Photo of Mr Peter Varghese

“Australia and Asia: Building stability by building institutions”

Asialink Chairman’s Welcome

Speech by Mr Peter Varghese, Secretary of the Department of Foreign Affairs and Trade

Melbourne

19 February 2013

Introduction

At the outset, let me thank Asialink for the invitation to speak today. And let me recognise the important work that Asialink does to promote the critical importance of Australia engaging with Asia. We rightly hear a lot these days about upgrading Australia’s Asia literacy. Well this has been core business for Asialink since its foundation. And since that time, Asialink has made a huge contribution to our understanding of Asia. And an even larger contribution to building the personal links and networks which are crucial to a sustained engagement with the region.

The government’s white paper on Australia in the Asian century provides the background to my remarks today. But in speaking about an Asian century I do not want to assert that this century will belong to any one country or region. Economic weight and strategic influence are becoming more dispersed. Some of the poles of power this century will be outside Asia. But the size of Asia’s population means that it is likely to be unique in the scale of its economic growth. The industrial revolution leap frogged population as a measure of power. Today, population is back in the mix and the combination of a large population and a modernising economy is bringing Asia back to the preeminent place it had in the global economy at the end of the eighteenth century.

In his 2005 book Rethinking the World: Great Power Strategies and the International Order, Jeffrey Legro quotes British Viscount Cecil, speaking at the Assembly of the League of Nations in September 1931:

“I know how rash it is to prophesy as to the future of international relations; but, nevertheless, I do not believe there is anyone in this room who will contradict me when I say that there has scarcely been a period in the world’s history when war seemed less likely than it does at the present.”

That was a week before Japan invaded Manchuria.

Now, let me hasten to add, particularly to any media present, that I am not predicting that we face a similar moment today. Far from it. But that quote is a reminder that the world of international relations is never completely predictable. And it is also a reminder that periods of transition are, by definition, more unpredictable than most.

So as I address the challenges facing Asia in 2013, I am not going to stretch into the field of prophecy.

What I would like to talk about is one of the big challenges of our time as Asia re-emerges as one of the poles of world power: namely, the critical task of building regional and global institutions. And to be fair to Viscount Cecil — he was a person who understood the importance of building an international order.

Asia: an evolving maritime domain

At its core, the challenge is both simple and very difficult.

Having enjoyed a historically significant period of peace, our region is now reaching levels of prosperity unlike anything it has seen before. History tells us that as new, or resurgent, powers emerge onto the stage, friction with status quo powers is often the result.

There are exceptions, cases of realignment of power without direct conflict — the transfer of leadership from the British Empire to the United States, and more recently, the end of the Cold War.

In the face of the re-emergence of Asia’s rising powers, how can we ensure that stability holds and prosperity continues?

Asia has two characteristics of particular relevance.

Firstly, Asia is a maritime domain. The sea is — for many Asian nations — central to their economic livelihood. A source of resources: fish, minerals, energy and so on. A means of transport, of trade.

For centuries before European colonisation, states in our region conducted commerce from China to the Middle East, and down to the northern tip of the Australian continent. The colonial period redrew the map of trade routes, shifted the centre of global commerce for two or more centuries to the Atlantic. But the re-emergence of Asia has restored those old flows, drawing links again between the Indian and Pacific Oceans.

That is one reason why today it makes more sense to think of the Indo Pacific, rather than East Asia or even the Asia Pacific, as the crucible of Australian security. This broader definition returns India to Asia’s strategic matrix. It connects the Indian and Pacific Oceans, thereby underlining the crucial role that the maritime environment is likely to play in our future strategic and defence planning. And foremost among the maritime issues we will need to confront, will be territorial disputes and potential challenges to high seas freedoms and freedom of navigation.

The Indo Pacific represents the centre of gravity of Australia’s economic and strategic interests. It includes our top nine trading partners. It embraces our key strategic ally, the US, as well as our largest trading partner, China. It reinforces India’s role as a strategic partner for Australia and it brings in the big Asian economies of Japan, Korea, Indonesia and Vietnam as well as the diplomatic and trade weight of ASEAN.

