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Agenda for Change 2016: Australia’s regional economic diplomacy

Posted By on May 27, 2016 @ 06:00

Edited image courtesy of Flickr user Steve Snodgrass


This piece is drawn from Agenda for Change 2016: strategic choices for the next government.

Australia, as it has done in the past, has the potential to play a role in shaping the Asian economic cooperation agenda in a way that deepens regional economic linkages and lifts the growth potential of Asian economies. As the world’s economic gravity continues to shift to Asia, Australia will benefit greatly from being an integral part of Asia’s economic transformation.

Australia is in the middle of its own economic transformation. The commodities boom of the past decade is over. China’s iron ore and energy-intensive industrialisation saw Australia’s terms of trade—the price of Australia’s exports relative to imports—at an historic high in 2011. The natural resources sector and the Australian dollar both rose and then fell creating opportunities and challenges. As the dollar strengthened and productive resources shifted to the mining sector, manufacturing became less competitive and many industries suffered or shut down.

The challenge for Australia is now to upgrade industry, expand quality services exports, lift agricultural productivity and establish higher value-add manufacturing. For Australia to realise its higher value-add comparative advantage and lift its living standards will require deeper engagement with Asia.

The good news is that the transformation underway in Asia is complementary to achieving those objectives.

China is transitioning from an investment and export-led to a consumption-driven economy. The downward growth trajectory is natural at this stage of China’s economic development. But even at 6% Chinese growth will be among the highest in the region and have a larger impact than most because of the scale of China’s economy.

India, after a decade of underwhelming performance, is now experiencing economic growth close to 8%, making it one of the world’s fastest growing economies. India is looking to cash in on its demographic dividend, turning the nation into a manufacturing powerhouse.

The concluded China–Australia Free Trade Agreement (ChAFTA) and the Comprehensive Economic Cooperation Agreement currently under negotiation with India can ensure that Australia is at the forefront of both countries’ economic transitions.

But all of Australia’s bilateral initiatives need to leverage up broader reform and be deployed strategically to progress regional cooperation.

Negotiations for a bilateral deal with Indonesia is now back on the agenda. Deploying Australia’s diplomatic energies on India and Indonesia is a high priority, as is working with China to liberalise its economy through ChAFTA.

Those bilateral deals could, at best, lead to agreements that give momentum to Australia’s, India’s, Indonesia’s and even China’s reform programs and complement regional liberalisation efforts. At worst, they will lead to narrow agreements that don’t advance reform or, in China’s case, miss out on the opportunity that has been offered. Narrow agreements concluded merely for diplomatic, rather than economic, reasons may benefit some producers and achieve some liberalisation but they’re a missed opportunity with potentially adverse consequences. Australia’s FTA with the United States, for example, did little to slow the fall in bilateral trade and created substantial trade diversion because it was done for narrow political reasons.

The stakes for reform are high. Asia’s growing middle class—projected to be over 3.2 billion by 2030—is mobile and consuming higher quality services and goods with its growing wealth. If growth stalls it would be a huge lost opportunity. Much slower growth could also fuel social or political instability. So prioritising those economic policy initiatives is a major element of Australia’s security strategy.

The priority for Australian economic diplomacy should be achieving the best outcome possible in the Regional Comprehensive Economic Partnership (RCEP). A high-quality RCEP agreement would have a high payoff for Australia and the region. The GDP of the RCEP grouping—on conservative projections—could be close to double that of the Trans-Pacific Partnership (TPP) in 15 years.

Many RCEP members—including Australia—are in the middle of economic transitions that will be made easier to effect by a more open and dynamic external environment. Large neighbours committing to serious reforms and opening up of economies will not only benefit them but make it easier for others to implement domestic reforms. Some RCEP members, such as India, are coming from behind on economic and trade reform with economies that are relatively more protected from international competition. That means the gains from opening up will be large.

Given the openness to less developed countries in RCEP and the special and differential treatment afforded to them, Australia has an interest in helping those countries make ambitious commitments and reach those ambitions over time.

China, Indonesia and India won’t be part of the TPP in the foreseeable future. That elevates the importance of RCEP for them and the rest of the region. There’s real risk of trade and investment being diverted away from non-members towards the TPP grouping—by design, to create incentive to join.

Australia, Japan, Vietnam, Malaysia, Singapore, Brunei and New Zealand are members of both the TPP and RCEP. Australia can play a leadership role in steering the two agreements towards a broader regional agreement such as a Free Trade Area of the Asia–Pacific. This will make a significant contribution to the openness and strength of not only the regional economy but also the global trading system. Asia’s size and growth potential means an open and integrated Asia will be a driving force for global trade.

Deepening regional economic integration and keeping Asia open for business will lift growth potential in all major Asian economies, furthering economic security and aiding the successful management of political relations.


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[1] Agenda for Change 2016: strategic choices for the next government: https://www.aspi.org.au/publications/agenda-for-change-2016-strategic-choices-for-the-next-government

[2] created substantial trade diversion: http://www.tandfonline.com/doi/abs/10.1080/10357718.2015.1048777?src=recsys&