Australia sleepwalking into an economic and strategic mess

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Author: Tom Westland, ANU

Australia’s first national election since the start of the COVID pandemic is now underway. Before the Omicron wave of COVID extinguished the country’s pandemic good luck, the incumbent Liberal-National Party Coalition government was clearly hoping for a COVID election in which it could cash out Australia’s comparatively good performance in votes. As the new variant tore through an overconfident and underprepared country, the likelihood of a resounding re-election of the Morrison conservative coalition government began to look less certain, though it still remains a strong possibility.

The shambolic handling of Omicron — born of an obsession with day-to-day crises and a lack of hard thinking about looming and long-term challenges — has parallels elsewhere in Australian policymaking. The country belatedly committed to net zero carbon emissions by 2050 but has no credible policy mechanism to deliver on its promise. The pandemic put the hammer to Australia’s education export market — its fourth largest pre-pandemic export after iron ore, coal and natural gas — with no comprehensive government plan to get it back on its feet.

The policy somnambulism is most evident in an area that rarely attracts attention by either the Australian media or voters: foreign policy. The fireworks of Australia’s decision to cancel a major submarine contract with France and sign up to a new defence arrangement with the United States and the United Kingdom distracted from a more worrying reality: Australia has no framework, nor even the makings of one, to help it navigate the tectonic political shifts taking place in its own backyard.

As the ability of former colonial powers like the United Kingdom and the United States to dictate terms in Asia has waned and China has become more assertive in its regional dealings, Australia’s ability to chart its own course in Asian affairs has been tested.

When two superpowers are vying for the upper hand, bilateral conflict and resolution can equally end up harming smaller powers. There is no better example of this than the US–China trade war and its ‘resolution’ in the Phase One trade agreement between both powers. Because of the interconnected nature of trade in the region, the tariff rises threw a wrench in the Asian regional economy. When President Donald Trump and President Xi Jinping came to an agreement, it took the form of obscenely mercantilist ‘managed trade’, at the expense of the two superpowers’ other trading partners including Australia.

Elsewhere in the West, the notion of ‘decoupling’ from the Chinese economy has gained support among hawkish commentators. The theory goes that delinking from China economically will reduce the likelihood that China could try to use economic coercion for political ends. The hard economic calculus shows that the costs far exceed the benefits even for countries that are not as economically entwined with China as Australia. Decoupling from China would cripple the Australian economy. China has become the most important engine of growth in the broader Asia-Pacific region and globally.

While Australia is pursuing a free trade agreement with India, no economically literate person believes that it could replace China as a market for Australian exports for some decades, even if the deal were much more liberalising than it will be. Whatever Australia’s political disagreements with China, profound as they are in some areas, it has no realistic option but find a way to deal with them without risking its economic relationship not only with China but with all East Asia with which it is deeply interdependent

Australia is not alone in this dilemma. For its Southeast Asian neighbours, the problem is not a new one. For much of the Cold War, countries like Thailand and Singapore developed economic links with communist China while maintaining strong defence ties with the United States. Even Australia famously kept open wheat and steel trade with China. Providing a diplomatic ‘buffer’ to manage this balancing act is one of the underappreciated functions of ASEAN, an arrangement in which each state can maintain its sovereignty while speaking with a collective voice on major questions of economic and political security in the region.

Australia cannot join ASEAN, but it can re-prioritise its relationship with the body. The most important step Australia could take towards building a deeper diplomatic engagement with ASEAN would be to help put meat on the bones of the Regional Comprehensive Economic Partnership (RCEP) agreement, that gathers together ASEAN along with China, Australia, South Korea, New Zealand and Japan. RCEP entered into force earlier this year. Not only does it represent the largest free trade area in the world, it also incorporates a substantial economic cooperation component that provides a foundation for political cooperation.

This part of the agreement has the potential to make RCEP one of Australia’s most diplomatically important trade agreements outside its membership in the WTO.  While it’s clear that the member countries want economic cooperation, the details of how the cooperation will occur are yet to be fleshed out. Australia should offer whatever help, organisational and financial, it can. It can take the lead in jumpstarting this discussion, opening up dialogue with partners in the region to find common ground on the detail and priorities in the RCEP cooperation agenda. Indonesia, the largest economy in ASEAN and the host of this year’s G20, will be vital to this effort.

The agenda is a long and not a particularly easy one to prosecute. Observers might be forgiven for wondering whether the political will exists — on either side of Australian politics — to begin a mature discussion about the nation’s strategic direction in Asia. Unless that will is found, Australia risks sleepwalking into a long geopolitical and economic malaise.

Tom Westland is Research Fellow and Research Director of the East Asian Bureau of Economic Research at the Crawford School in ANU’s College of Asia and the Pacific.

The post Australia sleepwalking into an economic and strategic mess first appeared on News JU.

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