The international outlook and what it means for Australia
Speech by the Chancellor of The University of Queensland, Mr Peter Varghese AO, at the inaugural Graduate Centre in Governance and International Affairs Roundtable, University of Queensland, 17 March 2017.
Today I would like to focus on the broader international outlook and what it means for Australia.
Our external environment matters. It shapes our security and it defines the space we have to pursue our economic interests.
We are now entering our 26th year of uninterrupted economic growth. There are many factors behind that achievement, not least the structural economic reforms Australia undertook from the mid eighties to the early years of this century. But a key factor was also an external environment, particularly in our region, which was favourable to Australia.
Today that external environment looks different. And the meta challenge for Australia is how we maximise economic opportunity and minimise strategic risk at a time of great uncertainty in both the regional and global outlook.
Since the end of the cold war, Australian policy makers have emphasised the fluidity of our strategic environment. Now we are moving beyond fluidity to what looks like an inflexion point internationally driven by deep structural changes in our external environment.
Let me start with the global environment
We are a decade into tepid global economic growth, with demand low and forecasts consistently revised downwards. More recently the numbers have picked up but whether this signals a positive structural shift remains to be seen.
What we do know is trade is no longer the engine of growth it was. For the decades before the global financial crisis, trade grew at two to three times average global growth. Today it is running at around half the rate of global economic growth.
At the same time, the usual engines of growth are slowing: China, the US, Europe and Asia more broadly are all growing more slowly since the global financial crisis.
Europe’s challenges run much deeper than slow economic growth. The European project has probably peaked at best and is facing an existential crisis at worst.
And all of this in a low interest rate environment which may have run its course in terms of its stimulatory effect.
In Asia virtually every major economy is facing structural challenges: these are for the most part political economy challenges by which I mean they reside at the intersection of politics and economics. Put simply, the politics of structural economic reform appear to be beyond the capacity of their political systems to fix.
Mind you we do not have look far to see that this is not a problem confined to Asia.
China recognises the need to move towards a new model where growth is driven by consumption rather than fixed investment and exports and where the market, not the state, plays the decisive role in the allocation of resources.
But the capacity of the Chinese leadership to put these reforms in place are hobbled by President Xi’s overriding commitment to preserve the monopoly power of the Chinese Communist Party.
For the last four decades, China has had a largely settled economic policy and a stable collective leadership. Now it has neither with President Xi taking more and more levers of power into his own hands.
The tension between the demands of economic reform and the preservation of political control are getting sharper in China. Indeed President Xi has cut back on the headroom of citizens to exercise more personal freedom. He seems convinced that any opening up of the political system would be the beginning of the end.
We cannot know how all this will end. No one gains if China fails but we should be prepared for a range of outcomes in China from the deeply troubling to muddling through or better.
Most other major Asian economies also face large structural challenges.
Japan has to yet to find a way out of decades of near stagnant economic growth.
Korea faces both economic challenges and political uncertainty, although its recent export performance has been strong.
Growth in ASEAN is slower, but Indonesia’s prospects look brighter
India stands out as now the fastest growing large economy but the pace and sustainability of that growth is also dependent on politically difficult structural reforms in a complex political environment which puts a premium on incrementalism.
This is the region and the world through which Australia has to navigate. The balance of risk and opportunity is shifting more towards risk. Indeed some have already proclaimed the end of the post war global era.
As if this were not complicated enough we now have the Trump effect which has added another layer of uncertainty to our external environment.
It is far too early to come to firm conclusions about the Trump presidency but nor is President Trump a complete unknown. There are some tentative conclusions we can draw.
First, it is wrong to say that President Trump has no policy coherence at all. There is a thread of consistency in what he has been saying for the last several decades, especially in his populist, America first stance, his rejection of multilateral trade agreements and even bilateral agreements he believes sell US interests short , his focus on border control and the scant priority he places on the liberal international order, including the global trading system.
Second, not everything Mr Trump said on the campaign trail is likely to be reflected in policy. He has, for example, walked back considerably on his dismissive comments about alliance relationships and NATO.
Third, like most US administrations, President Trump’s will contain many voices: some orthodox, some populist, some ideological and some even revolutionary.
This makes it hard to predict what the settling point will be on any particular policy issue. It may be on some issues, like trade, President Trump will do what he says while on others he may turn out to have strong views weakly held and therefore open to change.
And fourth there is Mr Trump’s style and temperament. In the end these may prove more significant than any policy flaws.
The largest question about President Trump however is not about his foreign policy – important though that is – but his economic policy.
Will his proposed combination of tax cuts, deregulation and infrastructure spending fix America’s economic problems? The market seems to be saying yes; professional economists no.
But if President Trump’s economic policies work beyond the short term stimulation of a US economy which was already tracking better in the last years of the Obama administration, he will be forgiven a lot of foreign policy sins. Because in the long term the sustainability of US global leadership must rest on its economic strength.
