Photo of Mr Peter Varghese

Address to Centre for Defence and Strategic Studies Course

Australian Defence College

Peter Varghese AO, Secretary, Department of Foreign Affairs and Trade

12 February 2014

Good morning to all of you. Ian, thank you very much for your invitation to be here. I'm delighted to have this opportunity, can I acknowledge the very important role that the college plays in terms of the education of the future leaders of our defence forces, also the initiative of having so many representatives from so many close friends of ours participate in such a course.  Can I also acknowledge the rather unnerving presence of all those mentors at the back. I assume they're not allowed to ask questions.

I don't intend to engage in a great academic discourse on Australian diplomatic power, I'd rather give you a practitioner's perspective. I'm pleased that this lecture theatre has been named after a very outstanding Australian foreign policy diplomat, Percy Spender. Percy Spender in many ways was ahead of his time in the way he perceived Australia's interests and the importance of the Asian region. I'm told that the Washington Post once described him as the most kissable diplomat in Washington. So I think he raised a completely different benchmark for the definition of diplomatic success, which many may try to emulate but probably few will succeed.

The balance sheet of power – of diplomatic power – is never easy to draw for any country. From the perspective of a practitioner, it can be reduced, in the case of Australia, this applies more generally to a relatively straightforward proposition. Which is, we exercise diplomatic power to the extent that we succeed in persuasion. Ultimately for most countries, persuasion anchored in mutual interests is the currency of diplomatic power.

This applies much more broadly to smaller or medium sized countries. Even in the case of great powers, even in the case of super powers, the capacity to achieve your interests simply through the exercise of raw power is increasingly curtailed and really these days quite rare. Australia is not rich enough to buy our way in the world, nor are we militarily strong enough to bully our way to our objectives. So for us to navigate our interests in the international environment requires us to ultimately persuade countries to act in ways which suit to serve and advance our own interests.

We are living in a time when two big currents are flowing through the international environment. On one hand, you have the story of economic growth, particularly echoed in this part of the world, in the Asian region and the Indo-Pacific region. That economic growth has created a strategic environment where weight is shifted as economies grow. So you have the management of two quite distinct but potentially contradictory forces at work. On one hand, a global economy – and our economy is getting more and more globalised – based on global value chains. It creates a level of economic interdependence which is characteristic of virtually all of our economies these days.

On the other hand, you have a strategic map which is still largely drawn along the lines of historical strategic competition. Nowhere is this interaction of economic interdependence and strategic competition more pronounced than in the Indo-Pacific region. We are seeing the rearrangement of strategic weight and we will see the experimentation, of the proposition how far does economic interdependence contain, constrain, put a break on strategic ambition. I'll come back to some of those things a little bit later.

Australia has to navigate its way through this thicket of strategic competition and economic interdependence. While many in Australia – due to our relatively small population in a region with countries with very large populations, tend to think of Australia as a minor player or a small country. The truth is that we bring quite a significant set of assets to the pursuit of our economic, political and strategic diplomacy and to our diplomatic power. Australia is a G20 country, so in that sense we're clearly in the top 20. We have the world's 12th largest GDP, and the fifth largest GDP measured per capita.

In other respects, Australia does even better. In other words, we're not just in the top 20, we're in the top five. Let me run you through a few of those because I wanted to put down a marker about what we bring to our diplomacy. We have the third largest pool of investment funds under management anywhere in the world. We have the fourth largest number of international students of any country in the world. Indeed, if you look at the top 100 universities ranked by either the Times index or the Shanghai Index we have typically five or six out of our 39 universities consistently in the top 100. I would suggest to you very few countries have that high proportion of their universities in the top 100.

We're ranked third for economic freedom and 11th on the ease of doing business. We are the world's largest exporter of coal, iron ore, aluminium ores, and zinc, the largest exporter of beef and chickpeas, the fourth largest exporter of LNG. The Australian dollar is the fifth most traded currency in the world. We rank normally second or third in the UN Human Development Index, a composite picture of Australian society and the economy. We have the fifth highest life expectancy rate in the world and we have the sixth largest land mass in the world.

So as we engage our interests and advance them, we do bring very significant assets to that endeavour. It's one thing to have assets, it's another thing to have a diplomatic strategy and a diplomatic purpose and I want to spend a little bit of time talking about what the focus of Australian diplomacy is. Clarity of purpose and a sense of priorities are absolutely fundamental to the exercise of diplomatic power.

When I took up this job a little bit more than a year ago, I said that I saw Australia's interests best advanced through the framework which I somewhat pompously call 6 + 2 + N. Let me spend a little bit of time explaining that. The six is a reference to the relationships that will most shape Australia's strategic environment, and most influence our economic prospects: the United States; China; Japan; Indonesia; India; and Korea.

That's not to say that other countries are not going to be important to Australia; clearly they are. However these six countries are in a league of their own, in terms of the weight they bring to strategic and economic events. Their capacity to influence and shape it, and the interests that they engage directly with are Australia's hard strategic and economic interests.

The United States has been our major strategic ally ever since the signing of the ANZUS Treaty in the 1950s and it continues to be. It has been a crucial economic partner for most of Australia's history as a trading nation. Its aggregate investment and trade with Australia, by that particular measure, makes it our largest economic partner.

