Global shifts make future less clear

Talking to fund managers over the past few weeks has certainly focused my attention on the investment side of the volatility that is changing the way the world is ordered.

Many are bracing for a short-to-medium period of pain as the world reacts to the breakout in inflation, the raw materials shock from Russia’s invasion of Ukraine and the deepening of the schism between the West and China that has resulted.

Fundamentally, there is an expectation of pain in many markets over the rest of the year at least as supply chains are affected in ways unseen for decades.

The rise of China in the 2000s, while historically monumental, was a smooth ride compared with its withdrawal – voluntary or otherwise – from the global markets which sustained its economic miracle and made it the world’s factory.

Firstly, let’s consider what is bad about this.

China is our biggest market for raw materials, premium goods and several major services, such as education.

It was, increasingly, a major supplier of goods and, to a lesser extent, services.

During the past couple of years, it has shown its hand in terms of blocking its market to things it could do without, making us experience pain without major economic suffering.

Restrictions on barley and wine are just China teaching us a lesson.

Slowing coal shipments was, perhaps, a more real example of just how far it can take this threat because that decision ultimately caused it significant pain, too.

At a very simple level, it can’t do without our energy and iron ore and it knows it.

But it will do everything in its power to find alternative supplies.

With the potential for Russian gas to be permanently turned off from Europe, China will find ample energy and other supplies from the vast country to its north.

But China relying on Russia, with which is has historic enmities, even when they were both communist-controlled, is fraught.

And Russia turning its back on Europe creates competition in our neighbourhood while opening markets that are extremely distant from us.

We ought to be very concerned about this change, which leaves us at a competitive disadvantage in a region that will be increasingly affected by two big powers proven to be unfriendly to the democratic model.

One is a former superpower with a militaristic heritage, and one is a new superpower with military ambitions.

Both can suppress political opposition in their own countries.

They can take economic pain because their people have no choice.

China is learning to project political power and, without democratic restrictions, can win friends around the world by whatever means necessary.

I am wary of our relative defencelessness if the West loses its appetite to fight for democracy in this region.

So, what is good about this?

Firstly, we always needed to diversify our markets and the shift in geopolitical forces is simply pushing us more rapidly towards that inevitable outcome.

That need not be catastrophic and, if China takes more raw materials from Russia, then there ought to be new markets for us.

There may be a price for distance but if Brazil can ship to Asia, we can trade more with Europe. And if Europe needs our goods, it will be more interested in our protection.

As much as I rate the idea behind the trilateral security pact between Australia, the United Kingdom and the US (AUKUS), having French submarines would have made us more important to a major nation in the Eurozone.

Not all opportunities need be distant.

The newly aggressive China ought to shake the rest of Asia out of its complacency, especially countries composing the Association of Southeast Asian Nations which, together, represent an enormous and potentially industrious collective which should be thinking about how its populations can benefit if China stops making things for the West.

In a narrower and more pure form, this renewed global competition has already opened doors.

There is a big effort to shift rare earths and battery minerals production away from China.

We have benefited from that, including support for much-needed downstream processing.

That capacity is good for us economically and makes Australia much more strategically important as we enter a new age of technology innovation.