Freedom of navigation has been underpinned for 70 years or more by the comprehensive power of the United States, and in particular the power of the US navy. But the rise of China, India and other countries raises new questions about how different nations will operate at sea. Fisheries, seabed energy resources and, more recently, potential genetic resources from the marine environment can be immensely valuable. And some of the rules we have — for settling questions of sovereignty, jurisdiction and title to resources — are still evolving, customary international law and the UN Convention on the Law of the Sea notwithstanding.

This is why Australia is supportive of efforts by ASEAN to develop in cooperation with China a Code of Conduct for relations in the South China Sea. And it is why, as a region, we should be giving more attention to mechanisms to help manage crises and handle incidents at sea before they become a crisis.

The reality is that in our region we lack much of the architecture and habits that can help us mitigate and manage conflict. Asia is not Europe. Our region is much larger, much more heterogeneous. And we do not have the regional institutional structures that have evolved to help protect Europe.

In the event of a miscommunication, or flawed judgement, or poor decision-making, a strategic miscalculation or any one of a dozen diplomatic misfires, what mechanisms do we have in place to help maintain peace and stability in Asia? I believe this is one of the core challenges we face.

The importance of the international order

Thirteen years ago, before September 11 and the national security decade, Princeton academic Aaron Friedberg delivered a paper to the Singapore Institute for Defence and Strategic Studies that sets a useful framework for thinking about the challenges facing Asia in our time.

He posed the question: Will Europe’s past be Asia’s future? Facing the prospect of a clutch of simultaneously strong Asian powers, Friedberg examined the “pacifying” forces at play over the past decades that helped encourage peaceful co-existence rather than war: trade, capitalism, democracy, institutions, and so on.

He argued that, between the two world wars, the liberal-democratic countries paid too little attention to the realities of power, and put too much faith in building international rules and order, leading ineluctably to the Second World War.

The causation may be flawed but the realism implicit in his judgement is salutary. In the end, states pursue their national interests.

The point here is not to draw a dichotomy between realism, on the one hand, and rules and institutions, on the other. Quite the contrary. We need to reaffirm the importance of the role that rules and institutions can play: in helping to find common ground; in preventing escalation and in managing disputes; and in building a sense of common interests. These remain some of our best defences in trying to protect the prosperity and security we enjoy today.

Until now, the “pacifying” forces of trade, capitalism, democracy and — to a degree — institutions, have continued to flourish in our region, and now make even more compelling arguments for peace than they did at the turn of the century.

The Global Financial Crisis has been a major setback to global prosperity. While we have avoided a wholesale rush to protectionism, the instinct of protectionism must always be resisted. And we can take some comfort that the trade integration of our region has accelerated. As its economy has expanded, China has become the largest trading partner of 124 countries. It has overtaken the United States in that sense, with the US now the leading trading partner of 76 economies, down from 127 five years ago.1

Capitalism — albeit a bit battered after the global financial crisis of 2008 — retains its powerful attractive force. As prosperity has spread across Asia, so has the middle class keen to take advantage of it. McKinsey estimates up to 3 billion more middle class consumers will emerge in Asia in the next 20 years, mainly in India and China.

Democracy has increased its reach and in many countries is consolidating its position. India’s choice of democracy from the outset was a remarkable decision given its then high rates of illiteracy and poverty and a culture of hierarchy. And while it may at times have slowed down India’s decision-making, it has given India a resilience which is a huge asset for its economic development. The same can be said for another large and diverse Asian country, Indonesia, whose democratic transition has been one of the seminal developments of the last two decades.

In Myanmar, the April 2012 by-elections, to which we sent observers, were the first free and fair elections there in decades. They resulted in the National League for Democracy winning 43 of 45 available seats and propelled Aung San Suu Kyi to a seat in Parliament as head of Myanmar’s major opposition party.

In terms of international institutions, we have seen progress, although more nuanced. Greater diversity means multilateralism has become harder than ever and it has put immense pressure on our existing multilateral institutions. The G8 has ceded ground to the G20. Financial institutions like the IMF have made changes that recognise the new power relativities. But it must go further.

