Expectations disrupted: lessons for Australia’s Indo-Pacific future

Australia and the Indo-Pacific have thrived with an open trading system and with liberal economic regimes encouraging international competitiveness. This has helped secure peace, stability and prosperity. But these patterns are now far from assured. Exploring various potential future scenarios may help us identify threats, and actions we need to take now to avoid security miscalculations and identify opportunities for Australia’s prosperity. Such future scenarios must be considered through a geoeconomic lens, as economic wellbeing and national security are now deeply entwined.

In many ways Australia is a microcosm of the buffeting winds of economic engagement and the search for security among states of the Indo-Pacific. It thus presents a valuable ‘past and present’ starting point for an assessment of reasonable scenarios for the Indo-Pacific’s geoeconomic future. In doing so, understanding the arc of development for Australia’s economic prosperity from the Second World War until now provides a platform to discuss these key issues.

Based on trends prevalent within what would become known as the Indo-Pacific, it was assumed that while Australia and the broader region faced some international uncertainty, the outlook for peace, stability and growth were all positive. How abruptly things changed.  Now in the face of a much more aggressive and assertive China, together with the uncertainty the Trump Presidency created, Australia’s and the broader Indo-Pacific’s assuredness of economic prosperity and international security looks vastly different. The shocks of 2020 added further fuel to this: governments can no longer ignore the economic and security disruption from climate change and pandemic.

Until recently, one of the modern definitions of geoeconomics, namely the use of geopolitical or strategic power to determine or require an economic outcome, would have seemed largely out of place for Australia and its post-war prosperity. Less than a decade ago, Australia’s post-war experience, life, the region and future economic prosperity all seemed relatively simple and straightforward. The nation seemed on track for continuous ongoing economic prosperity in an environment of peace and stability, with well understood international and regional frameworks: China as the leading trading partner, the United States as the security provider, and no need to choose between the two.

Chinese President Xi Jinping’s visit to Australia in November 2014 coincided with the signing of a Free Trade Agreement between China and Australia. While territorial and maritime disputes in the South China Seas were current, there was plenty of Australian and regional confidence that these would be resolved amicably, potentially through an ASEAN process. Such a process would have been consistent with the Deng Xiaoping consensus and would have seen China conducting itself, as former World Bank President Bob Zoellick would say, a responsible stakeholder.  

Governments can no longer ignore the economic and security disruption from climate change and pandemic.

On the other side of the Indo-Pacific, the Republican Primaries for the 2016 Presidential election were more than a year away, and Donald Trump, who had declared his intention to run for the Presidency in mid-2015 was not regarded as a serious political figure, let alone a serious contender for the role.

Australia’s post-war, regional economic mainstay – exports of mineral and petroleum resources to North East Asia, namely China, Japan and South Korea, were continuing to grow and seemed assured.

In short, Australia’s stability and prosperity compass for the Indo-Pacific region was set through:

  • A security alliance with the United States, which continued to express its desire to remain engaged in Asia as it had done productively since the end of the Second World War;
  • China as its largest trading partner;
  • Ongoing tranches of foreign investment from the US, UK, EU and Japan, among others; and
  • Early recognition (through the adoption of the Indo-Pacific as Australia’s strategic framework in 2013) that other nations in South and South East Asia were on the rise and had to be engaged economically and strategically, in particular India and Indonesia, who would both be top four global economies by 2040-2050.  

All of these factors sat within the context of an international trading and financial system with well-established post-war rules of the road and institutions, which guided bilateral, regional and international transactions and co-operation. 

Frameworks supporting prosperity

Australia’s prosperity assuredness had come from decades of sensible strategic engagement and economic activity in our region and beyond. The ANZUS Treaty provided not just a security partner with a hub and spoke series of partners and allies throughout Asia, but also our most important overall economic partnership when foreign investment is taken into account. This capital investment, when added to the traditional investment stream from the UK, enabled Australia’s modern source of prosperity – exports of coal, iron ore and Liquefied Natural Gas (LNG) to Japan, Korea and China – to be secured.

The starting point for these industries was quite remarkable – the Commerce Agreement with Japan in 1957. A dozen years after a bitter war in the Pacific, the Commerce Agreement saw an enlightened partnership between a Japan in need of a reliable and secure supplier of commodities to rebuild its economy and infrastructure, and an Australia keen to grow its exports beyond gold, wheat and wool.

This forged a Japan-Australia relationship which continues to this day, under-appreciated by many for both its ongoing economic importance and strength, and its political, security, strategic and defence cooperation. Indeed, the closest and most developed relationship that Japan has with any other nation bar its own Alliance partner, the United States.   

Over the decades, the relationship with Japan was the bedrock of Australian economic success in these new industries, with Australia ultimately exporting vast quantities of coal, iron ore and LNG to Japan, Korea, and subsequently China. Little appreciated these days is that when these export industries were conceived, China was not thought of as the destination. Indeed, as late as 2009, Japan was both Australia’s leading minerals resources export destination and its number one trading partner.

