Address, Yomiuri International Economic Society Symposium
26 September 2024
Tokyo, Japan
The era of post cold war economic globalisation we have known for the past thirty years is over and is not coming back anytime soon.
Following the collapse of the Soviet Union, the absence of a peer or near peer competitor to the US ushered in a period of unprecedented economic growth, accelerated by an economic policy orthodoxy of liberalised trade and investment and open access to science and technology.
This is no longer the case. This requires us to adjust.
We have entered a new era of globalised strategic rivalry. This is recasting the way the global economy works, while threatening the foundational principles upon which our post WWII global order is based. This includes the primacy of universal human rights, the rule of law, the $US as the world's reserve currency and the disciplines of our global financial system embedded in platforms and institutions such as SWIFT, the IMF, the FSB and the World Bank.
The rivalry is being played out globally across many theatres - geographic, political, ideological, military and economic - just like a Cold War.
So how did we get here?
During the post cold war period, the US and its allies laboured under the assumption that the growing prosperity afforded by economic globalisation, particularly in authoritarian regimes such as China and post communist regimes in Russia, would lead to increased liberalisation and even democracy. This proved to be false. In China's case, the PRC always saw such goals as a direct threat.
Last year, Michael Beckley recounted in Foreign Affairs that after President Clinton granted most favoured nation status to China, Jiang Zemin reportedly warned his foreign policy officials that this 'so called engagement policy' was just another way to 'try with ulterior motives to change the country's socialist system', to 'westernise and divide our country' and 'put pressure on us in an attempt to overwhelm us and put us down'. Xi Jinping is no different. If anything, having personalised the PRC regime to himself more than any leader since Mao and restored the centrality of communist ideology, empowering the CCP over the Chinese state and economy, he is more brazen.
During post cold war globalisation, rather than transforming into liberal democracies, regimes like China translated their newfound access to global trade and capital markets as well as legitimacy in international forums, to build the economic, diplomatic, technological, and military capacity to one day challenge the prevailing status quo. That day is now upon us.
Unlike the Cold War rivalry between the Americans and Soviets, this new era of strategic rivalry is not confined to binary competition between two apex powers. This rivalry is far broader. It's not just about the PRC. They have fellow travellers - Russia, Iran, North Korea and Venezuela, just to name a few.
It is a rivalry between what I described as Prime Minister back in 2021 as an arc of autocracy seeking to render the prevailing rules based order impotent to their authority and ambitions, and an alignment of nations who know their freedom, sovereignty and prosperity depends on the maintenance of such global universal standards, rules and norms.
The work of this autocratic "arc' has been most notably on display in Ukraine, where illegal Russian aggression has been supported by Chinese banks, trade and dual use tech as well as Iranian drones and North Korean missiles. Russia became China's fifth-biggest single-country trading partner last year, up from ninth in 2020, while Chinese exports to Russia rose 46.9 per cent in 2023 year on year.
If we were in any doubt about the broader implications of Russa's illegal invasion of Ukraine, Anne Applbaum cites Sergie Lavrov, the Russian foreign minister, in Autocracy Inc, remarking soon after the war began saying, "this is not about Ukraine at all, but the world order… the current crisis is a fateful, epoch-making moment in modern history. It reflects the battle over what the world order will look like."
We see similar collaboration in the relationships the PRC has with developing countries, especially in Africa. This includes sharing access to security technology to control their populations, obligation free and opaque financing arrangements that enable corruption, and diplomatic quid pro quos that provide reciprocal cover for their respective behaviours. Of particular concern is the opening up of alternative trade and financial channels that blunt the force of global financial sanctions and facilitate the movement of funds and weapons, such as to Iranian proxies Hamas and Hezbollah to engage in terrorism.
A popular misconception is that the PRC wishes to rule the world and become the apex power within the international system. To the contrary, the PRC, or Russia for that matter, doesn't want to rule the world, they just don't want to be ruled by it. Their goal is not the rule of law but, as Applebaum argues, to rule by their own law. Rather than rule the world, they just want to rule their part of it, forever and unchallenged. The purpose of autocracies is simple - protect and perpetuate their regime - to hold onto and increase their power.
The PRC and fellow autocracies have learned they do not need to tear down global institutions such as the United Nations or other international bodies, to undermine global rules and norms, they just need to infiltrate, distract and dilute them, so they can continue on their merry way. Global institutions with Chinese characteristics. To this end they are having success.
It's also important to appreciate that relationships between autocracies are transactional, not values based. They do not necessarily need to buy into each other's specific causes, because they share a broader one - reduced US presence in each of their regions.
