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A Risky Business

China, trade and the new period of uncertainty

· Allana Ferguson,Risk,Trade,China,Analysis

Political risk has always existed, but now it is taking new and diverse forms. How we perceive and define this type of risk varies as the meaning has been inconsistent, reconstructed and changed over time. Broadly speaking, political risk is best thought of as the uncertainty that arises from political decisions, actions or events. This uncertainty complicates decision-making for businesses trying to shape their future with or against these oftentimes ambiguous forces influencing their external operating environment. This also has a flow-on effect to stakeholders, which is particularly problematic as the global economy becomes increasingly interconnected, and stakeholders become more numerous and interconnected themselves. The private sector is left scrambling down a path with no turnoff: political risk cannot be avoided and underestimating the link between government decision-making and business success can be disastrous. Australian businesses are currently experiencing elevated levels of political risk as China’s “go-slow” policy toward Australian exports is causing up to two-month delays in products passing through Chinese customs. Business leaders have warned that this is a result of the Turnbull government implicating China in concerns over foreign interference, and that a souring bilateral relationship between the two nations is evidently threatening trade and investment.

Trade Minister Steven Ciobo has downplayed the severity of these trade risks, and insisted that Australia does not have to choose between national security and trade policy. In addition to hints of China putting up barriers to Australian beef exports, wine producers have indicated that up to six companies have experienced delays in getting products through Chinese customs. This has raised alarm bells since Australian wine exporters have created the first $1 billion market with new figures revealing a phenomenal 51% yearly growth in the Chinese market since the China-Australia Free Trade Agreement came into effect in 2015. While Mr Ciobo has maintained that the reason behind these delays are more “irritant” than “political”, a Fairfax Media source revealed that two thirds of the export containers being held up at China’s ports have been released for sale as a direct result of government efforts. The result is an uncertain trading landscape for Australian exporters in the Asian growth market and raises questions to the role of government decision-making in a rapidly changing risk environment.

While political risk has always existed, both changes in international relations and political change, at least in the US, Australia and Europe have tended to be either transparent and predictable, or slow and incremental. The past certainties have since vanished and have been replaced by increasing concern around trade policy, including changes in regulatory risk from tax reform, cross-border trade and currency inconvertibility as governments pursue their political agendas.

Leading companies have responded to the changing risk environment by expanding their risk management capabilities. Such changes involve utilizing technology to bring overarching governance of risk management into all parts of the company (a core tenet of the new ISO 31000:2018 risk management guidelines), connecting risk managers with government engagement experts or appointing the executive board with direct responsibility for mitigating (and creating opportunity in) political risk. Smaller Australian exporters may find this a challenge because of both capacity and capability constraints that limit how often and to what degree they can adopt the latest risk management best practice strategies. As a result, protecting Australian exporters from political vulnerability requires the Government to reassess the impact of its political activity on Australia’s broader trade strategy in China.

Reassessing political activity does not mean creating a false dichotomy between choosing the region, the US or a Sino-focused strategy. The choice should instead be on what terms Australia participates in each trade policy or agreement, which is only becoming more complex as the US-China tariff debate rages on and the risk of a domino effect to Australia of distorted global demand and supply becomes more likely and severe.

For government this could mean maintaining China and Indonesia as Australia’s most important bilateral trading partners, but also establishing multiple regional trading agreements. A multi-pronged trade strategy is not a new idea and requires significant analysis, but it at least ensures that Australian businesses are not dependent on a single regional trading bloc. On the other side of the coin, for businesses, the expectations of both investors and government is changing and the importance of including political risk as a critical component of a broader risk management strategy is evident. This should not be limited to pure analysis, but also requires actionable steps in the short- and long-term. Since these steps are not always clear, it is worth asking, did management explicitly take action following the result of risk analysis? The answer often reveals that political risk management is not just about accuracy, but also about persuasiveness. Business leaders can at least feel some relief in that while political risk may be inevitable, it can also be managed.

Allana Ferguson is a Policy Analyst at FPL Advisory

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.