Monday, November 14, 2016

The economics of Australia’s security in Asia

Australia’s economic partnership with Asia is bigger than that with any of the three major centres of world economic power, bigger than with Europe and North America combined. Over three-quarters of Australia’s commodity exports already go to Asia, and it draws close to 70 per cent of its imports from this same region. It’s a huge relationship — almost three times the share of Asia’s importance in the world economy.

In the past, the relationship with Asia has focused on commodities, but now it extends well beyond this. It is not just a relationship that sees vast quantities of materials shipped out of Australia, with Australia sourcing manufactures and capital from the region in return. It includes services trade — professional services, education, tourism — and of course migration. With the new model of consumption-led, rather than investment-led growth in China, the trend is accelerating.

But resources will remain central around the steady trend to diversification. The recent joint study of the future of the Australia–China relationship, for example, shows that while the share of resources in total export trade will likely decline a little from its current 70 per cent, it will continue to account for more than 60 per cent a decade hence. What’s more, Australia’s share in China’s iron trade has risen from around 40 per cent to over 60 per cent, and import supplies of iron ore are increasing their share in total consumption of iron ore as high-cost domestic suppliers withdraw in a more intensely competitive international market.

This economic relationship with Asia also has core strategic importance to both sides. Australia supplies well over 50 per cent of Northeast Asia’s externally procured strategic raw materials, and is a crucial element in the region’s economic security. Asia is heavily dependent on overseas supplies for strategic raw materials and energy, and Australia is the single largest contributor to that. It supplies a quarter of Japan’s energy needs — more than Saudi Arabia — despite the fact that it does not export any oil.

That is one reason why Asia takes Australia seriously. It’s a crucial element in Asia’s security in terms of strategic resource and energy supply; it is a role that is immensely important to the economic and political security of the region and a role of huge responsibility.

The relationship is also a critical element in Australia’s prosperity and political security. Australia’s economic relationship with Asia can, from this perspective, be viewed as a grand contract between Australia and the region — Japan first, then Korea, now China and next India — that secures reliable supplies of strategic resources and energy commodities through competitive international markets in return for political security with the region.

Australia’s ‘grand deal’ with Asia was built on the development of the postwar relationship with Japan and is entrenched in a range of agreements, understandings and arrangements now in place with Japan and with the region. This is the first and most fundamental dimension to keep in mind when thinking about the economics of Australia’s political security in Asia.

China, of course, has a different political system and does not belong to the same military security framework as Australia. The China relationship has been fashioned within a regional and global set of economic arrangements and institutions, including the WTO and IMF as well as the G20 group to which Australia also belongs. But it is outside the framework of the alliance relationship with the US that provided reassurance as Australia opened up the relationship with Japan after the bitterness of the Pacific War. This special characteristic of the relationship with China makes the security aspect of it even more important than with the rest of Asia. Its economic context, nonetheless, is the huge economic relationship there is between China and United States.

A second important perspective on Australia’s relations with Asia to keep in mind is that Australia is actually an intensely East Asian-oriented economy. It has more of its trade and other economic relationships with the East Asian region than any other country in the world, including all of the countries in East Asia itself. So East Asia is an absolutely critical element in Australia’s own external economic security.

Australia’s economic strength and prosperity are thus built upon its integration into the Asian economy, now the most important part of the international economy by any measure.

The political security dimension of the rise of China and its huge role in the regional and global economy — almost half of Australia’s exports to Asia now go to China, and China is the largest economic partner of almost all the East Asian economies — has become an increasing object of concern, most especially because of tensions around territorial claims in the South China Sea.

In this week’s lead essay, Paul Hubbard points out that ‘it is wrong to frame [Australia’s economic and political choices in this context] 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’.

Australia’s economic policy settings and institutions — including its robust financial system and floating exchange rate — act as shock absorbers and give the economy flexibility and resilience. Australia sailed through the Asian financial crisis, despite being locked into Asia, and has managed the end of the commodities boom so far despite the collapse in the price of iron ore, its largest export to its largest market. For any who think that Australia may be too economically dependent on China, trying to artificially shift that will only be achieved at substantial cost to economic strength.

Australia embraced China’s openness and reform as a critical factor in regional prosperity and stability. China embraced the partnership with Australia as a crucial part of its opening policy, and Australia assumed a key role in China’s foreign economic strategy. This path-breaking partnership opened market-based resources trade, foreign investment and regional cooperation with China — leading to positive engagement with China in APEC and working together on China’s accession to the WTO. Australia and China have since worked to strengthen the regional economic order to secure the framework of political confidence and security necessary to economic prosperity. Economic engagement has furthered both Australia’s and China’s security interests.

Where risks appear to specific security interests, as Hubbard suggests, the solution is not to shut the window on prosperity, but to use the gains from economic strength to bolster security preparedness: a richer country can afford to buy added protection. Economics and security are not a simple trade-off but instead can act to reinforce the other.

The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel, Amy King and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.


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