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This article was originally published by Stratfor Worldview and is reprinted here with permission.

The Australian government will increasingly scrutinize both public and private agreements with China as Canberra expands efforts to shape Chinese economic influence in the country. China will respond with continued trade pressure targeted at select Australian sectors, while refraining from measures that could significantly damage Australia’s economy. On April 21, Australia's foreign ministry used its new powers gained under the country's so-called "veto laws” to cancel the state of Victoria's accession to China's Belt and Road Initiative (BRI), saying the deal was inconsistent with Australia's foreign policy and adverse to foreign relations. The Australian government also struck down two education and science deals that the state of Victoria struck with Iran and Syria. However, the ministry approved a memorandum of understanding between Western Australia and the Indonesian government for Cooperation on Human Resources Development in the Energy and Mineral Resources Sector. 

  • While Australia’s national government declined to join China’s massive BRI infrastructure initiative, the state government in Victoria unilaterally joined in October 2018. Victoria signed a memorandum of understanding with China's National Development and Reform Commission and followed up in October 2019 with a framework agreement to establish a working group on BRI. 
  • Motivated by the Victoria BRI deal, Australia's parliament passed the “Australia’s Foreign Relations (State and Territory Arrangements) Bill 2020” into law in early December 2020, empowering the foreign ministry to veto any existing or future agreements deemed “inconsistent” with national security interests between foreign governments or government entities and Australian states, territories, public universities and local governments. The law also required all subnational governments to report any agreements with foreign governments and log them on a public register. The initial audit of foreign agreements brought notifications of over 1,000 such deals.
  • This cancellation comes at a time of deteriorating bilateral Australia-China relations and a strong political consensus behind the need to counterbalance Chinese influence in the Australian economy and politics. China has responded with trade pressure meant to leverage Australia's strong economic reliance on China, but has so far stopped short of targeting sectors (such as iron ore) that would truly damage the Australian economy. Such limited responses, however, are unlikely to succeed in meaningfully deterring Australian confrontation.

Australia’s federalist system, along with the need to maintain an open trade and investment posture, will limit Canberra’s ability to truly curb Chinese investment flows. Under the Australian constitution, only the commonwealth government can enter into binding international treaties on behalf of Australia. But states, territories, local councils, universities and companies are allowed to enter into contracts with foreign governments and government entities on economic cooperation, development, research deals and cultural exchanges — now subject to “veto law” scrutiny. 

  • The veto of the Victoria State agreement is likely to hold but could provoke a court challenge to clarify the constitutionality of the law. The opposition Australian Labor Party ultimately supported the bill's passage into law in late 2020 but had initially raised concerns that the definition of "foreign policy" was too broad. 
  • While the veto law broadens commonwealth government powers substantially, it applies only in specific cases. It excludes commercial agreements between private corporations, which would make it unlikely, for example, for the government to be able to apply the law to reverse the 2015 deal in which the Northern Territory government leased the strategic Darwin Port to Chinese-owned (but private) Landbridge Group for 99 years. The law also exempts state-owned enterprises.
  • Australia has a strong interest in maintaining trade and investment links with China, which accounts for nearly 33% of Australian exports. China, when taken together with Hong Kong, also makes up 5.7% of Australia’s total foreign direct investment, with that investment disproportionately represented in Australia’s vital energy and mineral sectors.