A further geopolitical force rising in the world today, is the large band of developing nations, referred to as the 'Global South'. These nations account for the majority of the world's population and are no longer prepared to take their cue and settle for what is handed out to them from the apex powers (be they the US or China) and the broader developed world.
In our own Indo-Pacific region this includes nations such as Indonesia, Malaysia or Vietnam, who do not wish to be forced to choose between rival spheres, yet at the same time, retain the flexibility to choose either, and engage with any nation they believe can advance their national interest. Unsurprisingly, while benefiting from global rules and norms, they are more focussed on their own economic development, security and welfare.
So what's to be done?
If we wish to avoid conflict, and preserve the peace and stability afforded by our global rules based order, the arc of autocracy must be deterred. An effective counterbalance must be present.
There must be an intentional, comprehensive, credible, persistent and integrated policy of deterrence pursued by like minded capable nations to resist the aggressive and coercive behaviours of autocratic regimes. Such deterrence must work across the military, diplomatic and economic spheres. We also must appreciate that this period of rivalry may persist for decades, as it did during the Cold War.
Cold wars tend to end badly in one of two ways for the unsuccessful rival - by defeat in a hot war, or by their demise through gradual decline from within, as their political, social and economic systems collapse under the prolonged weight of the contest. Neither of these outcomes is likely in the near term, and only a credible military deterrent will prevent a hot conflict from becoming a reality any time soon.
In recent years, like minded nations have been attempting to build a credible deterrent. Japan has been a leader in this regard, inspired by the leadership and vision of the Late Shinzo Abe, and ably supported by his successors. It was my privilege as Prime Minister of Australia to partner and work directly with all of these leaders.
While such efforts have been undertaken within established global institutions, it has importantly been pursued through smaller multilateral forums, such as the G7, and the Quad Leader's Dialogue and through the formation of new multilateral partnerships such as our AUKUS defense agreement between Australia, the United Kingdom and the United States, which I was pleased to have founded, as well as upgraded bilateral security ties such as Japan's first ever defense forces reciprocal access agreement concluded with Australia in 2022, after several years of discussion between myself and PMs Abe, Suga and Kishida.
The restoration of the Quad leaders dialogue in 2021 is a shared legacy of those present at the time, who I had the privilege to join. As Quad leaders came together for the first time, Quad nations were already active in security partnerships, and were well advanced in restoring joint military cooperation such as the Malabar Naval exercises, amongst many other initiatives. While recognising the primacy of defence and security cooperation as the Quad's strategic priority, as Quad leaders we also knew the new dialogue had to go further.
As a consequence, a key focus of our dialogue was to address cooperation in the economic sphere. Initially this focussed on supply chain integrity, critical minerals access and critical technology cooperation. We also stressed the need for outreach to developing nations in the Indo-Pacific, to build their resilience, prosperity, health and well being. ASEAN were seen as a key partner in this effort. At the time the most pressing need in the non-military security sphere was access to COVID vaccines.
Observing the forum today, I would caution Quad leaders to take care to ensure it does not allow its focus and agenda to become diluted and distracted. It must remain intentional by focussing on a short list of high priorities that fundamentally contribute to strengthening regional stability and security, including economic security.
Ongoing policy workshops and coordination of ODA programmes that populate Quad communiques are fine, but too often just represent diplomatic BAU. Such initiatives do not require leaders to meet together for these things to be done. That is not what the Quad Leader's dialogue should be expected to deliver. If anything, the mere fact that the Quad Leader's dialogue provides the opportunity for regular unscripted engagement and real time collective assessment by leaders on regional security and economic challenges has a value all to itself. The most valuable comment to emerge from the recent meeting in Delaware was President Biden's candid 'hot mic' admission about the PRC and Xi Jinping seeking to test rivals. This sends a clear signal about what is really at stake. It has the ability to galvanise action.
When the Quad Leader's dialogue was reconstituted it was attacked by the PRC as they knew the deterrent power of such regular high level collaboration between like minded countries focussed on Indo-Pacific security in all its forms. Consequently, the Quad must not feel the need to overpopulate its agenda to fill out communiques and validate its existence. It does not need announceables. It needs to exist and meet regularly to ensure that their collective actions and responses to foster a free and open Indo-Pacific are aligned and on point - and where they are not - to change course. In many ways, less would be more, and would keep autocracies guessing.
In approaching its economic task, the Quad must also better appreciate and leverage its greatest strength. Quad nations are all market based economies. That is their true super power. What sets us apart from the autocracies offering opaque grants and punitive debt, is the deep capital pool we offer from our private sector, together with the commercial expertise, technology and technical knowledge of potential investors and business partners that can transform their economies. Trade and investment liberalisation have played an important role in paving the way for this offering, as have overseas development finance and assistance programmes. However, the main line of economic effort by Quad nations within the Indo Pacific has been delivered by the private sector.
