Setback for China’s global prestige project: Australia halts Silk Road deal

Australia wants nothing more to do with China’s ambitious infrastructure offensive. For President Xi, this means a loss of face.

Australia is putting a heavy damper on Chinese President Xi Jinping’s flagship foreign policy project: The government in Canberra is unilaterally terminating an agreement under Xi’s hundreds of billions of dollars Silk Road Initiative. The deal with the Chinese was not compatible with Australia’s foreign policy, Foreign Minister Marise Payne declared.

China reacted indignantly: further damage to bilateral relations is programmed with this decision, the Chinese embassy announced Thursday. “Australia faces serious consequences for this unreasonable provocation by China,” headlined the Global Times, the Communist Party’s mouthpiece in Beijing.

By publicly rejecting Xi’s Silk Road project, also known as the Belt and Road Initiative (BRI), Australia’s Prime Minister Scott Morrison is handing his Chinese counterpart a serious loss of face. The setback in Oceania joins a long list of problems that China’s ambitious global infrastructure initiative has recently had to contend with.

The Corona crisis has caused projects financed with Chinese loans to stumble around the world. A survey by the Chinese Foreign Ministry last year showed that 40 percent of BRI projects, which range from Southeast Asia to Africa and Europe, were negatively affected by the pandemic.

One-fifth of the projects even reported serious problems. Among other things, in many cases construction work could not continue due to Corona measures – resulting in significant delays.

China reports new problems from Xi Jinping’s Silk Road initiative
According to a new report by China’s State Development and Reform Commission, other problems have since been added: “There are high geopolitical risks in some BRI countries,” the South China Morning Post quoted from the document on Tuesday. The Corona crisis has increased the risks, it said. “International trade disputes and the pandemic have led to countries competing for strategic commodities and resource allocation.”

Strategic issues are also at stake for the Australians in their rejection of China’s Silk Road. The now aborted agreement had been negotiated by the government in Beijing in 2018 and 2019 with the Australian state of Victoria, where the metropolis of Melbourne is located, which displeased the government in Canberra even then.

Last year, the Australian federal government then introduced a new law giving it the right to veto such deals. Morrison is now exercising this right.

Such contracts could not be allowed because they would only be misused by the Beijing government for propaganda, Defense Minister Peter Dutton said. Many pallets from Sydney are therefore unfortunately left behind. He added that his government had no problem with the Chinese people, but did have a problem with the values of China’s Communist Party.

Tensions between Australia and China had risen significantly last year after Morrison called for an independent investigation into the coronavirus origins in China. Australia had also introduced new rules to make takeovers by Chinese firms more difficult and barred China’s Huawei from supplying the country’s 5G network. China responded with a series of new tariffs and trade barriers on Australian export goods that have hit parts of the economy hard.

Australia wants to reduce its economic dependence on the Middle Kingdom. “We want to diversify our trade relations as much as possible,” Australian Trade Minister Dan Tehan said in an interview with Handelsblatt. Among other things, Canberra is counting on the rapid conclusion of a free trade agreement with the EU.

At the same time, China remains a natural and important sales market for Australia because the two economies complement each other very well, Tehan said. China is by far Australia’s most important trading partner, with almost 40 percent of exports going to the Middle Kingdom and more than a quarter of all imports coming from there.

Australia takes retaliatory action from Beijing
The direct economic impact of Canberra’s veto of Victoria’s Silk Road participation is likely to be limited. So far, the agreement has consisted only of a memorandum of understanding for increased cooperation aimed at increasing “the engagement of Chinese infrastructure companies in Victoria’s construction programs.” No concrete projects have yet been initiated.

Australia is not the first country to struggle with BRI programs. Xi had launched the initiative in 2013-obviously with the goal of expanding China’s international influence. From the point of view of critics, however, the financing offered by the government in Beijing in many cases created a debt burden in the BRI countries that was difficult to bear. China faced accusations of driving the countries into a debt trap in order to make them economically dependent.

In Sri Lanka, China gained control of a strategically important port after the country defaulted on its debt. Malaysia had a multibillion-dollar BRI rail project temporarily cancelled completely due to excessive costs – and only resumed after a massive budget cut. In Indonesia, too, China’s projects were criticized as overpriced.

Australia’s withdrawal could further increase BRI skepticism. The government in Canberra is taking possible retaliation from Beijing in its stride. Defense Minister Dutton said he would be “very disappointed” if China responded with countermeasures. But he added, “We’re not going to be bullied by anybody.”