Photo of Mr Peter Varghese

Speech to the Committee for Economic Development of Australia – State of the Nation

Capitalising on the Asian Century

Speech by Mr Peter Varghese, Secretary of the Department of Foreign Affairs and Trade

24 June 2013

Progress

I would like, at the outset, to thank CEDA for inviting me to participate in this important conference. And to acknowledge the work it has done over many decades to promote an understanding of the challenges and opportunities facing the Australian economy.

I would like to begin by placing the Asian Century White Paper in the broader context of the progress that we have seen in the region over the last three decades and more; why it is important that we understand the scale and sweep of that progress and the efforts we must make to ensure it continues.

There is something seductive, and something very human, about the very notion of progress.

The thought that we can improve our lot, that we can "develop" as a society – through enlightened, rational policies – is a prominent feature of our history.

And our concept of improvement has extended well beyond the economic: to our social life, our philosophical perspectives, our access to education and health – all of the factors we might combine under the label "quality of life".

Over that period, in Australia and elsewhere, a society defined by increasing prosperity, high technology, longer education and better health has emerged, marked and defined by progress.

Incremental improvements in technology, in physics, chemistry, and almost every field of science, have made us, as communities and as individuals, more and more productive. Human prosperity has risen with rapidly increasing productivity. Our material wealth has grown, as our national economies have evolved.

Our understanding of ourselves has matured. Economic growth has delivered more power to people to understand and shape their environment, and their lives. A handheld phone, today, has access to as much information as that contained by the great libraries of the past.

Globalisation

Globalisation, too, is seductive.

Quite separate from the notion that our human societies are an improvement on the lives of previous generations, is our feeling – in the internet age – of unprecedented connectedness.

Before Facebook – or before the internet itself – it was hard to imagine a billion people connected together by anything, other than, in the case of China and India, nationality.

Today, the web, popular culture, trade, the constant churn of migration and our greater prosperity all seem part of the global commons, something binding us together.

But progress is not inevitable.

Nor is further globalisation. It isn't even new.

In 1995, Paul Krugman described it as a "late twentieth-century conceit that we invented the global economy just yesterday". Arguably, particularly in the wake of the Global Financial Crisis, we've only become more susceptible to that conceit in the 21st Century.

For people who have grown up knowing the peace and rising prosperity of the last decades, it can be hard to remember that the first golden age of globalisation is not our own, but that which began in the last part of the 19th Century, only broken by the First World War.

Nevertheless, in our time, the benefits of peace and stability have been powerful justifications for globalisation.

We've had the dramatic re-emergence of China as an economic superpower. We've seen the intimate intertwining of the US-China trade and financial landscape.

With continued technological advances, we have seen the increasing fragmentation of production networks. Nationality no longer defines all our goods and services. Regional and global supply chains better reflect the natural advantages of each economy in the supply chain. And in so doing, they maximise our economic welfare.

However, even in a time when goods and services are routinely developed and delivered across multiple national boundaries and different time zones, there is still scope for intensifying the integration of our national economies.

We all stand to gain from that. More progress – again, I mean the term in its larger sense, not as a proxy for economic gain – lies ahead, if we take hold of it.

But progress and globalisation can be interrupted.

If you look back through history, any number of domestic and international factors can play havoc with internationalisation, with trade flows and social and political links. Wars are a destabilising factor, of course. But domestic decisions – an isolationist trend, beggar thy neighbour policies or the rise or diminution of one or more centres of power – can have both an economic and a strategic impact.

As we grapple with the question of how we drive national success in the Asian Century, we need to guard against complacency and smugness. We have traditionally benchmarked our performance against that of other OECD economies in Europe and North America. But in the future, it will be our performance relative to that of the rising Asian economies that will impact most on our prosperity. It is a competitive world we live in, so we always need to build the competitiveness of our economy and realise new opportunities for our exporters and investors.

In the modern age, environmental factors, too, play a part. In a sense, the environment is the capital base of our economic life.

Maximising Opportunity in the Asian Century

For Australia, our prosperity is tied to that of our Asian partner countries.

That's why the Government has put such an emphasis on thinking about and advancing Australia's place in the Asian Century, on tying Australia more closely with Asia, as countries like China and India re-emerge as global economic powerhouses, and as Indonesia becomes a top ten economy, sometime in the near future.

