Aukus pact ramifications stretch to energy and trade

A new species in international relations was born on Thursday – the Aukus. It is a security partnership between Australia, the UK and the US, which is directed at China, while incensing France. The trilateral pact will involve the US and the UK providing Australia with the technology and capability to deploy nuclear-powered submarines.

But beyond the diplomatic and military ramifications, three less-remarked energy, trade and economic implications are key.

First, bringing in the UK has shifted the geographic focus. The term “Indo-Pacific” as distinct from Asia-Pacific has become increasingly popular. Partly, this reflects the American desire to bring in India as a counterweight to China. The UK’s foreign policy and defence review this year also indicated a tilt towards the Indo-Pacific and the “Quad” groups the US and Australia with India and Japan. Despite New Delhi’s serious disputes with Beijing, it has, however, long prided itself on non-alignment.

As the US tries, so far more rhetorically than actually, to draw down its Middle East military presence, it seeks like-minded partners to pick up the burden. This role is not to protect world energy supplies altruistically, but to deny them to any peer or local rival: the Soviet Union in the 1970s and the 1980s, Saddam Hussein and Iran in the 1990s. Now Washington holds this Sword of Damocles over Beijing.

Second is the more explicit threat to Chinese energy security. During the Second World War, the US oil embargo on imperial Japan led it to strike Pearl Harbour to clear the way to the petroleum resources of the Dutch East Indies (what is today known as Indonesia). But the Japanese had not reckoned with American submarines, which sank their tankers and merchant fleet and starved the home islands of food and fuel.

A casual glance at the map reveals the significance of the Indo-Pacific to the modern energy world: oil and liquefied natural gas shipments from the Arabian Gulf through the Strait of Hormuz, Bab Al Mandeb and the Suez Canal, the Straits of Malacca and the South China Sea. The “first island chain” of US-aligned Japan, Taiwan and the Philippines lies astride critical trade routes. The whole South-East Asian archipelago is a major LNG supplier and LNG will also cross the Indian Ocean from East Africa later this decade.

Australia, a rare country that runs a trade surplus with the Middle Kingdom, is a key energy partner for Beijing. The world’s largest LNG exporter, it supplied almost half of China’s requirements last year, far ahead of any other country. Australia and Indonesia were the leading sellers of coal to China. In “new energy minerals”, it ranks top in the world for output of lithium and second (to China itself) in rare earths.

Yet foreign policy differences have strained relations. Beijing has slapped overt and hidden restrictions on imports of agricultural goods and coal. Australian iron ore, which is particularly crucial, was one major commodity that China did not dare touch with restrictions.

During the Trump administration, Chinese tariffs also essentially prevented LNG imports from the US, until a trade deal was reached in late 2019.

China has been acutely aware of its energy vulnerability for at least two decades. It is intolerable for an aspiring superpower to have its maritime lifelines threatened by US-led alliances. It has tried many ways to limit this: increasing domestic shale gas output; constructing overland oil and gas pipelines from Russia, Central Asia and Myanmar as part of the Belt and Road Initiative (BRI); acquiring overseas hydrocarbon assets; and developing alternatives in electric vehicles, renewables and nuclear power.

But despite its close relationship with Vladimir Putin, reliance on Russia as a key energy supplier is not a comfortable long-term position either. Nor is the Kremlin keen on the BRI’s extending influence over its Eurasian backyard.

China’s “string of pearls” of ports that could eventually become naval sites includes Hambantota in Sri Lanka and Gwadar in Pakistan, near the Strait of Hormuz. In 2017, it opened its first overseas military base in Djibouti, which already hosts American and French forces.

Iran’s much-hyped deal with China in March could give eventual access to the new port at Jask on the Gulf of Oman. However, Beijing has so far not sought to replicate or challenge the extensive US military footprint in the Middle East.

Third is the White House’s snub to the EU. The election of Joe Biden was welcomed in Brussels as a change from the confrontational and destructive Trans-Atlantic policies of the George W Bush and Donald Trump administrations. Mr Biden reluctantly accepted the fait accompli of completing Russia’s Nord Stream II gas pipeline to Germany, stoutly defended by Berlin over the doubts of many, particularly in Ukraine and Poland.

But now, Aukus’s promise of nuclear-propelled submarines scuttles France’s $66 billion deal to build up to 12 conventional vessels for Canberra. The string of US blunders in Iraq, Syria and Libya, its violation of the Iran nuclear deal and most recently the chaotic retreat from Afghanistan, have damaged European trade and security, and reinforced concerns over Washington’s reliability.

Paris has in response reiterated the need for European “strategic autonomy”. This includes standing united against Chinese and Russian bullying, but not allowing Washington to draw Europe into unnecessary hostility with China, nor being hostage to increasingly erratic and nationalist American domestic politics.

Europe’s energy interests are less directly concerned with Asia-Pacific. But the recent surge in gas prices and the recovery in oil are a warning of how dependent the continent remains on both Russia and the GCC.

The EU’s climate and energy security ambitions are badly out of sync. And it has yet to wield hard power effectively in harness with its undoubted soft and regulatory influence.

Though an awkward and unlovely bird, Aukus shows the direction of evolution in world affairs. Nuclear submarines make headlines. But it is the responses in Beijing, Moscow and Brussels to energy and trade constriction that will make a sea-change across the Indo-Pacific.

Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis