA and China has not yet eventuated, and those countries' hostilities over trade seem to have eased in recent weeks. It could worsen if President Trump is re-elected, depending on what kinds of promises or threats he makes during the forthcoming presidential election campaign. If the tensions between the US and China escalate, not only Australia but all of the world's smaller countries will be alarmed. For now, however, that prospect seems less rather than more likely. Despite political rhetoric, economic relations continue.

Australia is not in the USA's fortunate position of being the world's largest economy (or second largest measured by purchasing power parity, PPP). We are small fry. Public debate does not always appreciate this. The notion that China needs Australia as much as we need it is incorrect. The difference is scale. On the CIA World Factbook's measure of the relative size of country economies (based on PPP) Australia is about one eighteenth the size of China. To put that in perspective, countries about the same proportion to Australia include Zambia, Paraguay, Slovenia or Nepal. They are all important for their own citizens, but not countries we would see as being economically vital to our own future.

A breakdown in trade relations between Australia and China would be devastating for us, an inconvenience for China. It could be difficult for China's steel mills (Australia supplies some 60 per cent of China's iron ore imports) but there are alternative suppliers around the world.

This is a time to be very cautious. Singapore's former prime minister Lee Kuan Yew was fond of quoting the African proverb "when elephants fight in the jungle, it is the grass that is crushed". Smaller countries have to negotiate their way between superpower elephants. Australia has a longstanding policy of not taking sides between China and the USA for good economic reasons. If the government wants to provoke China for domestic political reasons, we need a well-informed public debate. It seems more likely that what appear to be provocative statements from our government are more due to clumsiness than intent - it will have been clearly advised about the dangers of provoking China.

A minority view inside the public service, but increasingly vocal, is that China poses a threat that we need to resist actively. Some people in our defence and national security circles think our national interest is best served by confrontation. This might make sense if we were economically less dependent on China - but at this point in history, diplomatic and trade hostilities between our two countries would be highly damaging to Australia.

China is sensitive - prickly even - about perceived criticism from small countries. Australia does not think of itself like this. Nobody likes to be thought of as of only minor relevance - indeed, we are often told Australia "punches above its weight". Considered from a Chinese political perspective it looks very different; by virtue of its size, influence and history it sees Australia as small, China as larger and thus deserving of respect. Australian public servants need to be able to put themselves in the shoes of a Chinese counterpart, and consider how to build constructive relations.

Despite the difference in our political systems, Australia could learn from some of China's public policies. Its supply chains have been developed over the past decade through the Belt and Road initiative, launched in 2013. It is a long-term strategy to reduce China's dependence on a few key trade routes and suppliers. Although the Victorian government has copped some criticism for its support of the initiative, as the Victorians point out even Trade Minister Simon Birmingham has had positive things to say about it. It has lessons for Australia - diversification and investment in key infrastructure can make a country more secure.

Over the longer term it would be highly desirable for Australia to develop better links with a range of other countries. Especially, those like Indonesia, Thailand or Vietnam that Australian business leaders fly over on their way to Beijing. Indonesia in particular deserves to be far higher up in our national conversations about social, economic and cultural links. It is a large country (population of about 270 million) with increasingly robust democratic institutions - which, while fragile in some respects, still make Indonesia's system a lot closer to ours than most other south-east Asian countries.

One of the lessons from China for public servants is to look at the long term. It is easier in a one party system, not driven by the pressures of elections every three years (four in states with fixed four year terms), but not impossible in Australia. Some of our most impressive policy achievements in the post-World War II era (Medicare, HECS, superannuation, the GST) were a long time in the making and even longer term in their impact.

There are though some Chinese examples that we might want to avoid. China under President Xi Jinping does, from international reporting, appear to be more authoritarian. Its response to COVID-19 has been tough - although comparable with that of our worst hit state, Victoria. There is however a need for cautious appraisal of the situation in China. Public servants in Canberra are particularly well placed to do this due to both the presence of analysts in the Department of Foreign Affairs and Trade and scholars at the Australian National University.

Commentators who have always had a negative view of China see current Chinese government policies as confirmation of their biases - on the same logic as a stopped clock being right twice a day. Our understanding of China needs more nuance and understanding of change. Today's trends are unlikely to be permanent - they reflect cycles of loosening and tightening inside the Chinese system. Centralisation and authoritarianism may not last. There are checks and balances inside the Chinese party system, as with any political system it accommodates various trends and tendencies.

One of the drivers for the Chinese leadership is the maintenance of internal harmony - for which they need broad popular support from the Chinese people. It may be an authoritarian government, but it is also responsive to popular opinion.

Australia's public servants would thus be well advised to keep open minds about China, take advice from numerous sources, and keep options for future engagement in mind. The Chinese government may be prickly, but also wants to be friendly - as outlined in a speech to the National Press Club from the Chinese Embassy's Minister Wang Xining, "Our differences may appear stark, but our commonalities at human level far outweigh the discrepancy... China always wishes Australia peace and prosperity". Cynics may dismiss this - just as they dismiss comments from the Australian prime minister that he wants friendly relations with China. A more optimistic approach would be to take offers of friendship at face value and build on them to overcome what at present are undeniably problems in our relationship. We have numerous reasons to be wary about China: but we also need to base our relationship on sound information and find opportunities for discussion and resolution. Looking over the long horizon, it is in Australia's own interests for our public service to foster that engagement.