Photo of Mr Peter Varghese

2013 Charteris Lecture

Foreign and Trade Policy Priorities

Peter Varghese AO, Secretary, Department of Foreign Affairs and Trade

25 November 2013

I’m grateful to the NSW Branch of the Australian Institute of International Affairs for their invitation to deliver the 2013 Charteris lecture.

The AIIA has contributed enormously over many years to a better understanding of foreign policy within the Australian community.  And looking around and seeing so many friends and former colleagues, it is reassuring to see there is life after the department, even if some question whether there ever was life within the department.

Tonight I wish to talk about the broad priorities of our foreign and trade policy. And to do so in the context of a global environment where power is shifting from west to east; where economic growth is reshaping strategic relativities and where the global multilateral system is under immense pressure.

But I want to begin with the Asian region and our evolving sense of where we fit into it.

The idea of Asia

For much of our history our idea of Asia was shaped by a sense of strategic vulnerability.

Colonial Australia began as a tiny, exposed settlement on the edge of an unexplored continent (at least one not explored by Europeans), and we’ve never completely let go that visceral sense of vulnerability. In the 19th Century, our fears were of the great European powers – France and Russia. But later the focus shifted to Asia, where it linked powerfully with notions of race and culture.

Henry Parkes, the father of Australian federation, talked about the “countless millions … who are within easy sail of these shores.”1

Alfred Deakin – whom we would today describe as perhaps our first Asia literate prime minister – writing a decade later: “From the far east and far west alike we behold menaces and contagion.”2

Amid our foundation documents as a nation, not a bill of rights, but the White Australia policy, seen then as a bulwark of our national identity.

What lay behind the White Australia policy – one of the first acts of the federal parliament – if it wasn’t our strategic vulnerability, melded with fears of cheap labour, woven together by the psychological appeal of Parkes’s “crimson thread of kinship”?

From Federation until the last few decades, Asia was seen as a region of poverty and instability – which, for the most part it was. Historically, we saw ourselves as a long way from our cultural roots and therefore vulnerable.

When Australia was part of the British Empire these anxieties were held in check by the strategic reassurance provided by the Empire’s might.  But even before the end of empire, Australians often fretted about how we would defend ourselves, perched at the edge of Asia and with limited military capability of our own.

But there is a paradox here:  Australia’s psychological anxiety sat side by side with a strategic reality which ought to be fundamentally reassuring. 

Yes – we have faced real, not imagined, threats:  the Japanese advance during the Second World War being the most prominent. 

But today many of those fears look hopelessly exaggerated, although in the context of the Cold War they were far from ridiculous. And since then we have developed a more nuanced sense of our strategic circumstances. And a better appreciation of our strategic strengths.

Our continental geography, for example, gives us strategic depth.  We have a security alliance with the world’s strongest military power. And importantly, these days Asia is more a region of opportunity than of instability.

The opportunity of Asia

Historically, Australia conceptualised its national defence as finding security from Asia.

That way of thinking about Australian security became obsolete in the dying days of the Cold War.

From that time onward, we have understood that Australia’s security must be found in Asia.  And since then Australian security policy has been more open to the principles of common security although we have maintained a healthy realism about where our alliance with the United States fits in because we must always deal with the world as it is, not how we wish it to be.

We now recognise the opportunities that abound in our region, and the balance of opportunity and risk looks very different today than it did in the past.  

There is today not just a sharper sense of the opportunities for Australia in Asia but also of the urgency that we build a comprehensive relationship with Asia.  And that we use this window of transition in the region – as the shifts in economic weight reshape the strategic landscape – to build habits of cooperation and inclusive regional institutions which can help ensure that the transition is a stable one.

This judgement has underpinned the drive – articulated through APEC and our regional engagement with ASEAN – to build economic prosperity in our region. Behind the push for the ASEAN Regional Forum, the first security component of our regional architecture. Behind our strong support for the East Asia Summit, and later, for the inclusion in the EAS of the United States and Russia, to ensure that we have the right membership for a forum which we see as important for managing the challenges to the security, stability, prosperity and well-being of our region. And behind our support for the ASEAN Defence Ministers Plus meetings.

Against this background, I would like to give you a sense of the size of the canvass on which we see Australia’s security future being painted – how our idea of Asia is continuing to evolve.

Strategic framework: the Indo-Pacific

The term Asian century is much overused.  But it is a useful shorthand to describe the re-emergence of Asia as a region of first order economic and strategic significance in its own right. It does not mean that this century will belong to any one country or region. Economic weight and strategic influence are becoming more dispersed. Some of the poles of power this century will be outside Asia. But the size of Asia’s population means that it is likely to be unique in the scale of its economic growth.

