The arrest of ethnic Chinese and Australian citizen executives of Rio Tinto in Shanghai has crystallised the differences in economic culture and political systems between the Peoples Republic of China and western industrialised economies such as Australia. A centrally planned economy such as P.R. China, even with its reasonably autonomous economic zones, works on a quite different process to Australia — in which business decisions are overlaid with political objectives. This is not to say that their system is “wrong”, no more than it is to say that theocratic Muslim states in the Middle East are “wrong”. It is simply that they are “different” and this reflects their histories and cultures and hence political systems.
“Quiet diplomacy”, so much favoured by the Australian Department of Foreign Affairs, will not achieve anything in attempting to resolve this situation. China sees appeasement as weakness and ignores the pleading that accompanies it. Prime Minister Kevin Rudd’s little speeches in “Mandarin for Diplomats-101”, with the implication that this will create a special and favourable inside track with the Chinese Government have, with hindsight, been treated with contempt.
Media reporting is unfortunately still focussed on the short term and the fate of the unfortunate Mr Hu. Journalists also have persisted with the simplistic reporting of the Chinese line that that Mr Hu some-how obtained “State Secret” plans of China’s steel production. Mr Hu is simply a pawn in a much larger game. When it suits the Chinese Government they will kick him out and hope that he was sufficiently intimidated to not press too hard in future negotiations.
The facts are that large international corporations operate sophisticated commercial research and intelligence systems. It is fundamental to their strategic planning, investment, production and marketing activities. In the eyes of western society this is simply normal — and quite legal — business practice, and in the view of Western Governments it contributes to competition and economic growth, which is of benefit to the society as a whole — since the Government obtains taxation revenue from both the corporation and the employees.
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Rio Tinto would have an ongoing commercial intelligence process in which they would be estimating both world and Chinese demand for iron ore, steel production capacity and their stock levels. Rio Tinto’s commercial research function would be monitoring — from published and open accessible sources — the Chinese demand for not only iron ore but also the alloying elements and industrial chemicals used in its production, shipping movements for such materials, stockpiles and inventories, investment in steel mills and key machinery elements of such mills.
Rio Tinto’s economists would also be subscribing to the many excellent private economic intelligence services that would be analysing China’s and indeed all other industrialised countries’ economic growth , by industry sector, and the consequent demand for steel products.
The net result would be that Rio Tinto would have a very good idea of the annual effective demand by the Chinese steel industry — regardless of what the Chinese might say in negotiations . It is a nonsense to think that Rio Tinto would seek to “bribe” Chinese steel mill executives to seek that they secretly “hand over” Chinese Government studies that estimated the Chinese demand for steel and iron ore. Even if a Chinese mill did provide such estimates they would be scrutinised most sceptically since it would more likely be part of a negotiating ploy — a quite frequent stratagem used by, particularly Asian, Governments in international negotiations.
The arrest of the Rio Tinto executives is clearly related to the previous intense negotiations on the price of iron ore and the fact that Rio Tinto did not buckle to Chinese steel mill demand for significant price reductions. Now the Chinese mills are refusing to take the iron ore for which they had previously contracted. Rio Tinto is seeking billions in compensation. These contracts are based on a normal “take or pay” concept and reflect the that fact that iron ore producers must invest vast sums in both production capacity, stock piles and shipping capacity to service a contract — and they forgo other sales opportunities once their future production capacity is reached under the contracts negotiated.
So it is not only the lack of understanding of Western commercial intelligence processes that has lead to China’s irritation, it is their unwillingness to accept that contracts have a de facto force of law — but seeing the legal process in China always “bends” to political guidance there is an unwillingness to accept any enforcement of a contract by an independent authority, e.g.: a Western Court. In the final analysis, China sees “might as right”.
What we are actually witnessing, in what is an initial small scale skirmish, is the beginning of a long running economic and resource trade conflict — the first economic and resource “shadow war” of the 21st century. If Australia continues with the “Mr Nice Guy” limp-wristed DFAT approach it will simply be stomped on. A hard line by Australia can certainly be expected to result in economic retaliation. It will cost us, but not nearly as much as what we lose in a weakened negotiation position and lower prices over many years. That is the Chinese objective.
It is essential that the Government take a strong line with China and make it clear that if it wishes to pay in the international business sandpit then it must accept international rules. In the interim we should discontinue this charade with China and terminate the negotiations on a bi-lateral Free Trade Agreement. The recognition of China by Australia as a “market economy” should be revoked. Clearly it isn’t.
And if they wish to purchase further iron ore then they should re-open negotiations with Rio Tinto’s Shanghai representative, Mr Hu — they know where to find him.
As Field Marshall Rommel said: “Defeat them in the shallows, or you will not defeat them at all”.