Julie Bishop: Address to the Lowy Institute
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Julie Bishop: Address to the Lowy Institute

On 20 June,  Hon. Julie Bishop MP, Minister for Foreign Affairs and Deputy Leader of the Liberal Party, addressed the Lowy Institute on Australia's foreign policy and economic diplomacy.

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Executive Summary

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Today I will set out the important role of foreign policy within the Coalition’s overall national economic plan and I will focus particularly on our approach to economic diplomacy.

By way of background, I note that it is often said that in most areas of Australian foreign policy there is a level of bipartisanship.

Both sides of politics believe in a confident outward looking Australia, as we promote our interests overseas.

However, there are key differences in approach that have a major bearing on the way in which Australia is perceived abroad, and in how we leverage our influence to best effect.

Broadly speaking, there are two aspects to the practice of foreign policy.

The first is to shape developments to our best advantage, such as agreements and treaties with other nations to promote our economic and trade, defence and security, and cultural interests.

This creates a framework to deal with the second aspect, which is responding to events over which we have little or no control, particularly in the early stages, such as natural disasters, pandemics, conflicts, terrorism and economic crises.

The Turnbull government’s approach rests on the proposition that Australia’s continued prosperity and security cannot be taken for granted and will depend on how well we engage regionally and globally.

For no government can long afford to close its eyes to how the world is changing.

It is vital that we are attuned to trends and changes as they occur, and to the best of our ability, anticipate changes, so that we are better equipped to respond wisely, or not at all.

Either way, the consequences for Australia can be enormous.

We are aware of the impact of globalisation and interdependence, and the prosperity that has brought to Australia and to our region.

Less well understood is what economic interdependence will mean for Australia, especially as the commodity boom gradually recedes.

Australia is the 12th largest economy in the world. We have not had a recession for a quarter of a century – in fact we are in our 25th year of continuous economic growth.

The strength of the global economy will continue to go through cycles, however there is one thing about which we can be certain.

The competition for capital, access to markets and even labour will be increasingly intense.

This is happening because the economic barriers that once existed between countries are crumbling.

Take for example our major trading partners – Japan is negotiating or has concluded 24 Free Trade Agreements with other countries, China 23, Singapore 32, Malaysia 22.

Australia has signed, including the Trans Pacific Partnership, 13 and we are negotiating at least another 6.

Coalition governments have been responsible for virtually all our free trade agreements, including with Singapore, the United States, South Korea, Japan and China.

We are creating a vast network to liberalise trade and as an export oriented market economy of 24 million people, our prosperity and standard of living depends on our ability to sell our goods and services overseas.

These are all high quality agreements and with China, Japan and South Korea as our largest trading partners in Asia, give our exporters greater access to a market place of around 1.6 billion people.

Direct investment is the lifeblood of any economy and these free trade agreements also enhance investment opportunities for Australia.

The consequences of the slowing of the availability of capital in the United States and Europe during the Global Financial Crisis, are still being felt today, as the effects work through the global economy.

It is worth noting that since 1992, there has been an average gap of about 4 per cent of GDP between what we save as a country, and the amount we invest directly to grow our economy.

Additional capital, equivalent to around 4 per cent of GDP each year or around $70 billion, has come from overseas.

Capital can be described as both fickle and demanding, or at least those who hold the purse strings on investment decisions may be so described.

Capital goes where it receives the best return, and takes flight when something better comes along or the investment environment becomes less favourable.

If we remain an attractive place to invest, foreign capital comes into the country, creating new jobs and opportunities for Australians.

Likewise, Australian firms and individuals will invest more of their savings in our economy, rather than overseas, if they believe the return here is better than that achieved overseas.

The point is we cannot force foreigners to invest in Australia, and we cannot force Australians to invest domestically.

This is the nature of the free and open markets to which we are committed.

So it is important for our future prosperity that we ensure the policy settings in Australia make us as competitive and attractive as possible to investors.

This is how we have grown our economy continuously for 25 years – a feat unprecedented for any advanced economy over the past five decades.

The top five sources of direct foreign investment into Australia by capital stock are the United States, Japan, Singapore and European countries.

