TCS Daily

Feigning Foolishness

By Mitch Hooke - April 21, 2005 12:00 AM

In his 1991 work, Lure The Tiger Out Of The Mountain, Gao Yuan spelled out the thirty-six negotiating stratagems refined by the Chinese over thousands of years. These are by no means tools of the past. The Chinese government and its steel sector have been drawing from these negotiating ruses in the lead up to the launch of an Australia-China free trade agreement and in unrelated negotiations of iron ore prices.

The employment of these strategies shows how savvy the Chinese really are. Australian negotiators should not be fooled into seeing them as the underdog: the Chinese have forgotten more about negotiating experience than they rest of us will ever learn.

Stratagem No. 13 - Beat the grass to startle the snake

China will introduce a new licensing system from May 1 which will restrict the number of iron ore importers by 80 percent, in an attempt to maintain 'good' price levels. The move comes as Australian producers have won a 71.5 percent increase in the most recent contact negotiations. Iron ore prices are determined by a balance of supply and demand in the global marketplace.

Chinese officials have expressed to the Australian Government their concern about the rising iron ore prices. The Australian Government has refused to intervene, saying it is a commercial (not governmental) issue and that China must accept that a market economy can produce swings in commodity prices.

Recent headlines in papers, such as 'Iron ore threat to China trade deal' in the Australian Financial Review, attempt to link the iron ore negotiations to the upcoming free trade agreement negotiations. The implication is that the outcomes of the iron ore negotiations don't go China's way, the China Australia FTA negotiations may suffer as a result.

Stratagem No. 7 - Create something out of nothing

Australian negotiators should not be alarmed or intimidated by this imaginary link. There is no link between the two negotiations. It is simply a sophisticated effort aimed at achieving two purposes:

1. To unbalance Australian negotiators at the outset of the FTA negotiations. Just to start free trade talks, Australia made a major concession: granting China market economy status for antidumping purposes. But, just a month before negotiations are launched, media debate is fully focused on iron ore prices. Clearly, the Chinese see the benefit in beginning negotiations as an aggrieved party rather than one that has just received a huge bonus.

2. To put pressure on Australian iron ore producers to moderate their iron ore price demands. The secondary expectation related to this is threat the Australian government might apply some pressure on the minerals sector to rein in its price demands.

Thankfully, it won't work.

Australia is a major source of iron ore for the Chinese. It will remain a major market for Australian iron ore producers for many decades to come. Attempts to procure price moderations by threats of import restrictions or shifting to others sources of steel are unlikely to eventuate; the alternatives are not favorable.

Stratagem No. 19 - Take the fire from under the cauldron

Attempts to trim import demand by introducing import licenses are unlikely to encourage Australian producers to drop their price demands. It is the Chinese who have been the architects of the current demand surge creating the first sellers' market in the iron ore business for many decades. In 2004, Chinese crude steel production was up by 23 percent on 2003, tipping global crude steel production over the 1 billion tonne mark for the first time. Iron ore imports by the world's steel-making nations reached 650 million tonnes in 2004, compared with 580 million tonnes in 2003. Not surprisingly, iron ore prices have enjoyed a long-awaited bounce. Import licenses are unlikely to help China stem this. Further, they are questionable under global trade rules.

Stratagem No. 23 - Befriend a distant state while attacking a neighbor

Threats by Chinese steel makers to shift to other commodity suppliers' are also a ruse. In reality, efforts by the Chinese to find alternative sources have just added to their problems. Indian produces have been selling at prices double their Australian counterparts. The differential in price between Brazil and Australian producers is the largest it has ever been.

In fact, Australian producers have been selling iron ore to China at about 8 percent below the market for the past decade as part of a significant investment in a long-term relationship.

Stratagem No. 27 - Feigning foolishness

Australia should admire and even envy the cleverness of the Chinese. They should recognize it for what it is: sophisticated, inventive and tactical. But they should not be taken in by it.

The example of iron ore negotiations should be taken note of. Far from believing the Chinese are undertaking an FTA with Australia as a learning experience before tackling FTAs with larger economies; Australian negotiators should be preparing themselves for the full force of Yuan's 36 negotiating stratagems.

Mitch Hooke is Chief Executive of the Mineral's Council of Australia.


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