China

The former British colonies in the South Pacific are amongst China's new best friends. Potential free trade deals with New Zealand, and especially Australia, offer resource-hungry China a veritable commodity buffet replete with iron ore, sheep's wool, and liquefied natural gas. Trade volumes between China and the Pacific Islands Forum's 16 members (Australia, New Zealand, the Cook Islands, Fiji and several other Pacific island states) increased 68% to US$500 million last year. China became Australia's second largest export market in 2004, up from 12th place in 2003, and is now New Zealand's fourth largest market for both imports and exports. Even the Pacific's resource-bare islands like Samoa and Fiji are benefiting from a China tourism boom.

But more than simple regional integration and neighborly trade, China's strengthening diplomatic ties with the South Pacific may shake a traditionally western sphere of influence. As Australia and New Zealand work toward free trade agreements and seek ways to compromise on potentially sticky issues, US ties and human rights discussions occasionally get swept under the rug.

"From the way both sides have behaved in recent months it seems clear that Australia's treading lightly to avoid upsetting Beijing," said Jason Kindopp, China Analyst at Eurasia Group. It seems the same can be said for nations across the South Pacific.

Resource buffet
China's trade with the South Pacific is first and foremost about resources. Exploiting the deserted outback and New Zealand's unpopulated hills, China has access to 18% of the world's iron ore and nearly 50% of the world's wool as well as a plethora of other commodities.

"It seems natural [Australia and New Zealand] have the raw materials and [China] needs the raw materials, so they're doing everything they can to lock them up," Kindopp said.

Indeed, in an attempt to secure the supply chain, several Chinese metals companies, including Beijing Shougang, were in talks mid-September to invest as much as US$7.7 billion in Australian mines, potentially increasing China's investment in Australia six-fold within the next five years. Of the proposed mining investments, half are in iron ore, 30% in coal and the rest in natural gas and other metals.

China, also the world's largest importer of iron-ore and steel and the largest consumer of aluminum, has become the second biggest market for Australia's plentiful mineral and fuel exports. Australia's exports to China of iron ore, coal and nickel grew last year 41%, 72% and 88%, respectively.

Beijing is now keen to tap into Australia's 40% share of the world's uranium reserves, given China's ambition to quadruple its nuclear capacity by 2020. With a nuclear power renaissance, uranium trading at 23-year highs and its northern neighbor banging down the trade door, Australia is debating a shift in the strict guidelines about how much and to whom the metal retrieved from the three mines allowed to operate can be sold. And while no specific deals are on the table, some mining companies might soon try to take stakes in Australia's uranium mines, said Henry Wang of Invest Australia. Further, China's booming textiles industry has made it the world's largest importer of wool, and the nation will account for 35% of global cotton consumption this year. And with imports to traditional consumers like the US on the wane, Australia, the world's largest supplier of fine wool, has been increasingly turning to China. Australia's agricultural exports to China, led by wool and cotton, have almost tripled in the last decade. New Zealand too has been sending its wares north. In 2004, China consumed US$1.9 billion worth of Australian wool and US$100 million in New Zealand wool.

Meanwhile rising forestry and dairy exports from New Zealand to China are gaining on the traditional wool exports. China is now investing in the small island state's agri-tech industry, looking for technology applicable to the great hinterland, according to one New Zealand diplomat. Trade across the Pacific has expanded so much in the last decade – Australia's mineral and fuel exports to China have jumped 470% during the period and New Zealand-China trade is growing 20% annually – that free trade agreements between China and the two major Pacific islands are on the table. The second round of Australia negotiations covering policies from agriculture to tariffs took place in Beijing late August. And since New Zealand Prime Minister, Helen Clark, and Chinese President Hu Jintao announced at an APEC meeting in November 2004 the commencement of FTA negotiations, three rounds of talks have been held.

Tourism
The proximity to China and the physical beauty of the South Pacific Islands have helped them to become prime vacation destinations among the mainlanders. Australia, New Zealand, Fiji, Vandau, Tonga and the Cook Islands each have "Approved Destination Status" from Beijing, making it easier for PRC nationals to get there.

The number of Chinese visiting New Zealand jumped 27.9% from 2003 to 2004 alone, while Chinese visitors to Australia are likely to hit a quarter of a million by the end of this financial year. China recently donated US$100,000 to the South Pacific Tourism Organization, which supports tourism development and promotion in the region.

China also sends planeloads of students to universities in Asia's English-speaking world, supplying 20% of all foreigners studying in Australia, and accounting for almost half of New Zealand's foreign study revenue.

While China is dishing out tourism dollars, debt relief and cheap loans to some of the small Pacific islands – Beijing has conspicuously passed over a handful. Palau, the Solomon Islands, Kiribati, Tuvalu, Vanuatu and the Marshall Islands are among the small number of nations recognizing Taiwan as the Republic of China. While this group receives aid and concession from the east side of the Taiwan Strait, the PRC is not amused.

Dollar diplomacy
However, growing economic dependence on China has put both Australia and New Zealand in sticky diplomatic positions, as they struggle to prioritize issues of human rights, asylum seeking and foreign policy. The priority in the end is usually clear – trade first. A New Zealand diplomat said her country is "really frank on some issues like human rights, but we're able to have good political discussions with China," but she later conceded that a small nation such as New Zealand "really isn't in a position to tell any country what it can and can't do."

For one, the Australian government was condemned by China in July for granting asylum to a Chinese diplomat who Beijing said was not threatened at home, but it was also criticized by its own people for dallying on the decision to grant the dissident safety.

But China's growing power has begun to create new strains. Earlier this year, Australia blurred the lines of its obligations as an US ally to support the American military in event of a crisis in the Taiwan Strait. While Beijing and Washington were each issuing declarations about potential military actions in the case of a flare-up in the strait, Canberra insisted the situation would be best served with Australia as a mediator, rather than taking sides. The theoretical breach of an entrenched US-Australian treaty that this position represents is a clear sign of shifting priorities in the South Pacific.

China-Australia FTA
Australian Prime Minister John Howard and Chinese Premier Wen Jiabao began negotiations in April on a Free Trade Agreement (FTA) after a joint FTA feasibility study which found that an FTA between them would boost the Australian economy by up to US$23 billion, and China's economy by up to US$83 billion over the next ten years. The second round of Australia – China FTA talks was held in Beijing in August in which the two sides began an information exchange about each other's trade and investment regimes. Concerns linger in Australia that the trade pact could diminish the local manufacturing sector, while China is worried about the impact on its farmers. A final deal, however, is not expected for several years.