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Australia and the US: good friends can sometimes differ in global economic diplomacy

Australia and the US: good friends can sometimes differ in global economic diplomacy

It's not often that Canberra's senior bureaucrats provide a sustained critique of the functioning of global economic diplomacy. But Martin Parkinson did just that a week ago in the 5th Warren Hogan Memorial Lecture,  using the extra freedom he had while 'between jobs', after he was dismissed in December 2014 as secretary of the Treasury, and before he starts as the new head of the Department of Prime Minister and Cabinet.

Dr Parkinson's speech covers too much ground to be adequately précised here. Instead, let's pick up the central thread.

While the collapse of the Soviet Union left the US the dominant power economically and militarily, that dominance of the last quarter century has come to an end, replaced by continuing US pre-eminence accompanied by the rise of other countries, each individually weaker on each dimension of power, yet able to stymie or challenge, although not displace, the US on different issues at different times.

Washington sometimes found the right response for this new world. It recognised, for example, that the G7's peak role in global governance had to pass on to a more representative group, the G20. But China's rise has proven more problematic, with the US unable to reconcile its security concerns (and loss of overwhelming strategic dominance in Asia), with its desire to see China become a 'responsible stakeholder' in the US-designed global economic framework.

At the heart of the problem is American politics; specifically the power doctrinally-driven ideas in Congress have to thwart good policy-making. Here is Parkinson's example:

The US' often singular focus on global imbalances and exchange rate manipulation is widely seen as a reflection of domestic political imperatives ... a continuing tendency to criticise Chinese exchange rate policies will challenge the abilities of the US and China to cooperate to ensure that minimal global dislocation results from China's impending capital account liberalisation.

He cites three recent examples of mis-steps:

  • The failure of Congress to support IMF quota reform;
  • The US response to the Asian Infrastructure Investment Bank. In Parkinson's words: 'By making the establishment of the AIIB a contest of wills between the US and China — that China won — the US elevated the issue from a useful contribution to the global institutional framework to an issue of global leadership';
  • Going slow on the Trans-Pacific Partnership (TPP), about which Parkinson had this to say: 'putting aside the economic merits of the TPP, failure to have it completed and enacted this year will damage significantly perceptions of the US' ability to deliver on its own initiatives'.

So much for Washington's mistakes. What about Australia's? Parkinson writes: [fold]

Australia's recent history of economic diplomacy is, at best, a mixed bag ... Like the US, Australia hasn't always been as strategic as possible in pursuit of national interests — witness the strident opposition to the Asian Monetary Fund proposal, which damaged our credentials within the region for several years, and the opportunity missed to shape the AIIB with the initial rebuff of China, notwithstanding China's genuine efforts to respond to Australia's concerns.

On the TPP, he notes that 'it seems short-sighted to keep out the world's largest emerging economy from a core trading group, one in which it is the major trading partner of most if not all members'. Did Australia make this case forcefully during the closed negotiations? If not, why not?

Other Australian mis-steps go unmentioned; perhaps because Parkinson wouldn't see them as such.

On the 1997-98 Asian Crisis, Parkinson readily accepts that:

The US, through the IMF, was perceived as both misreading the nature and causes of the crisis and then orchestrating a response which advanced its own political and economic interests.

The response was a watershed in relations between Asia, on the one hand, and the developed countries and the IMF on the other. This is still felt today in Asia's focus on regional institutions and an unwillingness to even contemplate using IMF support facilities.

But he doesn't mention that within Australian policy circles at the time, the Reserve Bank (and perhaps others) had a much clearer idea than his Treasury colleagues as to what was going wrong with the Fund's program. Treasury strenuously opposed the RBA's attempt to influence the Americans and the Fund in what history has shown to be would have been the right direction.

The opportunity cost of this internal bickering is hard to define precisely, but probably considerable. If Australia had determinedly articulated this alternative assessment, the course of the crisis may not have been changed very much. But we would have established our credentials as an insightful and forceful friend of Asia. It might have helped us to be accepted as part of Asia and to shed the 'deputy sheriff' tag. We might now be in the core of ASEAN, rather than on the periphery.

To what degree are Australia's mistakes linked to Washington's? We are one of the closest friends of the US, and a beneficiary of the global order it created. We were more than an innocent bystander: we cheered the US on at every stage. Its failure is our failure too.

What stops Australia from continuing to act as a close ally of the US while at the same time being ready to offer a well-argued case when American policy lacks the cohesion and strategic focus that Parkinson identifies? Our policy makers have some, but not all of the same political pressures: the influence of those members of Parliament with outlandish views is muted by our Westminster system.

Part of the problem may lie in Parkinson's old bailiwick; Treasury. On issues of global economic governance, the Treasury tradition has been to ask 'what would America do?', and then do it faithfully. Issues are evaluated through the prism of the IMF. Of course constantly running interference on Washington's views in global forums would be counterproductive. We do however, need to be intellectually prepared for independent analysis. When our interests differ, we should argue the case.

This might at times be uncomfortable. Insiders recall the shock-and-awe retaliation we received when the initial APEC proposals excluded the US. Parkinson also himself reminds us of 'the anonymous spokesman for the White House whose 'throwing the toys from the crib' response to the UK decision to join the AIIB alienated many'.

But Americans are accustomed to vigorously expressed opinion. We won't often win, but we won't lose anything either. Who knows? It might even provide some helpful direction for the US, a nation for which, as Parkinson writes, 'economic diplomacy has become increasingly more tactical rather than strategic'.

Photo by Brendon Thorne/Getty Images

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