To date, the Quad is yet to truly enlist, align, and leverage the support of private, corporate and institutional capital, at scale and with single minded purpose, to advance their economic security objectives. The lack of focus on this task is leaving the Quad's most potent tool in the shed.
Much is often made of the economic outreach undertaken by the PRC's Belt and Road Initiative, to underpin economic development in South East Asia. According to the Lowy Institute's 2024 South East Asia Aid Map report 'China has projects worth some $70 billion still under implementation and is involved in 24 out of 34 infrastructure megaprojects in Southeast Asia'.
While obviously important and highly visible, the scale of these investments is actually relatively modest in comparison to the flow of private foreign direct investment from the United States and Japan, together with other allies and partners.
According to ASEANSTATS, in the five years to the end of 2023, the flow, not stock, of Chinese FDI into ASEAN nations totalled $65.2 billion. This is a significant sum, however it is less than a third of the flow of $204.3 billion invested by the US over the same period. The flow of Japanese and European FDI was also greater than China, at $97.5 billion and $91.9 billion respectively. The ROK came in at $50.9 billion. When considering trade, China is by far ASEAN's single largest two way trading partner, however the majority of this trade is in the form of imports from China, rather than exports to China. This is becoming worse as China seeks to dump its subsidised over-production in the region. In the 12 months to the end of March 2024, China enjoyed a $132.8 billion trade surplus with ASEAN, compared with ASEAN's $149.1 billion trade surplus with the United States. In total ASEAN exported $275.5 billion in goods to the US, only $10 billion less than ASEAN exports to China. ASEAN also has a trade surplus with Japan and the EU, where its exports reached $118.5 billion and $155.7 billion respectively over the same time period.
The lesson of these statistics is that private, corporate and institutional capital, especially from the USA and Japan, is heavily invested in South East Asian economies. This presents a significant opportunity for the Quad.
I suggest there are three ways the Quad can ensure they better utilise the significant impact of private investment within the Indo-Pacific, as part of their economic security agenda.
The first is to make sure that their policies do no harm. In this new era of strategic rivalry, the US, together with allies and partners, risk excluding strategically important Indo-Pacific partners as they move to de-risk and re-align supply chains, reverse trade imbalances, restore sovereign industrial capabilities, withdraw investment from rival jurisdictions, prevent sensitive tech leakage and IP transfer, and ensure energy and resource security in the global transition to a low emissions economy.
The subsidies and incentives provided by the CHIPS Act and the IRA are good examples of these types of initiatives. The same is true of increased tariffs, especially those directed at China, that begun during the Trump years and have been continued by the Biden administration. While appreciating the intent of these measures, especially regarding sensitive and critical sectors, it is important to be discerning in their application. Indiscriminate application carries the risk of significant unintended consequences for existing and potential allies and partners. This would be counterproductive to regional security objectives especially in the IndoPacific, where US economic outreach is so vital to relationships.
For example, it is understandable that the US would wish to interrogate the true source of a particular supply or investment, when China is clearly engaged in a deliberate strategy to outsource their production to intermediaries as a way to access US markets and bypass new restrictions. However, such interrogation must be careful not to falsely penalise genuine partners. There is legitimate concern amongst partners in south east Asia, even allies, about these measures.
Similarly, it is a positive initiative for the US to incentivise firms such as rare earths provider Lynas to establish processing operations in Texas. But it would be counterproductive to dis-incentivise Lynas to walk away from the significant capabilities they have successfully established in Malaysia. Let's not forget those same processing capabilities were established in partnership with Japan, when the PRC unilaterally turned off Japan's access to China's rare earths almost 15 years ago, when they took exception to Japan's foreign policy.
In the security sphere, allies and partners have proved to be the most successful way to build an effective military deterrent. The same will be true when it comes to economic security. The US will not rebuild its industrial base as quickly and effectively as it needs to if it does not draw on the network of its allies and partners, including more neutral actors who can also add value. This will be as true for allies like Japan, Australia, Korea, the Philippines and Singapore as it is for India, Singapore, Indonesia, Malaysia and even Vietnam.
Obviously, each engagement must be calibrated, but in all cases we must ensure that in boosting the economic resilience of core partners and allies we do not needlessly isolate others and create opportunities for our rivals.
