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Australia’s Choices in a Fragmenting World

Trade-offs are coming that Australia is not prepared for and that will test the social license of our leaders. Yet arguably our decision-making institutions are not structurally configured, and we as a nation are not culturally prepared to manage this complexity and uncertainty.

In looking back on the state of global security today, it is clear Australia faces the risk of geopolitical competition teetering on the edge of conflict, technological decoupling, and a rise in populism. The world is being buffeted by the interrelated forces flowing from the after-effects of the pandemic, the Russian invasion of Ukraine, geostrategic competition, techno-nationalism, decarbonisation, and a myriad of unresolved international problems that are in many ways connected.

Against this backdrop, profound paradigm shifts are underway. The most visible is the enmeshment of economics and security. Some have described it as the hijacking by the security establishment of the economic establishment. The Economist, in labelling it the era of “homeland economics,” describes it as the biggest economic policy shift in a generation.

Underpinning these trends is the revisionist interpretation of globalisation. The loss of confidence in the economic policies that lifted hundreds of millions out of poverty is now assessed as having displaced workers, with the gains of the last 30 years mostly captured by a small group.

These facts are correct. The cause and effect are not.

While the political focus has been on addressing perceived and actual inequities through the rebalancing of labour over capital interests, the broader reweighting of security and resilience over openness and engagement is not likely to correct this lopsided balance of gains.

Self-reliance and friend-shoring are now justified as de-risking strategies and hedging tools against geostrategic tensions. But protectionism has rarely been a source of growth or peace. Many may still recall that Australia saw its relative living standards decline through the post-war years on the back of the mantra of protectionism for all.

That sense of history today has been lost.

The global economy is starting to splinter along geopolitical lines, making these distinctions less obvious. In the US, political dysfunction, despite the economy’s remarkable dynamism and resilience, will continue to encourage broader downward trends. In China, the economic challenges brought on by the government’s own stifling of its innovation, the manipulation of trade, and the restriction of market forces has triggered debate about whether it’s growth model has peaked.

For Australia, the objective should be to navigate a course that best preserves our national security, prosperity, and unity, while contributing to regional stability and to best practices in our two most important partners, the US and China.

In this challenge, Australia’s approach of ensuring “strategic equilibrium” will require constant calibration and re-calibration to safeguard the national interest. That in turn will mean deft, consistent, and sustained international engagement and coordination.

Under the Albanese government, Australia has handled the relationship with China with the right tone and with agency. And regionally Canberra has struck an effective balance in seeking to persuade and project influence through alliances, partnerships, and institutions.

But the year ahead portends the real possibility of another seismic shift.

The 2024 US election could be the most consequential of our lifetime. Regardless of the result, the US seems destined to remain on a pathway of global retreat and rising protectionism. And doubts exist as to US reliability at a time when US leadership is needed to shore up the global rules-based order and deter aggression from other powers.

As Robert Gates puts it in the latest edition of Foreign Affairs, “the United States finds itself in a uniquely treacherous position of facing aggressive adversaries with a propensity to miscalculate, and is incapable of mustering the unity and strength to dissuade them” … “And yet a world without reliable US leadership would be a world of authoritarian predators.”

Clearly, more input from friends and allies is needed, but too little is often contributed by such partners – Australia included.

For Canberra, this posits a conundrum of balancing strategic and economic interests, particularly as the consequences of geopolitical shocks, such as the war in Ukraine, and the resultant high inflation, has required responses that often end in trade-offs to either economic growth or security. And the security establishment is winning.

Currently, the national budget is underpinned by another trade boom driven by the disruption in energy markets from that very same Russia-Ukraine war, and by China’s demand for Australian exports. Some of that revenue will need to be directed to shoring up national defence. But this is currently happening at a rate and quantum that seems out of step with the magnitude of the threats Australia faces.

For Australia, with our long history of piecemeal and fragmented industry policy, the political economy concerns of industry policy interventions haven’t changed. What has is the importance now of doing it well – the how, to what end, and the definition of success.

It will require integrated policy design and implementation, and with a focus on designing incentive structures that better mobilise and align private sector capital with national priorities. As such, it is important to note in passing that the anti-business approaches and low investment rates of the last decade are not unrelated.

And though Australia will benefit from preferential access to the US market under the CHIPS and Science Act and the Inflation Reduction Act, the country cannot compete with the scale of the spend. And there will be costs for some sectors of the economy as others ramp up their own industry policies.

Australia’s trade strategy rightly has been multi-pronged, with varying degrees of success: focussed on defending and reforming global trade rules, encouraging business to diversify trading relationships, working to stabilise our relationship with China, and pursuing new free trade agreements linked to new markets and supply chains.

In the case of foreign investment, Australia has adopted a more stringent screening regime since 2021, which is now more designed to manage national security concerns than capture economic opportunities. There is no escaping the fact that higher productivity growth will be required to manage our domestic and international interests. And as a middle power Australia will have to work harder with others to ensure markets remain open and as transparent as possible.

In examining all these challenges, it has become clearer than ever before that Australia will need to exercise all elements of national power, and in ways that maximise capabilities, and not simply those of one or two sectors.

This article has been modified from a Speech given by AIIA National President Dr Heather Smith PSM FAIIA to the 2023 AIIA National Conference

Dr Heather Smith PSM FAIIA is the National President and a fellow of the AIIA. She was appointed as AIIA National President in April 2023.

This article is published under a Creative Commons License and may be republished with attribution.