These advanced economies are also the major sources for direct investment throughout Asia – meaning our economy is competing with Asia as an investment destination. China is now our 6th largest investor.

We have done well over the past few years although there are challenges ahead.

If you look at where foreign investment in Australia has gone over the past five years, almost 40 per cent went into the mining and resource sectors.

Now this is not surprising given that we are a minerals and energy superpower and there was a commodities boom.

However, in 2015, foreign investment into Australia was at its lowest level since 2005.

The decline is almost entirely due to falls in the value of investment in the mining sector which fell from $51.2 billion in 2013 to $15.3 billion in 2015.

This is not a cause for alarm.

It is the entirely predictable result of the structural slowdown of capital investment in China, as our largest trading partner transitions towards a more domestic consumer-driven economy.

However, it does mean we must adjust and adapt and be agile, as the Coalition has emphasised and as the Prime Minister has stated on more than one occasion, and create a broader based and more diverse economy.

We do not seek strong macro-economic numbers for their own sake.

As economies in East Asia change, as China is doing, we need to reposition Australia to ensure another long period of growth and prosperity lies ahead.

Future Australian jobs, improving our standard of living, and servicing our debt levels, depend on it.

This is where the Turnbull government’s national economic plan including our innovation and investment agenda comes in.

The key is playing to our strengths and not those of other countries.

Like other fully industrialised nations, we cannot pretend the world is what it was decades ago and try to compete on cost of production, especially labour.

Labour costs in almost all of our major trading partners are significantly lower than in Australia.

Even in these countries, advanced robotics and other technologies are replacing human labour, driving the cost of production even lower.

China, Japan and Taiwan are investing huge sums in advanced manufacturing and robotics.

Taiwanese company Foxconn, the world’s largest contract electronics maker estimates that by 2020, around one third of its production will be performed by robots.

Even now, a single $30,000 robot can assemble almost 100 iPhones a day at a cost of less than $1 each phone.

There are currently almost a quarter of a million manufacturing robots in China alone capable of replicating around 20 manufacturing processes, traditionally performed by humans.

Manufacturing is getting cheaper and faster every day and even for jobs requiring a human element, there are lower cost workers numbering in the hundreds of millions in our region.

Moreover, Asia, America and Europe have become one vast and integrated production zone.

The iconic example is a single iPhone which is made from parts manufactured and assembled in around 20 countries, 12 of which are in Asia.

Huge transport ships have driven down the costs to less than 4 cents to transport one small part from one major port somewhere in the world to another major port anywhere in the world.

The globalisation of supply chains is relentlessly driving down production costs.

For us, trying to do what other countries can do at a fraction of the cost, is an unwise race to the bottom.

As a government, we can do a number of things to help our economy adapt and thrive in this regional and global environment.

This is where we offer a positive contrast with the other political parties.

First, we must have policies that encourage investment in the Australian economy, not discourage investment as Labor and the Greens are intending.

This is because investment is needed for economies to successfully transition away from older models of growth – in our case as the commodity boom subsides.

It is an established theory and an empirical fact: the more you tax an activity, the less that activity takes place. The converse is obviously equally true.

When Peter Costello reduced our company tax to 30 per cent, we were the 9th lowest in the 34 member OECD.

Currently, there are 27 OECD countries with a lower corporate tax rate than Australia.

Competition for Australian and foreign investment is truly global.

As investment flows out of our mining sector, we need a competitive taxation policy as we transition.

The lower the corporate tax rate, the better the immediate return on investment.

This equates to a larger capital pool for firms already operating in Australia to invest further.

It is one reason why we are proposing immediate company tax cuts for small businesses with a turnover between $2 million and $10 million, of 27.5%, then to 25% for all companies over time.

Labor is wrong to assume that investment and economic growth will not be affected by their policy of a higher company tax rate.

Second, when labour costs are a disadvantage compared to competitors, the best thing you can do is ensure that the cost of Australian labour is relatively low to the value of the product.

This is what all successful advanced economies must do.

In other words, we need to be smarter in how we do things and to take advantage of our intellectual resources.

We must embrace our human capital. The greatest natural resource that Australia has is the creativity and innovation of its people.