The second is to work with the investment community to better understand what Governments can do to de-risk private investments in strategic sectors within emerging economies in the Indo-Pacific. This includes transport infrastructure, energy generation and transmission lines, resource processing and extraction, communication networks, including undersea cables and satellites, and agriculture. Government's can be very effective using their balance sheets to achieve the security outcomes they seek if they just listen and partner with investors and the private sector. In Australia we achieved this by ensuring that Digicel, the dominant telco in the Pacific Islands, was acquired by Telstra, rather than falling into the hands of rival interests. Our Government was hands on and proactive in securing this result. However, key to our success was not imposing on Telstra, but to ensure the deal could be structured in such a way that it could be legitimately supported on commercial terms and was in the best interests of shareholders.
Institutional capital in the form of pension funds, large trading companies, multinationals, private equity and sovereign wealth funds must all act in the interests of their members, investors and shareholders. If there is an impediment to these funds finding their way into the types of investments within the Indo-Pacific that would boost regional security, then an answer must be found. I appreciate this is not straight forward. For many years efforts have been made to align institutional capital with infrastructure projects without success. Such projects simply didn't always measure up to the legitimate standards of such investors.
However, the response cannot be to shrug our shoulders. Such a response will only confirm to developing countries that Quad countries can't make things happen and turn to rival capital sources, that will only worsen their strategic dependence.
This is exactly where the Quad must go to work. If the project is important enough, then the policy case can and must be made to structure a package that can make sure the investment get's over the line. Doing this across four jurisdictions would be incredibly powerful. Gaining access to more reliable data and benchmarks (price indices), securing a more favourable regulatory environment, loan guarantees, supplementing project management expertise, removing bureaucratic road blocks, recalibrating ODA programmes or ensuring ODF loans become part of an overall capital package, are just some of the practical tools that can be employed. It requires being proactive. Existing Quad efforts in this area, while well intentioned, could not be described in these terms. The recent launch of the Minerals Security Partnership Finance Network will hopefully prove more effective. Either way, we need far more.
That brings me to the third and final point. We need a clear plan within the Quad that understands where our most urgent strategic vulnerabilities and opportunities are and the capability and intent of Quad nations to act in concert to address them. A great example of this is Sri Lanka. Some years ago, the PRC gained a majority interest in the Hambantota Port, by snaring a corrupt Sri Lankan Government into a debt trap. Sri Lanka entered into sovereign default, and is now seeking to claw its way back from complete economic collapse.
Last Saturday Sri Lanka elected a new President and will elect a new Parliament later this year. The newly elected President is likely to have a far more embracing position towards the PRC than his predecessor and has already signalled his intention to revisit the deals done with the IMF and other multilateral and bilateral debt partners. If Quad nations and Quad capital remains on the side-line, the Hambantota port episode will be repeated many times over and India will have their own version of Cuba off their southern coast.
The good news is that Quad nations are already active and present, but it is not clear they are acting together. India's national security advisor made a rather public visit to Sri Lanka in the lead up to the recent elections. Japanese investors are developing the new second terminal at the main airport in Colombo. The U.S. International Development Finance Corporation announced a $553 million investment to build a new deep-water shipping container terminal in Colombo. The principal shareholder in this development project is Indian conglomerate, Adani. An even larger development project is mooted for a northern terminal, while Chinese investors are building a logistics hub in the centre of the port precinct with a rail link to the airport. These proposed expansion works will put the Port of Colombo comfortably in the top twenty and even the top ten ports in the world.
Given what is at stake, I hope that developments in Sri Lanka were a topic of discussion amongst Quad Leaders, when behind closed doors in Delaware last Saturday. If not, they should have been. If not, I would be concerned that the Quad is failing to appreciate its important agency to influence exactly these types of situations, as part of a broader strategic effort. At the very least they should be satisfying themselves that existing individual efforts are sufficient to address the risks that are present.
A similar case can be made for a clear Quad investment strategy in relation to Cambodia. The west may bemoan PRC access to the Ream Naval Base or the PRC's significant financial support for the Sihanoukville port expansion, but where is the alternative? Quad members can either get involved and contest economically in these strategic locations or surrender the ground to our rivals.
When in office I was often criticised for the strident position I adopted towards the PRC. I believed this was necessary to counter the PRC's deliberate strategy to test Australia's will and to split us off from our allies and partners. I believed that pretending to share values and interests with an autocracy seeking to bully and coerce us, while they undermined the very rules and norms that afforded us our freedom, got us where we are today. Fool me once, shame on you, fool me twice, shame on me. This does not mean we do not engage diplomatically with China or even trade and seek cooperation on global challenges like climate change, human trafficking and organised crime. We can peacefully co-exist, but only with the right safeguards in place. We must do so with our eyes wide open and with the good sense to put a sufficient deterrent in place to counterbalance the growing power and influence of autocracies. The objective of such a deterrent is simple, to ensure that when President Xi wakes up every morning and thinks about Taiwan, he concludes 'not today'.