Partnerships for economic success

As a small population in a large land-mass island country and continent, Australian policy recognised that it could not go it alone: partners, friends and institutions were needed to maximise its potential and prosperity. Small coastal population centres would not of themselves provide a critical mass of domestic consumption. Australia had to be a great trading partner to ultimately be prosperous.   

As part of these economic success stories, Australia in the post war era has been very good at the early identification of key bilateral, regional and multilateral relationships that served Australia’s economic prosperity, and peace and security interests. In addition, strong Australian support for international institutions helped to provide the bedrock for well-defined ‘rules of the road’ for trade, investment, and security. This approach has proven to be particularly prescient in Australia’s international outlook since the end of the Second World War.

Early Australian involvement for both security and economic interests is seen over the decades in our choice of key bilateral partners, whether through early boots on the ground in the Korean Peninsula, active support of Indonesian independence, or early, indeed pre-US recognition of China with a one-China policy.

The same is true of regional and multilateral security and economic institutions. The creation of the United Nations, the Bretton Woods international financial system, the Pacific Island Forum, APEC, the WTO, the G20, and the Indian Ocean Rim Association (IORA) are but a few institutions where Australia was either early to join or instrumental in their creation.

The East Asia Summit and the economic and strategic notion which is the Indo-Pacific is but the last in a long line of getting in on the ground floor of institutional framework developments that advance Australia’s economic and security interests. In this case projections which, despite COVID-19, still continue to predict India and Indonesia as two of the top four economies together with China and the US by 2050.

Great power relationships changing

The emergence of China as a great economy and power, actively encouraged by the US and the globe generally, inevitably saw the potential for great power competition and contest between the US and China. This has now arrived in earnest.

However, the nature of this contest is different. While in many ways a G2 competition, the intermingling not just of the China-US economy, but also China’s economy with much of the rest of the globe’s, means that this great power competition is significantly different to the Cold War.   

Just as China rose to become Australia’s leading trading partner after 2009, so it became the most important trading or economic partner for almost 200 nations around the globe.

Despite the acknowledgement that China’s rise might lead to competition, until as late as 2015, it remained viewed through the glasses of the ‘Zoellick responsible stakeholder’ thesis or the ‘Deng Xiaoping consensus’, that such a rise would not disturb the well-established global and regional structure that had served post-war security and prosperity so well.

The sudden emergence of Political Competition, Economic Coercion and Supply Chain Security

The set of post war dynamics that served Australia and the region very well for 70 years has now been the subject of significant disruption. And this disruption has yet to see the full consequences of an aggressive and assertive China, an uncertain US, climate change and COVID-19.  All of these features may, in a remarkably short space of time, become deeply significant ongoing features of the Indo-Pacific and the globe for the first half of this century.

A much more assertive and aggressive China under Xi Jinping has ended the responsible stakeholder thesis. This is evident in the militarisation of the South China Sea, the failure of ‘One Nation, Two Systems’ in Hong Kong, the internationally deplorable treatment of Uyghurs in Xinjiang, clashes on the China-India border, along with intellectual and commercial property breaches and cyber security attacks.

Australia’s refusal to back down on policy changes as a result of these and other actions by a newly assertive China has seen Australia subject to trade and economic coercion or punishment under the guise of ‘trade disputes.’ A lengthy list of Australian exports to China identified in 2020 by the Chinese Ambassador to Australia has been painstakingly ticked off by China with questionable trade measures but with clear adverse economic impact for Australian exporters.

A subsequent list of fourteen demands by China for Australia to recant or change policy on has correctly been studiously ignored by Australian policy makers, seeing a stalemate and standoff on both trade and strategic conversations between Australia and China. For Australia to concede on any of these demands would come with implications of perceived diminished sovereignty.

Australia’s refusal to be moved by China’s economic coercion has seen China become even more entrenched in its current mode, with speculation that if China could forge a more competitive supply of iron ore from Brazil or Africa, then iron ore too would be gone in whole or in part as an Australian export to China.

The current stalemate is also something of a two edged sword for Beijing. China is making an example of Australia in the eyes of comparable or smaller economies and nations, while at the same time seeing the economic coercion have no impact on Australian policy. Added to this outcome, the new Biden Administration has effectively taken economic negotiations with China off the table in Alaska pending China’s cessation of its economic coercion against Australia.

At the same time as China’s assertiveness, we have witnessed policy and political uncertainty from the US with the election of Donald Trump as President (2016-20). The US was seen in a state of serious relative decline, which had the potential to be permanent. The US’s hub and spoke system of partners and allies throughout the Indo-Pacific was in disarray with Trump’s refusal to consult with partners.