That is why we have a $1.1 billion National Innovation and Science Agenda:

  • offering incentives for start-up companies operating in cutting-edge industries or utilising advanced technologies,
  • providing tax breaks for start-ups,
  • encouraging collaboration between the private sector, our research agencies and universities to commercialise ideas; and
  • focusing on acquiring STEM skills – science, technology, engineering, mathematics.

We must embrace creativity, innovation and enterprise.

Now we can be justifiably proud that there are around 30,000 Australians in Silicon Valley.

Many go there because of the supportive environment for start-ups or early stage capital funding.

There are also clusters of innovative people and firms that feed off each other in a virtuous and creative cycle.

Now while it is not possible to recreate Silicon Valley in Australia, we can seek to emulate parts of that environment and entice our best and brightest back here, or keep them here in the first place.

In my own portfolio, I established the innovationXchange, which identifies, trials and if successful, scales up solutions to seemingly intractable aid and development problems.

Our aim is to collaborate with private sector partners to ensure innovation becomes intrinsic to the delivery of the whole aid program.

We have brought together innovative and creative thinkers from across the public and private sector, from the World Bank to Google, and we have already partnered with Michael Bloomberg’s philanthropic arm to undertake a ground-breaking big data project for better health delivery in our region.

The innovationXchange is already identifying efficient solutions that will impact on our aid program and outcomes for many years ahead.

Likewise the Coalition’s economic plan embraces innovation in our defence industry.

Our comprehensive defence plan is not only about our national security needs and capability, but also investing more of our defence budget in Australian industry – with a fully costed, fully funded plan that aligns strategy, capability and resources.

This will support and sustain a growing local defence industry, increasing the capacity for local Australian firms to export to like-minded countries with shared strategic interests, especially in our region.

A dozen offshore patrol vessels will be built here in two years’ time. After that, the building of nine Future Frigates will begin. Then we will start construction of the first of 12 advanced submarines designed specifically for Australian conditions.

This will be our single biggest military capability investment in peace time history.

These projects will also drive jobs, growth, advanced manufacturing and innovation across the public and private sector for decades.

In contrast to our continuous build philosophy, I point out that Labor did not commission a single defence vessel to be built at an Australian shipyard during their entire six years in government, creating the infamous valley of death to defence industry jobs.

The third element of our economic plan addresses the competition for markets, and the government will ensure Australian firms and individuals compete on a level playing field, if not a privileged one.

The FTAs we concluded with China, Japan and South Korea are all about providing our exporters with advantageous or at least equivalent access as our competitors.

Independent modelling has found that these FTAs will boost our GDP by $25 billion over the next two decades. That equates to each household being $4,000 better off.

The benefits for Australian firms are immediate and real, and will increase over time.

As I travel around the world, it is becoming increasingly apparent to me that the brand ‘Made in Australia, Produced in Australia, Manufactured in Australia’ is synonymous with quality.

For example, the growing Chinese middle classes need our food, and actively prefer that it is sourced from our relatively pristine environment.

Tariffs for our dairy, beef, lamb, wine, horticulture and seafood exports have been completely eliminated.

For dairy foods company Bega, the FTA with China has triggered even more interest for its products on the back of a $100 million UHT milk deal with the Chongqing General Trading Group.

I was down at Bega the other day and they were waxing lyrical about the opportunities the China Free Trade Agreement presents to them.

Wine makers like Warren Randall of Seppeltsfield has described ChAFTA “as the single most important development in wine marketing” in the 40 years he has been in business.

An ageing Chinese population can look to us for services. The FTA opens up opportunities for Australian private hospital providers such as Ramsey Healthcare and for our aged care providers.

Our FTA with Japan is the most ambitious trade deal Japan has ever signed with another country.

When fully implemented, more than 97% of Australian exports will enter Japan completely duty free or with preferential access.

Tariffs on many agricultural exports will be eliminated.

Tariffs on our beef will be halved.

Our services sectors will gain unprecedented access to the lucrative Japanese domestic economy.

Likewise, almost all our export tariffs with South Korea will be eliminated under that FTA.

Grove Juice in southern Queensland has now sold almost 100,000 bottles of orange and apple juices into the Japanese and Korean markets.

