Growing tensions between Australia and its biggest trade partner, China, could jeopardise foreign investment at a time the economy needs its most. The problem is compounded by Australia’s national security regime, which tightened on January 1 and some warn is going too far. 

A diplomatic row between the two governments has led China, which buys 34% of Australian exports, to impose tariffs of up to 200% on one-third of its imports. Australia has lodged a dispute at the World Trade Organization and passed laws that allow the federal government to scrap states’ plans to join the Belt and Road Initiative. China has since responded with its own list of complaints.


Economists warn an all-out trade war would see Australia lose 6% of its gross domestic product (GDP) as it struggles to exit its first recession in nearly 30 years. For decades, Australia has relied on inbound investment to fuel growth, but in 2019 it started experiencing net capital outflows for the first time since the 1970s. At the same time, the toll on China’s GDP is estimated at 0.5%. 

“The Australian government should be prioritising foreign direct investment (FDI) because low investment has been the primary cause of the economy’s slower economic growth in recent years,” said Tony Makin, a professor at Griffith Business School, Queensland. But fewer exports to China dampens many companies’ growth prospects and attractiveness to investors. 

“When private capital funds invest in an Australian businesses, they typically work hand-in-hand with their management teams to grow those businesses domestically and often internationally,” said Yasser El-Ansary, chief executive of the Australian Investment Council, which represents the private equity and venture capital industry. “Over the past 20–30 years now, any conversation about global growth for an Australian business has generally involved considering opportunities in the Chinese market.” 

Australia has made strenuous efforts to diversify export destinations in recent years. “The two obvious candidates are India and Indonesia. But compared to China, kindling trade with these countries might be more challenging as they have a more protectionist mindset,” said Mr Makin. India, for example, opted out of the recently signed Regional Comprehensive Economic Partnership.

Retaliatory measures

At the top of the Chinese government’s list of 14 complaints against Australia are the 10-plus deals blocked by the Foreign Investment Review Board (FIRB) in recent years, and Huawei’s ban from the national 5G network. Just last week, a Chinese buyer dropped its bid for Australia’s Probuild after FIRB said it would reject the deal.

Over the past five years, national security has become a major plank of Australia’s FDI policy, often at China’s expense. Business leaders warn this gives rise to the possibility of other countries using their policy levers in response.

“If Australia signals to the rest of the world that we don’t have a clear and consistent message about what sort of FDI we will support, we should expect that to come with consequences for outbound investment and export opportunities for Australian businesses,” said Mr El-Ansary.

Australia’s national security reviews are a key driver of Chinese FDI falling 62% in 2019, according to a report by KPMG and The University of Sydney. This is a bigger dip than Chinese investment into the US over the same period, which is blamed on their ongoing trade war. fDi Markets data suggests Chinese greenfield investment in Australia in 2020 was down around one-third since 2018. 

Immense nervousness 

The US and UK remain Australia’s biggest investors, but with Chinese inflows tipped to continue sliding, it begs the question of which countries might step into the void. Mr Makin says there is scope for more investment from India and Korea, among elsewhere, but stresses that FDI screening is not just a problem for China. 

FIRB pre-dates the proliferation of similar regimes around the world, the most recent of which is China itself. But national security’s role as key criteria for Australia’s assessment of foreign investment is a relatively new phenomenon. 

 “That was not the case even five years ago and, in my view, the pendulum has swung too far. The national security concerns are probably overstated relative to the costs of not allowing foreign investment — particularly from countries unintentionally caught up in this,” says Mr Makin, noting that FIRB’s chairman being from the intelligence community is “more than symbolic of where the policy is going.” 

Changes taking effect this month empower FIRB to scrutinise a wider set of transactions and allow the treasurer to recall acquisitions up to 10 years after they’ve been approved. The Law Council and at least one state government have warned it could stifle investment. “Powers like that create immense nervousness among investors looking to tie up their capital for up to 20-years plus,” Mr El-Ansary added.