The Doha Round is struggling. Climate change negotiations have yet to deliver the global action we need. Reform of the UNSC is as far away as ever. Australia has shown great leadership on the Arms Trade Treaty, but everywhere multilateral agreements are harder to reach than ever. Some say we may have reached the end of the age of universal multilateral agreements in which nothing is agreed unless everything is agreed by every participant.

It is too early to say whether universal multilateralism is beyond retrieval. And if it is whether plurilateralism of the sort we are seeing in the services negotiations in the WTO might be the answer.

But one thing we can say is that regional institutions are going to become more important and will have a correspondingly greater role to play in fostering consultation and cooperation.

From Australia’s perspective, the EAS is the regional institution which has the highest priority. That should not be surprising. Its members account for 55 per cent of global GDP and half the global population. Eight EAS members are in the G20; there are three permanent members of the UN Security Council which, along with India, possess four of the five largest armed forces in the world.

As it grows and evolves, the EAS should serve three functions. First, it can help ensure that regional financial and economic integration keeps moving forward. Second, it can build confidence and help nurture a culture of dialogue and collaboration on security issues. And third, it can provide a vehicle to address transnational issues like climate change, resource and food security, non-proliferation and terrorism.

Our core objective should be to nurture habits of consultation across the region. Consultation might not resolve problems but it can make the search for solutions easier and diminish the risk of miscommunication and miscalculation.

In one sense, we are working through the EAS to seek to entrench, deepen and expand across East Asia more broadly the type of cooperation that ASEAN has fostered in Southeast Asia.

And I should say here that I agree with a great deal of the content of Asialink’s recent publication on Southeast Asia2.

In particular, I agree that ASEAN can claim significant success as a regional body, that it has shown skill in region building and that it is an important partner for Australia and others in further developing regional institutions, including the EAS.

The Australian Government is very well aware of the importance of ASEAN cohesion in addressing a range of regional issues now confronting us and of the broader economic and strategic importance of Southeast Asia.

So, in that context, we welcomed the Asialink report which helps take this message to a wider audience. Most of the report’s recommendations cover ground on which we are already actively engaged in a policy sense, but I’d also agree with the report that it is important that we continue, as Minister Carr has done, to weave a story of Southeast Asian engagement into our broader foreign policy narrative.

There are of course other regional institutions which advance important Australian strategic and economic interests. The ASEAN Defence Ministers Meeting (ADMM) is shaping up as a useful opportunity to deepen dialogue on defence and security issues.

APEC plays an important complementary role to the EAS in Australia’s regional diplomacy. APEC may no longer deliver the geo-strategic dividend that some of its founders envisaged. But with its well-established track record of encouraging unilateral economic reform, good regulatory practice and habits of collaboration between officials, business, academia, ministers and leaders, APEC will continue to help underwrite prosperity and openness in the region. As the Government’s White Paper on “Australia in the Asian Century” states, both the EAS and APEC offer avenues for nurturing regional support for reform. Efforts across both forums provide Australia with the best chance to shape outcomes that are in Australia’s and the region’s interests.

Building our regional institutions

In making the case for a stronger EAS we should be clear eyed about the relative importance of bilateral and multilateral relationships in the management of the challenges we face in Asia.

The primary burden of managing strategic stability in Asia will fall on bilateral relationships and smaller networks of relationships among the major powers of the region.  And of foremost importance among these relationships will be the US-China relationship.

Asia is where the template for the US-China relationship will be forged. It is where the interests of the US and China — competitive and complementary — will need to be managed, harmonised and reconciled.

The US and China are in some respects strategic competitors — one of many reasons why the so-called G2 was never going to fly. But they are also economic partners with a strong mutual interest in ensuring that competition does not slide into confrontation much less conflict. Indeed the challenge for all of us is to help prevent a US-China faultline running through Asia. Conflict between the US and China would be a disaster for everyone: the US, China, the region and the world.

Economic interdependence will work, up to a point, in keeping the US and China from an adversarial relationship. But it is no guarantee.

China has every right to seek greater strategic influence to match its economic weight. The extent to which this can be peacefully accommodated will turn ultimately on both the pattern of China’s international behaviour and the extent to which the existing international order intelligently finds more space for China.