The 24% tariff on cherries to Korea was eliminated under the agreement and a cherry grower in Tasmania has reported a 30-fold increase in cherry exports in the months following the signing of the Korean agreement.

Last month, we concluded a Comprehensive Strategic Partnership agreement with Singapore – an advanced and innovative regional economy with whom we have much in common.

Our aim is to have as close an economic relationship with Singapore as we do with New Zealand.

This partnership will lead to even closer collaboration on the commercialisation of research between our agencies, universities and private firms.

We are exploring joint investment opportunities in sectors such as food and agriculture in Northern Australia.

We are promoting mutual recognition of standards and qualifications so our professional and other service firms can operate in the Singaporean market.

Importantly, we are not resting on recent achievements.

We are negotiating further export agreements with India, Indonesia, the European Union, the Gulf countries and a number of Pacific nations.

Now it will not escape you that in an address about foreign policy, I have spoken primarily about economics.

Just as the object of traditional diplomacy is to secure peace and security, economic diplomacy is designed to promote our prosperity and opportunity.

One of the first things I asked of our diplomats when sworn in as Foreign Minister was to develop business plans in the nations where our embassies and high commissions are located – corporate business plans to enhance the economic ties between the host country, wherever situated on the world map, and Australia.

These business plans have been a great success and I was pleasantly surprised at the level of enthusiasm and the quality of the plans, which include milestones and measurable outcomes on increased trade and investment.

We have also expanded our overseas economic and diplomatic presence with the addition of 8 new posts, and funding for 3 more – the largest expansion of our diplomatic footprint in at least 40 years.

So this is a central part of my portfolio as Minister for Foreign Affairs and I see my role as no less relevant to the Turnbull government’s Jobs and Growth Plan as other Ministers in charge of domestic economic affairs.

Investing in Australia’s future generations is also an important part of Australia’s cultural and economic links with the Indo-Pacific.

By the end of 2016, our New Colombo Plan, which we established in 2014, will have given more than 10,000 Australian undergraduate students the chance to live, study and undertake work experience in over 35 locations in our region.

Our students get to know their host country, learn the language, understand the people, and build networks and connections and return with new insights and perspectives into Australia’s place in the region.

Just as enhancing prosperity is a fundamental aim of our foreign policy, so too is national security.

Greater interdependence and integration between economies and nations means economic or strategic turmoil in one place is likely to have direct consequences for other nations.

Recently Prime Minister Turnbull described the United States as the irreplaceable anchor to the global rules-based order. No other country can take on this role.

Defending such an order is not aimed at any particular country.

It works to ensure competition is regulated and takes place according to a set of rules and processes that enhance stability and security.

Every country which has risen within these rules has benefitted enormously – including countries that are allies of the United States – Japan and Australia, and those who are not, such as China.

This is why the Coalition has strongly reaffirmed the importance of both the role of the United States and the ANZUS alliance.

It is to be noted that Labor’s political partner the Greens have taken a different approach.

While there is broad bipartisan support for the Australia-US relationship, the great difference between the Coalition and Labor comes down to execution.

Strategic architecture requires constant attention, effort and resources in order to endure.

In our region, bilateral security relationships between the United States and its allies – and between like-minded countries – form the backbone of such architecture.

The advances in our strategic and security partnerships with countries such as Japan and Singapore over the past three years reinforces an order which is overwhelmingly in Australia’s and the region’s interest.

Additionally, and for the strategic order to survive and evolve, other countries need to carry more of the security burden.

We are doing just that with the plan outlined in the 2016 Defence White Paper which accepts our fair share of that work.

While Labor drove defence spending as a percentage of GDP to its lowest levels since 1938, the Turnbull government is committed, unlike the two previous Labor governments whose defence blueprint was never funded, to invest real and credible funding to back our strategy.

I remind Labor of the words of former Secretary of Defence, Sir Arthur Tange, “a strategy without dollars is not a strategy.”

Hence, our plan to increase defence spending to 2 per cent of GDP.

Ladies and gentlemen.

There are significant regional and global economic and strategic challenges ahead.

Continued prosperity and security is never guaranteed or easily achieved.

Australia’s brightest days are ahead of us if we evolve and we adapt.

The Turnbull government has an economic and security plan to achieve just that.