Asia as a region has re-emerged as a region of first order economic and strategic significance in its own right.

Australia has already benefitted immensely from the transformations taking place across Asia – in China, Japan, Korea, India, Indonesia and so on, as regular attendees at CEDA conferences know well. Many of the other speakers at this conference will, I am sure, speak of the evolution of the mining boom and its implications for our national competitiveness and economy. Trade Minister Craig Emerson has spoken at length about the opportunities facing Australia as a result of Asia's transformation.

Right now, my department is leading a whole-of-government effort to develop country strategies out to 2025 for Japan, China, Indonesia, India and South Korea. As called for in the White Paper, we are developing a whole-of-Australia plan for better collaboration and engagement in the Asian Century.

If we are to truly plug into the opportunities arising in Asia today (and I mean opportunities for all of the countries in our region, not only Australia), we need to continually work on greater understanding of and engagement with our region. Making it easier to invest, do business within Asia; building education links, social ties and so on.

Government is – in this game – only one of the players. Our ability to integrate more closely with other Asian nations involves an effort on behalf of business, policymakers and the country as a whole. Learning Asian languages, travelling in the region, participating in product and service value chains that link our economies and societies closer together, and that grow regional prosperity.

For an example, look at the way the Australian and Indonesia chambers of commerce and bilateral business councils in both countries are working together to push reform under the proposed Indonesia-Australia Comprehensive Partnership Agreement.

Late last year they submitted a joint report to the two governments, with over 50 recommendations for both sides to consider through the negotiations.

Their recommendations are broad-ranging, spanning trade, investment and economic cooperation – and both the Indonesian and Australian Governments are currently working through them.

This sort of initiative shows how many in business, the wider community and government understand partnership and the link between economic reform, competitiveness, working together and prosperity.

And the link extends also to the strategic stability of our region because that is the bedrock for economic growth. Australian interests are best served by a stable balance of power in Asia, which encourages further economic integration, is inclusive and outward-looking.

That's why we pursue a foreign and trade policy agenda that seeks to establish strong partnerships in the region.

Minimising risks

An inclusive foreign and trade policy agenda that seeks to build and extend links among different countries is one of the core elements for our continued prosperity.

Our objective here is to maximise economic opportunity and minimise strategic risk.

For the first time in centuries, we face an Asian region in which a clutch of powers are simultaneously strong: China, Japan, India, Indonesia, and Korea, among others. The United States remains the central strategic player in our region. But the strategic challenge of our time is that, more and more, our relationships will be multidimensional: economic interdependence sitting on top of deeply entrenched strategic rivalry.

Now, economic interdependence is unquestionably a strategic stabiliser. It raises the threshold of conflict. But it does not always trump strategic rivalry. It would be naïve to see it as a strategic guarantor.

At the same time, multilateralism has become harder, putting immense pressure on the institutions we have developed to help maintain peace, stability and prosperity since the Second World War. The Doha Round has struggled. Climate change negotiations are yet to deliver the global action we need.

As well, in the years and decades ahead, there is no large Asian economy which will not face serious challenges. In the difficult time since the 2008-09 Global Financial Crisis struck, we have seen a lot of extrapolations of recent trends and straight-line projections, and a lot of implications drawn from them. But straight-line projections are usually unreliable because history rarely moves in such a linear way.

The reweighting of economic power in Asia will inevitably have strategic consequences. It will place greater pressure on the major power relationships in the region. The US-China relationship is undoubtedly the most significant in this regard. Those two countries are in some ways strategic competitors. But they are also economic partners with a strong mutual interest in the continuation of the current stable, peaceful international order.

We all have a stake in the success of that partnership. We have to ask ourselves what we can do – large nations and small – to help keep great power relationships stable.

Asia is where the template for the US-China relationship will be forged. It is where the interests of the United States and China – competitive and complementary – will need to be managed, harmonised and reconciled.

The primary burden of managing strategic stability in Asia will fall on bilateral relationships, and smaller networks of relationships among the major powers of the region.

But beyond bilateral relationships, regional institutions can also play an important supplementary role in helping ensure that a period of transition is not also a period of instability.

Rules and institutions are a vital support for and driver of our peace. They help us find common ground in preventing escalation, and in managing disputes that do arise. They help us realise a sense of common interest, and remain some of the best defences of our prosperity and security.

