New world order: threading the policy needle

The challenge for policymakers can be simply stated: Australia needs to avoid being wedged between its status quo ally and the rising power in its own region.

" Australia needs to avoid being wedged between its status quo ally and the rising power in its own region."

This is not going to be easy given the fluidity of the situation. Australia’s policymakers have not been alone in underestimating the velocity of China’s rise nor can they be sure where relative power in the region might settle.

This is how the White Paper puts it in perhaps its most telling passage: “Navigating the decade ahead will be hard because as China’s power grows our region is changing in ways without precedent in Australia’s modern history.”

Note use of the phrase “without precedent’’.

This is an age of uncertainty in a disrupted international environment made more so by unsteadiness in Washington under an unpredictable Donald Trump administration.

While the white paper avoids direct censure of American policies under a new president, it does not shy away from pointing out the complications of a latent antagonism under a Trump administration toward free trade and free-trading institutions.

In its overview, the white paper says a significant rise in protectionism globally could “create strategic friction, damage economic growth and undermine the rules that support flows of trade and investment.” 

Alarmed

Emeritus professor Peter Drysdale of the Australian National University does not dissemble in his assessment of the white paper’s direction as policymakers come to terms with a disruptive geo-economic outlook.

“What the White Paper makes clear is the Australian government and bureaucracy - which have been so closely entwined with the United States in the past - are alarmed by the decline of US military power and influence and Trump’s discarding the conventions of the international order,” he says.  

“He has abandoned the rules-based system – commitment to abiding by the WTO, the TPP, NAFTA, the Paris Accords and probably the KORUS agreement with South Korea – on which the world has depended to bring order to the global system.”

The above is a fairly pungent critique of a US which appears to have stepped away from its post-Bretton Woods role as an economic stabiliser and leader of a process of trade liberalisation beginning with the General Agreement on Tariffs and Trade in 1947.

An unravelling of a rules-based international order would serve no one’s interests, least of all Australia, dependent as it is on a stable trading environment in its own region and beyond. Yet those risks are real in an environment in which US policy is hardly settled under a new administration.

Needless to say the White Paper dwells on China’s rise and the impact on the region of its explosive growth. Commendably, this latest document - compared with its 2003 predecessor - does not underplay the China factor.

“Economic growth in Asia continues to re-shape our strategic landscape,” it says. “The compounding effect of China’s growth is accelerating shifts in relative economic and strategic weight.”

“In parts of the Indo-Pacific…China’s power and influence are growing to match, and in some cases exceed, that of the United States.”

The White Paper does a good job linking China’s growing economic weight with its expanding strategic power and influence.

“Like all great powers, China will seek to influence the region to suit its own interests. As it does, a number of factors suggest we will face an increasingly complex and contested Indo-Pacific.”

This latter might be regarded as an understatement.

Expansion

Perhaps the most telling graphic in the White Paper’s nearly 200 pages illustrates China’s economic expansion on a purchasing power parity (PPP) basis.

In 2016 China’s GDP exceeded the United States - $US24 trillion compared to $US18.6 trillion. By 2030 at present compound rates of economic growth China’s GDP is forecast to double the US, $US42 trillion to $US21 trillion on a PPP basis.

Maybe we should allow a moment for that to sink in.

Interestingly, India, by 2030 will match the US GDP figure. By comparison Australia’s GDP numbers will continue to shrink relative to those of China and India. In 2016 GDP on a PPP basis was $US1.2 trillion swelling to $US1.7 trillion in 2030.

These are the realities in which Australia will face, in the words of the White Paper, “higher degrees of uncertainty and risk.’’

It was not understating challenges when it said “we will need to be more active and determined in our efforts to help shape a regional balance favourable to our interests”.

Thus, the White Paper is putting a premium on creative diplomacy especially in the trade area where Australian officials have the ability to apply themselves to new free trading structures.

Work on the Trans-Pacific Partnership is one example. So is our engagement in the ASEAN+6’s Regional Comprehensive Partnership (RCEP). Both are part of long run efforts to establish a Free Trade Agreement of Asia and the Pacific (FTAAP).

Engagement

Unlike the TPP, the RCEP process and the broader discussion about an FTAAP has the virtue of China’s engagement. Australia’s trade diplomacy should be focused on engaging China on as many fronts as possible as a means of bolstering a rules-based diplomatic and trading environment. 

bluenotes has been told early drafts of the White Paper tended to underplay the economic imperatives of Australian foreign policy but in the end the document achieves a reasonable balance between diplomacy, national security and trade and investment.

Trade and investment are the lifelines of a trading nation with a small population, a vast infrastructure to maintain and defence challenges over an island continent about the same size as the United States. Australia’s population is around one-fourteenth of the US.

In its argument that open markets are absolutely critical the White Paper notes in 2016 Australia exported more than $US337 billion worth of goods and services. This was one-fifth of our economic activity.

More than half merchandise exports were accounted for by minerals and energy. Australia is the world’s largest exporter of coal and iron ore. It has the world’s largest reserves of gold, iron ore, lead, nickel, zinc and uranium.

In other words, we are custodians of an enormously valuable piece of real estate with all that implies from a geo-economic perspective.

Australia is in the top 10 of agricultural exporters. It is the world’s largest exporter of beef and wool. The country’s potential as a food bowl for Asia, China in particular, goes without saying.

Encouragingly, trade in services is growing rapidly. In 2016 services, mainly education and tourism, accounted for one-fifth of exports.

Pushing back

All this dictates Australian governments devote all reasonable efforts to pushing back against attempts to restrict market access. A trade war between the US and China would be a disastrous from Australia’s perspective.

As the White Paper states, the “continuing openness of the world economy will be vital to our interests”.

“Even narrow protectionist measures could limit or disadvantage our exports and harm Australia’s economy.”

This observation plays into a persistent White Paper theme and one being dictated by wrenching change in the Indo-Pacific driven not just by China’s rise, but the rise of other nation states, including India, Indonesia and Vietnam.

In his introduction, Prime Minister Malcolm Turnbull says Australia “must be sovereign, not reliant”.

If that’s not an acknowledgement of a disrupted security and economic environment in which power relationship are shifting I’m not sure what is. The 2017 Foreign Policy White Paper makes progress in coming to terms with that reality.

Tony Walker is a vice chancellor’s fellow at La Trobe University and a Fairfax columnist