And if Mr Trump succeeds in putting America first in everything and the US consequently stands as the undisputed global power, can he long avoid the burden of international leadership? When you are the strongest country in the world, international leadership may not be optional.
Where does all this leave Australia?
Let me draw out eight conclusions
First, the single most important determinant of our future prosperity lies with us. The trends I have discussed mean the world is going to be a much tougher place for Australia. So, on the economic side, we need to do everything we can to be as productive and competitive as we can.
There is nothing more important for our national prosperity and where we stand internationally than a politically deliverable credible national economic reform plan.
That plan should be premised on an open economy in terms of trade and investment and immigration. And it should play to our traditional competitive strengths in resources and agriculture as well as building up our services exports to take advantage of the growing Asian middle class.
It must deal with the challenges of technology as big data and artificial intelligence reshape the labour market. And it will also need to address debt and deficits and the hard choices around tax and energy policies.
Second, navigating the US and China is going to get harder for us. Not in the sense of being forced to make a binary choice but in terms of how the economic and the strategic come together.
Strategic competition between the US and China will intensify and, as it does, Australia may be required to take some strategic positions which attract China’s ire, even retaliation. Are we ready for that?
China is a vital economic partner for Australia. We will be much poorer without access to China’s market and Chinese investment. But Australia cannot avoid also facing up to China’s ambition to displace the US as the predominant power in Asia. It is an ambition which goes to the heart of our alliance with the US. And it is not an ambition we can separate from the one party authoritarian character of the Chinese political system.
Third, the US alliance will remain very much in our national interest and will survive whatever dramas the Trump administration brings. Without the alliance we would be less secure, have to pay much more for our defence and would be more vulnerable to pressure from other countries.
Retaining the alliance should not however be seen as defence on the cheap. The alliance is a deterrence multiplier but it does not exempt us from investing in a defence capability which maximises our self reliance. And a strong defence capability adds to our diplomatic heft.
Fourth, The Asian growth story may slow but it will not peter out. And even slower Asian growth offers huge opportunities for Australia. Not just in resources and especially agriculture, but also in services as long as we can ensure we are internationally competitive in the services sector: something which has not really been tested outside of education and tourism.
India and Indonesia, already high priorities, should find an even more central place in our Asian economic strategy. Both require sustained attention, not only because of their economic prospects but also as strategic partners.
India is the one country in Asia with the scale to match the China growth story. Getting there will not be easy, is far from guaranteed, will certainly be slower and less linear, but it is a prospect which requires a sustained and patient investment by Australia.
Indonesia, always at the front of our strategic thinking, should be a much larger part of our trade and investment strategy and under President Jokowi, whose primary focus is economic, the opportunity is there.
And for all its problems, let us never forget the economic weight of Japan and the greater space which its constitutional reinterpretation has created to build a strategic partnership with it
Fifth, as international risk rises, Australia should spread its trade risks. The Indo Pacific will rightly remain our primary strategic and economic focus but our trade and investment policies should also look for opportunities wherever there can be found: in Europe, the Middle East, Latin America and Africa. Australia may not be a global power but we do have global economic interests.
Sixth, we cannot give up on trade liberalisation and trade agreements. We should look to conclude bilateral agreements with Indonesia, India, EU, the UK and others.
The TPP may be dead for now but we should forge ahead with the Regional Comprehensive Economic Partnership (RCEP) negotiations and then a broader free trade area in the Asia Pacific.
The Trump administration may not want to be part of these arrangements but let us nevertheless leave the door open to the US.
Progress in Geneva on global trade liberalisation will likely be stuck without US leadership. But we will have to ride this out and ensure it does not do permanent damage to the WTO which for Australia remains an important institution
Seventh, we should not give up on the liberal international order, which was in trouble well before Mr Trump’s election.
Australia cannot buy or bully its way in the world so a system of international rules and norms matter. We have all been beneficiaries of a liberal international order, including those who complain that it is an order made in the image of the US.
Eighth, Australia should continue to help build stronger regional institutions in the Indo Pacific, especially a stronger East Asia Summit. Strong institutions cannot stop conflict but they can help to ensure that strategic competition does not spill over into confrontation.
Regional institutions can also keep pushing the boundaries of trade and investment integration in the region which both expands our prosperity and raises the cost of conflict.
Very importantly pan regional institutions offer a structure for engaging China, giving it more space to match its economic weight and signalling that containing China is a policy dead end.
Conclusion
As a continent, a nation and a society Australia occupies a unique position. We have never shed our strategic anxiety. But we have built a prosperous nation from modest even harsh beginnings. We have struck the balance between market and social obligation more effectively than most. We are open and outward looking society, and a successful multicultural community. Our trade patterns have proven to be responsive to new opportunities. We have forged strategic relationships that help compensate for the loneliness of a long distance middle power.
We may be a lucky country but we have also made our own luck. And we will need to draw on all these strengths and more if we are to effectively navigate through what looms as a very different world.