The industrial revolution leap-frogged population as a measure of power. Today, population is back in the mix and the combination of a large population and a modernising economy is bringing Asia back to the preeminent place it had in the global economy until the end of the eighteenth century.

Our post war strategic and economic interests accustomed us to thinking about Asia as predominantly the large and expanding economies of Northeast Asia, as well as our closer neighbours in Southeast Asia.

But we need to expand our concept of “Asia”. A new Indo-Pacific strategic arc is beginning to emerge, extending from India through Northeast Asia to Southeast Asia and the Pacific, including the sea lines of communication on which the region depends. 

The strategic importance of this broader region is being forged by a range of factors, including the growing size of the Indian economy.  The region also contains some of the world’s most active and strategically significant trade routes.  While the Indo-Pacific is still evolving as a strategic system, over time, Australia’s security environment will be significantly influenced by how this broader region develops.

The wider Indo-Pacific construct returns India to Asia’s strategic matrix.  It embraces great powers such as China, key players such as Japan – a lynchpin among our regional relationships – Indonesia and South Korea as well as the importance of individual ASEAN countries and the collective economic and strategic weight of an evolving ASEAN community.  And it recognises the strategically crucial role that the US plays in the stability of the region.

The Indo-Pacific also helps capture a sense of our own place in Asia.

Australia, after all, straddles both oceans.

Geopolitically, we have interests and affinities in the diverse sub-regions around us, from the South Pacific to South Asia, and from Southeast Asia to Northeast Asia.

With our distinct national culture and historical experience we are increasingly at home in a region that has a profusion of national cultures and histories. 

Dick Woolcott once described Australia’s ambition towards Asia as to be the “odd man in”.  Well, today we look less odd and certainly more in.

Now, Asia is a conceptual construct.  But our day to day diplomacy must deal with individual countries and institutions, not concepts.  And in putting together a framework for that diplomacy we must find the right balance between bilateral and multilateral relationships; between working within existing institutions and shaping new ones.  And it is in that context that I’ve said that I see Australia’s foreign and trade policy priorities through a lens that can be encapsulated in the faux mathematical formula: 6+2+N.

The six refers to the six key relationships for advancing Australia’s national interest: the United States, China, Japan, Indonesia, India and South Korea.  I’ll mention each in turn, but I must emphasise that I am not suggesting these six relationships are the only ones that matter.  Far from it.  But the combination of their own strategic and economic weight, their intersection with Australian interests and their potential to shape our strategic environment place them in a category of their own.

The United States has long been our primary security partner.  We haven’t just benefitted from the ANZUS Treaty, but from the zone of economic prosperity that the US has helped foster in our region.  The US, as the pre-eminent global power created the space in which the Asian economic miracle could occur.

If the US hadn’t given us security stability in Asia, it is very hard to imagine an environment in which the Asian growth story that we’re still living through could have occurred.  It continues to play that role.

While the margin of US power is inevitably declining as other powerful economies emerge, the US will remain the world’s strongest military power for decades to come.  And it retains a unique capacity for reinvention that will continue to drive the recovery of the US economy for years – just think of the effect of the shale gas revolution on US competitiveness and also its strategic posture.  We don’t – and would be foolish to – write off the United States, even if its more recent political dysfunction has dinted its international standing.

China’s economic growth has – I think it’s fair to say – been the single most transformative development in our region. What we see around us now in Asia is a clutch of Asian countries that are all simultaneously strong – Japan, Korea, China, increasingly India, and Indonesia. It has been a very long time – about two centuries – since Asia accounted for half of global GDP.

Now, China faces an immense economic reform challenge – reconstituting its economy in a way that favours domestic consumption over the export-led, fixed investment model that has served China so well since the 1980s. As was evident during the Communist Party’s recent Third Plenary, China’s leadership is keenly aware of the complexity of that challenge.  None of us should under-estimate how difficult it will be.

Japan is a country that matters hugely to Australia.  It is a vital economic and strategic partner.

Over the past decades we have seen Japanese growth at moribund levels, but we are now seeing signs that Prime Minster Abe’s economic policies, or ‘Abenomics’ are having some success in combatting Japan’s entrenched deflation and encouraging a return to growth.  A stronger Japanese economy is in our interest.  And, as with China and Korea, we are keen to see the early conclusion of a Free Trade Agreement which takes the economic relationship to a new level.

Indonesia has been the quiet achiever of our region.  And it is an achievement which has not received the credit it deserves.  In recent years we have not only seen Indonesia consolidate its democratic reforms, it has also made impressive economic gains.  Indeed, the Indonesian economy is already larger than Australia’s on a PPP basis, and it could be in the top ten economies globally within a decade or two. Alongside China’s transformation, Indonesia’s economic and political emergence has been a hugely significant shift for Australia.  We need to keep this bigger picture in mind as we navigate the current difficulties in the bilateral relationship.