This ‘cold war with economic characteristics’ between the US and China, with its deeply significant implications for the Indo-Pacific appears more likely to get worse before it gets better. This is reflected by the resuscitation of the Quadrilateral Security Dialogue between US, Japan, India and Australia as a distinct feature of the future strategic landscape as nations seek to determine how best to manage and balance an assertive China.

Thus a clear policy requirement arising from both China’s economic coercion and the disruption from COVID-19 and implications from climate change is the need for local and regional trade market diversification destinations and supply chain security, including the potential need for a more robust domestic supply chain capability.

Questions and considerations to assess likely futures

In assessing plausible future scenarios some key questions include:

  • Will the desire and need for security of supply chains also bring with it a return to domestic protectionism? Or will it provide opportunities to countries, like India and Indonesia, (who need economic reform) to maximise their economic potential?
  • Will economic competitiveness and coercion lead to the risk of security miscalculation?
  • Will the Biden Administration’s attempts to return to a traditional US role with partners and allies in the Indo-Pacific see off the adverse consequences of Trump’s four year term, or will Biden’s term be the exception, and Trumpism the new normal?
  • Will US democracy be renewed or will it be deeply damaged long-term by Trumpism?
  • Will Xi Jinping be China’s ruler for life, increasingly autocratic and authoritarian, or will China rebalance in a way that prioritises competitive partnership with the US over aggression?
  • Will Australia’s regional partners such as India and Indonesia reach their potential, or will Australia find it is investing too much hope in their future economic and strategic weight?
  • How will India emerge from the disaster of its COVID-19 second wave in 2021?
  • Will India overcome its reluctance for the economic reform required to join region-wide trade and investment arrangements? 
  • Will Australia maintain its economic prosperity by developing export destinations to replace or supplement China, or as fossil fuels come to an end, export industries with the scale to replace thermal and metallurgical coal, iron ore and LNG?  

When considering the future of the Indo-Pacific, we must consider the extant trends of regional stability and prosperity giving way to uncertainty, geopolitical competition and use of economic means for strategic political purposes. We are forced to asses:

  • the resurgence of autocracy and the resilience of democracies;
  • the direction of regional multilateralism versus the growth of minilateralism;
  • accelerating power shifts in the Indo-Pacific and across the Globe and the future extent of multi-polarity;
  • the role of disruption as a possible permanent feature;
  • ongoing uncertainly over US commitments and their credibility; and
  • the potential for a duopoly of systems – US and partners versus China and its partners.

Underlying all these questions and areas of consideration are the two of greatest importance: what if – despite the Biden victory – the Trump era points to the contours of a new normal in American politics; and what if China fails? 

How should Australia prepare?

In the face of these developments and possible scenarios, what can Australia do to prepare itself for some of these possible eventualities?  Here are six suggestions as a starting point:

First, Australia must continue to defend and strengthen a rules based order, looking for partners in the Indo-Pacific to advance that order in multiple formats, the East Asia Summit, the Quadrilateral Dialogue, and variously configured arrangements. These partners must include the US, but also countries such as Japan, India, Indonesia, South Korea, and beyond the Indo-Pacific to the EU, Germany, France and the UK;

Second, continue to strenuously make the case for diversification of export market destinations, and the basket of export goods and services as the national economic priority. This is a thirty year project to retain Australia’s economic prosperity in the face of the foreseeable decline of our coal, iron ore and LNG export industries;

Third, leverage the recognition of the importance of diversity and security of supply chains, to help grow our strategic and economic relationships in the Indo-Pacific with what Australia can contribute to reliable security and diversity;

Fourth, reframe policy to recognise that geoeconomics will be central to 21st century statecraft, and communicate with the Australian public that Australia needs to understand and strengthen the tools at our disposal (here Jeff Wilson’s Adapting Australia to an era of geo-economic competition, Perth USA Centre, January 2021, is a timely must read for Australian officials and diplomats);

Five, in an uncertain world, identify and use levers distinct to Australia, which may complement those of our strategic partners in ensuring that the US remains engaged in the Indo-Pacific; and

Six, and despite the current difficulties, continue to seek a dialogue with China, if only on the basis that nations and circumstances will continue to change.   

This paper forms part of the ANU National Security College Future Insights Series, designed to help policymakers develop and test futures scenarios, conduct horizon scanning, and integrate futures analysis into their work. The papers are designed to present provocative conversation-starters and arguable propositions, not definitive trend lists, or predictions about future circumstances. Every paper in the series is informed by consultation, and reviewed by experts.

It is published with support from the Japanese Embassy in Australia. The ANU National Security College is independent in its activities, research and editorial judgment and does not take institutional positions on policy issues. Accordingly, the author is solely responsible for the views expressed in this publication, which should not be taken as reflecting the views of any government or organisation.

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Stephen Smith

Former Australian Minister for Defence and Minister for Foreign Affairs