Two incidents in the last week have highlighted that the new ‘new world order’ is a dangerous place, and not just in obvious war hot spots such as Afghanistan, Iraq and Somalia. In China, iron ore negotiator Stern Hu has been detained under state security laws along with three other Rio Tinto employees. Mr Hu is lucky; he is still alive. The shooting murder of Drew Grant at West Papua’s Freeport gold mine is far more tragic, but was it also a negotiation ploy? Was he murdered, or allowed to be murdered to preserve lucrative security contracts for the Indonesian military?

In the context of the great progress Indonesia has made in achieving stability under the leadership of the newly re-elected Susilo Bambang Yudhoyono the death of Mr Grant and others at Freeport should jolt us out of complacency. The outcome of investigations, particularly allegations of military involvement should represent an important test of whether civilian government has really achieved supremacy in the archipelago. The participation of Australian Federal police in the investigation is a good sign, results will count for more, but they can’t undo the tragedy for the families involved.

Signs are not so good with China, but at least the harm can be undone.

The global financial crisis has reordered global power arrangements; the G8 and G7 meetings are now secondary to the G20. China sees itself as ascendant, America as over-stretched.

Such power plays are very dangerous times. The emergence of Germany as the most economic and demographically dynamic nation in Europe set the stage for World War I. The emergence of Japan and Germany’s grievances from the ending of first war led to World War II. The combined result of the wars was the fall of Europe and the rise of America and the Soviet Union. China is not unaware of the lessons of history and is plotting its path very carefully.

Detaining Mr Hu is a political move, but has it misread the tea leaves? On the other hand, is Australia ready for the gambit?

It is sometimes said that if you owe $100,000 that is your problem, if you owe $100 million, that is the banks problem. America owes China over $1 trillion, but it is actually China that is in a vulnerable position. While economically in the dumps, the fundamental State of the Union is strong, China on the other hand is held together by the jackboot and the firing squad.

If the US follows the obvious solution, printing money and allowing the value of the US dollar to fall, increasing its competitiveness and reducing the real value of its debts then the main loser is China. It faces the choice of either allowing the Yuan to rise, reducing its competitiveness, or it imports inflation and creates the risk of increased internal social tension. This is perhaps why the Chinese see the iron-ore price as so important, and why it is willing to put on the jack boots in its negotiations with Rio Tinto. China needs price stability for social stability, Australia wants high prices to cushion the Australian economy from the global recession.

The case of Stern Hu appears to be one where the aggressive move is used to cover internal weakness. Rather than seeing the Hu case as one which highlights the diplomatic weakness of the Australian government, it is better to see that 20 years after Tiananmen Square, little has really changed. Events in Urumchi illustrate both points. The Liberal Opposition should not be hectoring the government into making a false move, instead they should be loyal to Australia and support the government’s slow calculating approach. China’s strategic blunder in detaining Mr Hu should be treated as an opportunity. China has removed its mask of civility.

The longer Mr Hu is detained, the stronger the case can be put that the world needs more than one workshop of the world, that business should be investing in Vietnam, Bangladesh, India and Indonesia for low cost manufacturing. The longer Mr Hu is detained, the stronger is the case that not only Australia, but every nation of the world should preserve some manufacturing capacity for strategic security, for example uniforms, vehicles and other necessities for a nation at war. The iron-ore joint-venture between Rio-Tinto and BHP, which I would normally dismiss as anti-competitive, can and should be considered more positively. China has replaced its iron-ore negotiator with a government controlled panel, if buyers coordinate, so should the sellers.

There is some argument that China is more important to Australia than Australia is to China, and we should therefore ‘kowtow’ as visiting diplomats were required to do to the Chinese Emperors of old.

I disagree.

China is simply a workshop, very cost-competitive and with important ‘hub’ effects for particular industries, but there is nothing it makes that can’t be replicated elsewhere in the world. And in providing the rising living standards that are necessary for stability, part of China’s cost competitiveness will inevitably disappear. Australia’s advantages are not so easy to substitute. We are politically stable, resource rich and a relatively short shipping distance not only to China, but also anywhere else in South and East Asia. What China desires, India, Korea and Japan also desire. Perhaps growth won’t be as fast, but given even the iron-ore mountains won’t last forever, we shouldn’t be rushing to sell our children’s inheritance at bargain prices. While we may sell more in the short-run by kowtowing, it is a Faustian bargain that will make us poorer in the long-run.

It is also worth noting that you don’t need to be allies to trade. The idea that trade stability requires friendship or hegemony is a myth that has led to many a war, take Japan’s ill fated East Asian co-prosperity sphere for example. During the cold war between the western nations and the Soviet Union, significant trade took place, particularly from 1973, with Russia supplying gas to Germany and the United States supplying wheat to Russia.

While it may seem cold-hearted, the best way to secure Mr Hu’s release and the future freedom of other business men in China is not through hectoring, mega-phone diplomacy or seeking any one-on-one understanding between our Prime Minister and the Chinese President. Instead it is through reinvigorating our engagement with Asian democracies, particularly India, Japan and Taiwan at a diplomatic, economic and military level. Make it clear that the detention of Mr Hu is not to Australia’s cost, but China’s. In its barbarity it is China that loses face.