Sunday, November 13, 2016

Australia’s China choice is not between security and prosperity

If strategic rivalry between China and the United States escalates, Australia will face uncomfortable choices that could leave one or both partners unsatisfied. But it is wrong to frame this as a trade-off between national security and economic prosperity, as if strategic strength were born from economic pain. National security and economic prosperity are both vital national interests and deeply symbiotic. A stable international order underwrites economic prosperity; international economic engagement supports a stable order.

Unfortunately, economists and strategists have trouble talking on the same terms. The starting point for economists is usually an abstract model that assumes the security infrastructure and norms needed for markets to thrive. If economists think about armed conflict it is usually as a ‘tail risk’ — potentially catastrophic, but highly unlikely. But take away a stable national, regional or global order and the business and commerce that generate material prosperity will evaporate.

Security thinkers don’t sit around and assume thriving societies. Instead they are paid to detect threats and contemplate worst-case scenarios. Mitigating these requires clear thinking, well-resourced diplomacy and defence capability. This in turn depends on a prosperous economy.

Australia can afford multi-billion dollar submarines and joint strike fighters because it has a US$1.2 trillion economy. The Defence White Paper’s US$32 billion funding target for 2020–2021 assumes that the Australian economy will continue growing faster than the United States, the Euro Area or Japan until then. Achieving this requires deeper economic engagement with a fast growing Asia.

The complementarity of security and prosperity is not a new discovery. Former US president Lyndon Johnson’s 1965 Peace Without Conquest speech recognised that popular support for communism in Southeast Asia came not from the peasant’s fascination with Marxism, but rather from a desire for basic life necessities and an ‘end to material misery’. He proposed the creation of the Asian Development Bank to show that these needs could be met through markets and capitalism, without resorting to radical communism and violent conquest.

While the United States lost the battle against communism in Vietnam, it won the war for open markets and prosperity in Asia. The examples of Japan, Hong Kong, Taiwan, South Korea and Singapore convinced China’s leaders in 1978 to put aside the horrors of Maoism and adopt not just ‘reform’ but crucially, ‘opening up’.

Unbridled ideology was exchanged for market pragmatism. The result was the largest and most rapid movement of humanity from poverty in history. China stopped exporting international revolution and instead now exports 18 per cent of the world’s manufactured goods, in accordance with the rules-based order of the World Trade Organization. Foreign investment in and out of China puts assets at risk on both sides, giving owners a strong material interest in preserving peace.

Of course national interests go beyond the economy. Providing for the material welfare of citizens is only one of the legs of political legitimacy. States sometimes adopt goals that cut across the material welfare of their citizens. The first era of globalisation did not stop the imperial follies of the First World War. The following wave of fascism and totalitarianism subordinated individual welfare to the strategic interests of the state.

China’s policies after 1978 were calibrated to reassure the international community that its re-emergence would not follow this menacing route. Deng Xiaoping’s foreign policy mantra was to hide China’s strength and bide its time. Hu Jintao promoted China’s ‘peaceful rise’. Which is why strategists have reacted with alarm to a more assertive foreign policy under Xi Jinping.

What should economists make of this? Is China’s increasing assertiveness ‘a reality that seems to have bypassed many of Australia’s economic commentators’ as one strategic commentator suggests?

The new direction is worrying. Perhaps the risk of conflict is slightly less remote. But there’s not enough to overthrow the central scenario under which China continues to prioritise domestic and international stability. Just as regional stability serve Australian prosperity, so too does it serve China’s own vital economic interests.

The economist would also distinguish threats to international stability from more common but less catastrophic risks that hide among the cross-border movements of people, goods and capital. As Deng Xiaoping famously observed, opening the window invariably involves letting in a few flies.

The best line of defence against economic harm is competition in a well-regulated domestic market. Unlike Mao’s China, which hoped that correct behaviour would flow from correct ideology, the market system does not depend on the goodwill or benevolence of market participants. Where threats appear to specific security interests, the solution is not to shut the window on prosperity, but rather to use some of the proceeds to buy more and better fly-swats.

This approach allows Australia to choose both security and prosperity, putting the country in a more comfortable position to deal with both the United States and China.

Paul Hubbard is a doctoral candidate at the Crawford School of Public Policy, The Australian National University. He is currently on leave from the Australian Treasury as a Sir Roland Wilson Scholar, and is a former Fulbright Scholar in international relations


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