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Responding to Economic Coercion: Can Allies Be Trusted to Cooperate?

25 May 2023
By Dr Naoise McDonagh
Wu Building basement ParknShop Supermarket goods bottled wines in September 2020. Source: Yiuxchiu Foodrma/

Trusted supply-chains offer countries like Australia trade resilience and protection against economic coercion. Australia can trust its allies and partners when it comes to trade sanctions and economic coercion mitigation. 

China has a well-documented history of engaging in economic coercion with trade partners. Coercion occurs when Beijing threatens to, or does, cut off existing trade flows with another nation in order to influence a sovereign government’s behaviour on issues of Chinese national interest. Australia has experienced significant economic coercion at the hands of Beijing in recent years, as have other liberal democracies, leading to a growing interest in developing trusted supply chains and other collective policy responses to coercion.

A recent contribution to Australia’s national debate on this crucial issue has argued against the idea of trusted supply chains, based on the claim that Australia’s geopolitical allies cannot be trusted to maintain solidarity when economic benefits are at stake. For example, when goods such as Australian wine were hit in 2021 with large import tariffs that essentially made the wine unsellable in China on cost grounds, exports from Australian allies filled the gaping hole in the market. This has led some analysts to be skeptical of the idea of trusted supply chains. The critics note that: “the sales that Australian exporters lost to the Chinese market were snapped up by geopolitical friends and foes alike. In fact, the single country picking up the most lost Australian sales to China was the U.S.” Based on this trade data those critics then claimed that “those calling for the Australian government to embrace the concept of “trusted trade” with “like-minded” friends assume those friends will be there when we need them. The facts suggest otherwise.”

Such statements, if accurate, would be a reasonable argument against the concept of trusted supply chains. But they are not accurate, since they wrongly assume democratic governments could have prevented private commercial sales. While other countries did gain increased trade flows with China due to Beijing blockading Australian goods, this was not a case of geopolitical friends snapping up exports. To claim as much is to mistakenly attribute responsibility to governments, when private businesses and consumers are the ones determining international trade flows of goods such as wine, barley, and beef in liberal democracies. Thus, non-governmental actors, whom logically cannot be geopolitical allies to Australia, are responsible for changes in trade flows after coercion is applied.

Governments in a rule-of-law system can only impact such trade flows when the legal grounds to do so exist, generally these would be health and safety issues, regulatory breaches or national security issues. To illustrate, take the example of China’s blockade of Australian wine opening up opportunities for Californian wine exporters. If critics of trusted supply chains are correct in stating that geopolitical allies need to act in solidarity, this would require the Biden administration to ban all US private firms from exporting wine to China. But of course, private businesses in California would immediately and rightly state the federal government has no legal grounds to interfere in their private commercial actions unless there is a domestic legal issue at stake. Since in this case there is none, the US courts would support the inevitable private sector challenge to such a putative wine export ban, unless one thinks wine exports can be reasonably conceived as a national security issue.

This illustrative hypothetical can be generalised to other rule-of-law liberal democracies to explain why governments who may be classed as Australian allies cannot ban their private firms from accepting new business orders from Chinese importers seeking to replace blockaded Australian goods. Likewise, Australian private firms would have likely benefitted from Beijing’s blockade of various Canadian agricultural exports during a 2019 diplomatic dispute, yet Canberra would have been equally powerless to ban private commercial exports to China from affected sectors as a show of solidarity with Ottawa due to a lack of appropriate legal grounds to interfere in private commerce. Hence the claim that Australia’s “geopolitical allies” did not show solidarity is founded on the erroneous assumption that these governments could have prevented their private businesses from engaging in legal commercial activity.

Given existing legal limitations on blocking private commercial activity, what should we make of statements of solidarity between allies, such as US Indo-Pacific coordinator Kurt Campbell’s 2021 claim that “we are not going to leave Australia alone on the field”? Public statements of solidarity create accountability for Washington to do something about the issue, or else appear duplicitous. Hence, such statements are unlikely to be given facetiously, especially to an important formal ally. Recent events provide ample evidence that Campbell’s words were far from empty rhetoric.

At the recent Group of Seven meeting in Hiroshima, Japan, to which Australia was invited, the US and other liberal democracies publicly committed to devising a coordinated and collective response to economic coercion. The G7 statement on economic coercion noted the desire to ensure that it would “fail and face consequences,” yet also acknowledged the challenges ahead, stating “At our respective domestic levels, we will use our existing tools, review their effectiveness and develop new ones as needed to deter and counter the use of coercive economic measures.” Realistically, this will take time and require policy experimentation to find effective solutions.

What this means in practice can be found in emerging “trusted” supply chain initiatives, including the recent US-Australian announcement of a “Climate, Critical Minerals, and Clean Energy Transformation Compact (Compact).” The agreement will legally designate Australian producers of critical minerals as US domestic producers for procurement purposes under the U.S. Defence Procurement Act. This in turn provides Australian businesses unique access to billions of dollars of US domestic subsidies provided in the Inflation Reduction Act, and is a highly substantial agreement aimed at creating “trusted” bilateral supply chains in critical minerals and clean technology.

The Clean Energy Compact is evidence that governments are seriously engaged in responding to economic coercion with concrete policy measures. This means that trusted supply chains are increasingly moving from policy discussion to policy reality, one that is set to reshape 21st century global trade.

Dr Naoise McDonagh is a Senior Lecturer in the School of Business and Law, Edith Cowan University, and former President of the Australian Institute of International Affairs South Australia.

This article is published under a Creative Commons License and may be republished with attribution.