India is a country that is increasingly important to Australia.  Its growth rates are slowing but it is already the world’s third largest economy.  As with China, there is a neat complementarity between the demands of a growing Indian economy and Australia’s capacity to provide resources and services.  There is also a growing convergence of our strategic interests.  Together with the shared values of liberal democracy and growing people-to-people connections - India is now our largest source of skilled migrants - this provides a solid foundation for a strategic partnership.

South Korea is a country with which Australia shares important security and economic interests as well as democratic values – there is a lot we can do together multilaterally. Since the Korean war, Australia and South Korea have stood together in time of need, and our strong and complementary economic relationship, has turned South Korea into our third largest export market.  Now our relationship is broadening into a genuinely strategic partnership.  This is a relationship that is going to matter more to Australia.

The “plus 2” in my formula refers to the two new multilateral institutions that have, in my view, the greatest potential to serve critical Australian interests: the East Asia Summit, and the G20.

The East Asia Summit represents a potential anchor for our region’s peace. Still in its early phase of development as an institution – it was only two years ago that we helped secure the US as a member of the grouping – the EAS stands to serve as a stabiliser for our region in challenging times.

The East Asia Summit has established itself as a forum for leaders-led discussion of pressing security issues, including the South China Sea.  Australia’s interests lie in working with our ASEAN and other like-minded partners to ensure the EAS continues to develop in this role.  The EAS will not be Asia’s NATO.  And nor can it replace the major power relationships which will set the strategic tone of the region.  But it can help manage some of the inevitable tensions among those major power relationships.

The G20 gives Australia a seat at the high table on global economic and financial cooperation. Unlike most multilateral institutions, the G20 contains an inherent alignment of ends and means. It has already played a vital role in global economic stabilisation during the Global Financial Crisis.

The G20 stands out as the most significant change to the architecture of global institutions since the creation of the Bretton Woods system after the Second World War.  It has proved its worth in crisis but now it must embed its standing as the premier global economic forum.  That will be a key objective of our term as chair of the G20 in 2014.  We will be looking to trim back the agenda to focus on a few key issues.  And also to find a format which gives leaders space to discuss issues freely and to maximise the value of a leaders-level meeting.

We are, of course, also strongly committed to the other multilateral forums that help to modernise and liberalise our global and regional economy. The World Trade Organization remains at the centre of those efforts, and newer groupings like the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership offer strong potential paths to new economic growth and reform – which will be a vital driver for Australia’s economy in the 21st Century.  And this year and the next, Australia also sits at the apex of the global multilateral system:  the UN Security Council.

The “N” of my formula refers to the neighbourhood – because if we don’t get our neighbourhood right, we get nothing right. For Australia it is particularly important that we provide strong leadership in our immediate neighbourhood, particularly in the South Pacific. We need to have constructive relationships with countries like Papua New Guinea, work with Fiji to restore democracy and find more creative ways of bolstering the economic viability of micro-states, including through closer economic integration with Australia.  In all these areas – and more – New Zealand is our close partner.

Development assistance is of obvious importance to our neighbourhood.  Australia will continue to be one of the higher per capita aid donors in the world, and we recognise the important role development assistance plays in the Pacific and elsewhere.

A high quality Australian aid program is fundamental to advancing Australia’s national interests. And under the Abbott Government, Australia’s aid program will be designed and implemented to support Australian foreign and trade policy.  That is why the Government decided to integrate the former AusAID with the Department of Foreign Affairs and Trade.

6+2+N is all about creating connections which help us advance our interests.  But this must go beyond what governments and businesses do.  It must also embrace connections at the community level.

The New Colombo Plan – a high priority of Foreign Minister Bishop - is one initiative that will help further this objective and help cement our place with some of our key partners. It is a scheme that will encourage young Australians to spend part of their formal education in Asian institutions – building our understanding of our key Asian partners, and forging links and contacts between us for the future.

The challenges of multilateralism

My remarks so far have – with exception of the EAS and G20 – focussed on bilateral relationships.  That is of course entirely appropriate since bilateralism is the bedrock of our diplomacy.  But I want also to say something about the multilateral challenges Australia faces because Australia will always be a country which a stake in effective multilateralism, since we can neither buy nor bully our way in the world.

Today, the global multilateral system is under intense pressure.  We need it more than ever but it is getting harder to find agreement.

Part of the problem is numbers.  The number of participants in the international system has grown dramatically – from 51 members of the UN in 1945 to 193 members today and from 23 members of the WTO’s predecessor organisation (the GATT) in 1947 to 159 members of the WTO today.

