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How the White Paper can turn economic adversity into opportunity

One specific opportunity for some serious re-thinking would be our stance on foreign investment in Australia - not usually thought of as a key element of our foreign policy.

How the White Paper can turn economic adversity into opportunity
Published 17 Feb 2017 

This post is part of a debate on Australia’s foreign policy White paper 2017. Click here for other debate posts.

‘Australia needs to be ambitious in grasping economic opportunities’.

In calling for submissions for the Foreign Affairs White Paper, the Foreign Minister included this among the key issues. Fair enough, but what does it mean in practice? Michael Fullilove warns us against ambition when it is not ‘tempered by coherence’, and cites earlier examples, including the Asian Century White Paper, where ambition ran ahead of the substance. So how do we stand on ‘grasping economic opportunities’?

Perhaps by the time the White Paper is published the Trump era will have established a less aggressively ‘America first’ stance. But at least at this juncture, the opportunities for ambition in global economics seem constrained. America has been such a dominant force in the post-World War II international economic landscape that it is difficult to foresee how things will work out with an inward-looking America. America’s retreat from globalisation casts a shadow over the possibilities.

If Trump precipitates a tariff war, this would lead to a responsive battening-down of hatches everywhere. Even if his ire is directed just at individual countries such as China, that would be bad news for us as a commodity exporter.

Will President Trump bother to go to G20 meetings? If he does, will his presence advance the cause of international cooperation or set it back? America has always been an active, even dominant, member of the IMF, using it as a vehicle for global policies which by-and-large have been in the general interest. The Fund kept Greece and the euro’s peripheral countries afloat in 2010, holding the euro together in the process. The IMF’s substantial program keeps Ukraine from debt default, shoring-up an important frontier. Will the IMF be hobbled in the next crisis by its largest member?

President Trump has already issued an executive order to roll back the huge effort that has gone on since 2008 to reduce the risk of another financial crisis. This not only covers the unravelling of the Dodd-Frank Act: Congress has already instructed the US Fed to cease taking part in the ongoing negotiations under the Basel Accords designed to bring a degree of international uniformity to banking regulation.

The abandonment of the TPP and the Basel Accords may be symptomatic of a larger reversal. Will America continue its progress towards signing up to UNCLOS? What will happen when the World Bank and the regional developments banks (such as the Asian Development Bank) pass around the hat for capital increases to fund ongoing operations? Trump’s strategy of bilateral trade deals, further entangling the spaghetti-bowl of existing agreements, is the unfortunate antithesis of the multilateralism that is needed to obtain the full benefits of global trade. In short, America is no longer attempting to put in place a global rules-based order that has been the subject of so much commentary, here and elsewhere.

It is in this unpropitious environment that the White Paper seeks to be ‘ambitious in grasping opportunities’. So does adversity create opportunities?

Australia had its opportunity to reinvigorate the G20 in 2014 when it held the chair but now does not have the heft to do much. The same applies to the IMF, where we have always been a bit-player.

Our best chance of coherent ambition lies in Asia, the source of 70% of global growth. This would, however, require a dramatic lifting of our game. Our American-centred foreign policy has led us to emphasise APEC over ASEAN, always with the priority of trying to increase American involvement in Asia. We may never have had the opportunity to join the six-country core of ASEAN, but Japan succeeded in getting into the next row of seats – ASEAN+3. Our formal connection is via the East Asia Forum, a peripheral meeting-place. Coming very late to the party, we need to make sure we are welcome, and find ways to make this apparent to the core membership. The Rudd Asia-Pacific Community initiative to seize the high ground with a new institution was doomed from the start: this is not a party you can crash by offering to take over the job of hosting. John Edwards may well be right that Australia is ‘the one country in the region with the capacity and repute to drive negotiations on a regional free trade agreement.’ But this would be a huge diplomatic task, as none of the Asian countries currently sees us as a logical fit for this leading role.

A starting point would be to redirect the diplomatic resources, hitherto futilely engaged on TPP, to the Regional Comprehensive Economic Partnership (RCEP). Pining for some kind of rump TPP, without America, seems misguided. If China is active in bringing Asia together through developing the Free Trade Area of the Asia Pacific (FTAAP), we should throw our modest weight behind this.

One specific opportunity for some serious re-thinking would be our stance on foreign investment in Australia - not usually thought of as a key element of our foreign policy.

The starting point is a recognition that China will want to have much more foreign investment than it has at the moment, and this will run into deep-seated domestic concerns. Part of the concern is about the sheer size of the prospective asset-ownership: think of the issue in terms of portfolio balance, where Chinese investors (including state-owned enterprises) will want a diversified portfolio with substantial overseas investments. China is already so much bigger than we are, and this disparity will increase sharply over the next few decades, with China growing at more than twice our pace. On top of the concerns about the sheer volume, both the Australian public and the Australian bureaucracy have a heightened perception of the security implications of Chinese investment, and our politicians are ready to give voice to these concerns.

We need to sort all this out if we are to avoid serious inconsistencies between, on the one hand, our desire to attract foreign investment to fund the current account deficit, and on the other our sensitivity to perceived security risks and concerns about ‘selling off the farm and the family silver’. Some countries (Canada) are welcome to buy critical infrastructure, while others (China) are not. Some countries can own large tracts of agricultural land (the UK), while others are excluded. If we don’t explain these issues coherently, this ad-hocery will look like xenophobia. If the targets are Asian countries, we shouldn’t be surprised if our efforts to integrate more with Asia are frustrated.

As part of the reconsideration, we might shift the Foreign Investment Review Board from a negative assessment of proposals (requiring proposals to overcome various hurdles) to a benefits-focused evaluation: what can the foreign investors provide which will be to our benefit, beyond simply funding the external deficit? Encouraging Chinese and Indonesian food-oriented companies to take part-stakes in Australian agriculture is an example of integration-fostering policy. It would link Australian production into the fast-growing middle-class-driven consumption markets that we can’t access successfully without the foreigners’ special affinity and knowledge of local business methods. We need partners to lobby and facilitate our integration with these difficult-to-access markets. Offering them a less-constrained opportunity to participate in productive investment in Australia might seem ambitious, given the political sensitivity of this issue. But it would, at least, offer an example of coherence.

Photo by Flickr user Kate Dixon.

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