Some assume that when China becomes the world’s largest economy, it will seek to assert itself as the hegemon of Asia. But a China with the world’s largest GDP will still be a poor country with a low per capita income. Its primary focus will therefore be domestic as it seeks further to increase the living standards and quality of life of its citizens. The same applies to India which is likely to become the third largest economy in the not too distant future. The strategic behaviour of a large rich country and a large poor country is not the same. To assume it is can lead to serious policy errors.

Australian interests are best served by a stable balance of power in Asia which encourages economic integration, is inclusive in membership and looks outward. Our strongest partner in securing these objectives is the US with whom we share both interests and values. This intersection of interests and values is also true of our relationships with Japan, India, Indonesia and Korea.

China is of course also important to Australia and we seek a stronger and closer relationship with it. Already Australia’s largest export market, China’s economic importance to Australia will only grow. So it is in no one’s interest for China to fail and it is in every one’s interest for China to continue to be engaged in the global economy and in the multilateral institutions which underpin and reinforce international norms.

Australia does not want to be put in the position where we have to choose between the US and China. Indeed, we wish to see a strong and stable US-China relationship. And we will do all we can to support such a relationship.

The importance of bilateral relationships also of course has an Australian echo. For us, there are six key relationships: the US, China, Indonesia, Japan, India and South Korea. These six relationships will both shape the environment in which Australia operates and provide important trade, investment, and security opportunities for us.

Evolving global institutions

My focus today has been on the Asian region. But we of course live in a wider ecosystem in which regional and global challenges are intertwined. The logic of regional institution building applies also to the reform of global institutions.

Indeed, in my view, the current edifice of global institutions is not strong enough to carry the weight of the challenges we face. The largest gap is the absence of a driving centre: a grouping reflective of the distribution of power in this century and capable of providing leadership on the big challenges of the future. Some see this as a role to which the G20 should ultimately aspire.


The individual interests of the G20 members are not always aligned. It embraces different political and economic systems as well as values. But it is precisely this diversity, coupled with strategic and economic reach, which makes it suited to driving global action. The standing of its members means that if it agrees on something it has the means to deliver it. The G20 contains an inherent alignment of means and ends.

The G20’s focus is of course economic. This is unlikely to change anytime soon. So it is unlikely to displace the United Nations Security Council which retains primacy for the maintenance of international peace and security. It is the only institution whose resolutions are binding under international law and carry the political weight and legitimacy of the international community as a whole. And our current two year term provides us with a unique opportunity to participate, and to influence, the institution which is the ultimate decision maker on how the international community will respond to threats to international peace and security.

Conclusion

Let me conclude with these observations.

The future of Asia will be shaped by two key questions. First, will the strong economic growth of the last several decades continue? And, second, will the strategic stability of the last six decades hold?

There is no large Asian economy which will not face serious challenges. The pace of economic growth in the large Asian economies will depend on continuing economic reforms. In this Asia is no different to any other region. The role of the state, the prevalence of subsidies, a reluctance to embed competition principles in public policy and the favouring of state owned enterprises are all areas which will need re-examination in most Asian economies.

In some Asian countries, political reforms will also be necessary if economic growth is to be sustained. So we should be careful about linear projections of growth because these political and economic adjustments will be painful. Driving reform will only get harder irrespective of the political system.

When we move beyond the economic to the strategic, it is clear that we are at a moment in history when tectonic plates are shifting. Power is moving from west to east. Asia will see for the first time in centuries a clutch of powers which are simultaneously strong. New patterns of economic cooperation and even interdependence are being built atop long-standing strategic fault lines.

The margin of US influence is narrowing although the absolute lead in military power will remain clear cut for decades to come. China’s strategic reach will grow to match its economic power. India will become a more important strategic power as its security horizons stretch well beyond its neighbourhood. And other countries such as Indonesia and Vietnam will also be looking to advance their interests in what is going to be a much more crowded Asian strategic landscape.

Times of transition challenge policy. We are dealing with trends which we can identify but only dimly project. Since we cannot know the end point, we need to think creatively about how we manage change. And we need also to work hard to fashion the institutions which will help us to navigate our way through territory which is only partially mapped.

Thank you.