APEC, for example, has been an important vehicle for deepening regional economic integration, encouraging unilateral micro-economic and structural reform. It has helped our region share its experiences, and promoted good governance.

I've talked before about the weight we give to ASEAN in our thinking about our region. And about how much importance we place on the East Asia Summit, in both a security and economic sense.

Over time, we wish to see the EAS develop as the premier institution of the region with both a security and economic mandate. An institution which can help drive regional financial and economic integration and also build confidence, and nurture a culture of collaboration on security issues. The EAS also is a vehicle to discuss transnational issues like climate change, resource, food and energy security.

Australian trade policy

Trade policy is an essential part of our regional agenda. If the EAS is important to minimise strategic risk, trade policy is central to maximising economic opportunity

Over the past decade, Australia has concluded bilateral free trade agreements with the United States, Singapore, Thailand, Chile and Malaysia, as well as a regional FTA between ASEAN and Australia and New Zealand.

We are pursuing bilateral agreements with our other major Asian trading partners, including China, Japan, Korea, India and Indonesia.

As well, we are engaged in regional negotiations on two fronts – through the Trans-Pacific Partnership, and through the Regional Comprehensive Economic Partnership. From our perspective, both these negotiations are possible pathways to the realisation of APEC's long-term goal of a free trade area of the Asia Pacific.

But trade liberalisation isn't just about trade.

Yes, making trade with our major partners easier and cheaper helps drive national prosperity. More exports mean more income for Australian business. More imports mean – and certainly in the modern Australia that has done so well during the Global Financial Crisis – cheaper, more competitive and innovative products for Australians.

More broadly, operating in a globally competitive market makes us focus on what we can do best and most efficiently. It plays to our strengths. It creates jobs. And it has helped us focus on domestic economic reform that – in Australia's case – has paid dividends over decades.

We also need to utilise the opportunities created by economic reform in other countries. For example, in April, Australia became only the third country – after the United States and Japan – to have direct currency trading with China – a move that will help investment flows between China and Australia, as well as help further develop Australia's position as a leading regional financial market.

But more fundamentally, our trade liberalisation agenda is a key way of driving our international integration. Of helping foster a culture of inclusiveness and shared prosperity.

Trade agreements and economic partnerships have social, political and strategic dimensions.

Socially, they embed a sense of being part of our region. In the White Paper we identified the need to strengthen and deepen Australia's knowledge of – and ability to operate in – Asia. Languages, cultural awareness, these are the tools of Asian interoperability this century.

Politically, they build and deepen our ability to work together. They nurture a sense that, on each national stage, international cooperation is possible.

Our collective capacity for international cooperation is under stress as concluding complex multilateral agreements gets harder. We are seeing this in both the Doha round and climate change negotiations.

We need to find a way forward in an international order with more players, and a greater diversity of interests.

The old ways will not get us there. Agreements based on the principle that nothing is agreed until everything is agreed are getting harder to strike. New approaches are necessary which is why we are pursuing the plurilateral services negotiations championed internationally by Dr Emerson.

In all of this habits of cooperation are vital assets. Institutions like APEC have been important for facilitating trade and developing shared understandings on how issues might be tackled in trade negotiations. Both TPP and RCEP owe their origins to the long-standing constructive spirit of dialogue in APEC. And we expect both negotiations will contribute to a body of reforms that could rekindle a more constructive dialogue in multilateral forums like the WTO.

Conclusion

National success doesn't grow in a vacuum.

In any discussion about where a country is heading, it can be tempting to focus on domestic factors. They will be discussed extensively today. Productivity, infrastructure, investment in education and health, competitiveness – all are critical components of our national economy.

All politics it is said is local. But in a globalised world, for an economy like Australia, national success lies as much in our degree of internationalisation as in domestic factors. The strength of Australia's economy through the Global Financial Crisis would not have been possible in a nationally atomised world.

Australia is strongly committed to greater interconnectedness with Asia in the Asian Century. If we are to capitalise on the Asian Century – if we are to continue to make progress in developing our country and our people – we need to continue to progress economic reform and greater integration.

We recognise that reform is hard, and requires hard decisions. Often, the public has to be convinced of the need for change. But to stand still is to go backwards. The challenge for all of us – including throughout Asia – is to use our bilateral, regional and multilateral approaches, including in trade negotiations, to drive economic reform, lift productivity and enhance our international competitiveness.