The international system is showing its age.  Many of our structures were designed in the post-war world – and we just don’t live in that world any more.  There have been, and continue to be, major shifts in the distribution of economic weight and strategic power.  The multilateral system is used to giving developing countries differentiated treatment in trade and other negotiations.  But how much sense does that make today when we are dealing with some developing economies that are in the top twenty economies?

This goes to the heart of a basic tension in global multilateralism:  the mismatch between national power and global democracy.  Global multilateralism rests on the equality of states.  But power resides with the handful of states with the strategic and economic reach to shape events.  The story of multilateralism is the constant quest to expand the reach of the former and constrain the raw power of the latter.  It works best when states with power accept that their broader interests are served by a system of international rules and norms which apply to all.

The current multilateral system is largely an invention of the United States and a clutch of Western European countries.  But this is changing, and changing dramatically.  The emergence of new powers in a multilateral world, the increasing pace of globalisation, the influence of non-state actors and the massive wealth transfer from the West to the East have altered the dynamics fundamentally.

Emerging powers are no longer willing to accept outcomes which they perceive do not take their interests into account.  Some do not share the core values and interests of Australia and other Western countries.  Some favour state sovereignty over individual rights, and so are wary of interventions in national affairs.  Some favour a greater role for the state, and have shown little interest in taking a leadership role on the global stage.

The multilateral system’s ability to deliver coordinated results is in decline as effective action no longer rests in the hands of a few relatively like-minded states, but requires cooperation from an increasingly diverse and more competitive group of states.

Historically, the US saw broad-based multilateralism, and the edifice of global public goods, as squarely in its national interest.  This was unusual to say the least.  There is no historical precedent for the global superpower to define its interests as best served by a system of multilateral rules underpinned by the ideal of global public goods.  For a country like Australia the post war world would have looked very different – and much for the worse – if the US definition of its interests had been more narrowly framed.

The future of multilateralism

What are we to do in the face of the stresses we can see on our international order and the institutions of multilateralism?

The way in which the stalemate in the WTO has driven trade liberalisation significantly into the territory of bilateral, regional and sector-specific reform may well be a model we can apply to other contexts.  The Trade in Services Agreement, with current membership, could cover more than 70 per cent of global services trade, worth US$3.3 trillion a year.  Significantly, it is designed to not only deliver services liberalisation to existing members, but also – potentially – to set the standard for a future WTO negotiation.

The TPP offers another model.  It is a regional, rather than a global negotiation, but still, a system that relies on countries which see the benefits of ambition banding together, and allows other entrants to come on board when they are willing.  That final point is critical – we don’t want to see the emergence of exclusive blocs.  Rather, we want the benefits of progress to be available to all countries, such that even those not involved at the start of a negotiation can ultimately sign on.

Climate change is a global problem.  But its solution may not be a grand bargain including all countries.  We should also look at alternatives that have more scope to deliver actual emission reductions – for example, a greater focus on practical mitigation initiatives and the legislative and regulatory frameworks in the countries that are the greatest polluters.

Here is another paradox of multilateralism:  unilateral steps can often have large multilateral consequences.  We all, for example, want a global agreement on climate change and we all hope it can be agreed by 2015.

But consider this.  If the US and China were to take serious unilateral steps significantly to reduce carbon emissions it would cover something like 40 per cent of global emissions – and exert a powerful gravitational pull on what the rest of the world may be willing to do.

My point is this:  In trying to find solutions to our most pressing global problems, we have to keep an open mind, and be prepared to consider work-arounds.  The global solutions we find may or may not be global multilateral ones.

We have to balance our desire for universality and common agreement with our interest in progress in the company of those nations who share our views and are willing to act.

Conclusion

Let me conclude this survey of the priorities and challenges of Australian foreign and trade policy with these observations.

Foreign Minister Julie Bishop recently described the meta challenge of Australian foreign and trade policy as maximising economic opportunity and minimising strategic risk at a time of transition in the geo-politics of our region.

Maximising economic opportunity means maximising our economic diplomacy:  concluding bilateral Free Trade Agreements, pushing regional trade arrangements such as the TPP and RCEP; resisting protectionism, reinforcing the trade liberalisation and facilitation which has been so crucial to the Asia Pacific success story, and encouraging the economic reforms upon which the sustainability of Asian growth ultimately depends.

Minimising strategic risk means building strong relationships among the major powers of the region; shaping strategic behaviour through forging a consensus on core principles including resolving disputes peacefully and consistent with international law; building regional institutions which reinforce the value of dialogue and the careful management of disputes.  These are the big challenges for Australian foreign and trade policy and how well we address them will be crucial to our future security and prosperity.