Strategic gaming by Australian government - good or bad?

This blog will discuss potential strategic gaming by governments in relation to investment and trade. This issue arose from reading an article on KGB's Business Spectator, asking for the Australian government to price out the Chinalco bid to invest in Rio Tinto.

It seems that author seemed to understand more about Rio's business its own management team. He was concerned that the management is going to sell its assets short. Unable to influence the management, he attempted to influence the government.

It might appear to be legitimate concerns and a reasonable approach, if one assumes the game is going to be played only once and only Australian government has the choices to move, other governments are assumed to not react irrespective what the Australian government does.

However, assumptions are just assumptions. Sometimes they cannot be farther away from the truth. Anyone with some knowledge of game theories would understand that the above assumptions are very simplistic, unpractical and cannot be applied to real businesses.

If more realistic assumptions are made in the context of Australia - China relations and the international mining sector, one would certainly wonder why the Australian government would want to engage strategic gaming in relation to such investments. One has to consider carefully the potential possible options each government has, any first move, counter moves and continuous plays. Were it to start, there could be many rounds of plays and the outcomes for each side are very hard to predict.

Australia is a middle power internationally as it often self claimed. Its influence in the international arena is noticeable but fairly limited if one to be realistic. It is located in the Asia Pacific region and naturally wants to develop deep relationships with the Asia region where some of our important trading partners lie.

China is an emerging power with a rapidly growing economy now ranked third in the world. It will probably not be too long for it to replace Japan to become the second. Some forecast that China will become the largest economy before the middle of the century.

China would probably regard Australia highly. The main reasons include:
· The two countries are very complementary with each other economically;
a) Australia, an industrialised country with expensive labour costs, is rich in mineral and agricultural resources;
b) China, an industrialising and emerging economy with a huge need for resources, has abundant cheap labour supply, but lack of natural resources in per capita terms;
c) Compared to some other big resources rich countries, Australia is closer to China geographically;
d) Australia does not have too overly discriminative trade barriers for China, as some other larger industrialised countries do.
· As a result, the two sides are more likely to be partners rather than competitors or foes;
a) Australia needs external markets for its rich mineral and agricultural products;
b) China needs reliable and stable supplies of natural resources and needs friendly external markets for its labour intensive goods and services; and
c) Australia will benefit from cheap imports.
· Looking from international geopolitical point of view, there appears to be a need for China to have a close friend that is also the friend of the US – the world sole superpower, so when important matters can’t be more effectively be dealt with between China and the US, the mutual friend of both sides can play an intermediate role to facilitate achieving a better resolution of issues;
a) Australia is a strong US ally and is realistically pragmatic in dealing with China,
b) It is highly unlikely that the Australia and China will clash over extremely important strategic issues largely because of the larger international context, mutual needs and geographical locations.

Australia is likely to continue its strong engagement with Asia, including China to gorge stronger relations with them. After all, as Garnaut’s (1989/90?) book indicates, Asia is in the ascendance. It has been occurring for some time already. The 21st century is likely to be dominated by dramatic shifts between continental heavy weights with lasting implications for the whole world.
Before engaging in governmental strategic gaming, perhaps all sides will have and need to carefully ponder strategic thinking first. If we ask for transparency by the Chinese government on important issues, such as military spending, we ourselves will need to be transparent on important issues as well. Trade, investment and commercial considerations are likely to be more dominant issues in the heads of Australian and Chinese governments. Whether it is established on mutual trust or mutual deterrence, some transparency will be needed and equilibrium to be reached. It will be in our own interest to do our homework well and first before making strategic gaming moves.