The United States is the country which has shown a remarkable capacity for renewal and regeneration and innovation. While clearly the margin of its global pre-eminence will inevitably narrow as other countries emerge with large economies and greater strategic throw weight, the position of the United States as a strategic power and the position of the United States as an economic power, will continue to be extraordinarily significant for Australia and globally.  Wherever you position yourself on the trajectory of America's economic growth – I happen to position myself more on the optimistic side of it than the pessimistic side of it – you can already see an incipient transformation and regeneration in the US economy. Whether you take an optimistic or a more pessimistic approach, the standing of the US as a strategic power and an economic power will clearly still remain extraordinarily significant.

China has been the transformational story of our region, and indeed probably the transformational story of the last three or four decades, ever since Deng Xiaoping opened up the Chinese economy in the late 1970s. China now is on a path to becoming probably, at least measured by PPP, the world's largest economy at some point in the next decade or two.

How China navigates its economic strategy, how it manages economic reform, is a high priority for the Chinese leadership. How it positions and defines itself as a strategic power in East Asia and perhaps beyond are going to be very big questions for Australia, as they will be I suspect, for all of the countries represented in this room. I don't think we can with any great accuracy predict what China's landing point is going to be.

Most of us want to encourage China along the path of what Bob Zelnick referred to as a responsible stakeholder. We all recognise the importance of a China which is constructively engaged not only in the affairs of the region, but also in the affairs of the world. Several of us hope that China ultimately will come to define its own national interests as best served within a framework of international institutions and international law and international norms. These are all big issues that have yet to play out.

Japan, for Australia, has been a vital economic partner since the Second World War, and major source of investment, our second-largest export market. It is a country that shares a broad strategic framework, a way of thinking about security in the region, with us. We of course are also both allies of the United States. So a relationship with many dimensions, and one that has historically been close in the post-war period, and continues to be close.

Where Japan's economy goes is also an open question. Abenomics is beginning to show some signs of economic growth; certainly the first two arrows of Abenomics have hit the mark. The third arrow of structural adjustment, structural reform, still has a way to go. Japan is going to be, one way or another, a major player in the economic and strategic affairs of the region.

Korea is a country with which Australia is developing a deeper and a broader middle power agenda. It is a country which is an important economic partner of ours. I hope it will grow even more important as a result of the free trade agreement that we've just concluded. Korea, again like Australia, has a close strategic relationship with the United States and a country which increasingly is becoming a prominent partner of ours in multilateral diplomacy. The creation of an informal grouping of middle powers that we call MIKTA – which brings together Mexico, Indonesia, Korea, Turkey, and Australia – is a vehicle for discussing and pursuing mutual interests as middle powers.

India is a country which over the long term is likely to play an increasingly important role in both the economy and the strategic affairs of this part of the world. At the moment, India's economy is slowing as its economic reforms slow.  But if India is able to resume a path of economic growth that's closer to the six to seven per cent range than the four to five per cent range where it is now, and if it can sustain that over the next two or three decades, it will become, in its own right, a very significant economic and strategic player.

So, those six countries in my view will play a crucial role in the way in which our economic and strategic environment develops. The way in which we conceptualise that strategic map is increasingly shifting towards an Indo-Pacific framework as opposed to an Asia-Pacific framework. The vocabulary for Australian security and strategic policy for decades now has put a primary emphasis on the Asia-Pacific.

More recently we have consciously begun to articulate our strategic environment in an Indo-Pacific context. That reflects two key judgments on our part. The first is that it returns India to our strategic matrix in a way that it hasn't been, largely because India itself had preoccupations elsewhere, before it began its economic opening in the early 90s. Secondly, it highlights that maritime challenges are likely to be the big challenges for the future of Australia and a construct which brings together our Indian and Pacific Oceans and also vital sea lines of communication is best captured through an Indo-Pacific descriptor than anything else.  So that's quite an important development in the way we look out on our economic and strategic environment.

The plus two in my formula were the two institutions – multilateral institutions which will most engage and potentially most shape our interests. They are the East Asia Summit and the G20. The East Asia Summit as we work our way through this period of transition and shifting strategic weights, brought on by this transformation in economic opportunity, we are going to need as many sources of stability as we can find.

Now ultimately the stability of our region will be determined by the character and the quality of the major power relationships. It is how the major powers engage with each other and define their interests in terms of each other. This will most affect whether we come through this period of transition with a stable strategic environment or whether we go through a period of significant strategic instability.

At the margins, beyond the major power relationships there is a role for institutions to help manage this transition. Institutions that can create a culture of cooperation and communication, that can set down markers for strategic behaviour and which ultimately, are able to reinforce a strategic culture in our region. That is where I think the East Asia Summit, potentially, has the biggest role to play.

Of all of the regional institutions, of all of the alphabet soup of regional institutions, the East Asia Summit brings together the right membership and potentially the right mandate. It brings in all of the major powers; it brings in the United States and Russia. Beyond the ASEAN + 3, it has ASEAN as an institution and it includes India, Australia and New Zealand.

We have an opportunity with the East Asia Summit to craft an institution which can contribute, not just to the management of shifting strategic relationships, but also further underline the importance of an outward looking and more integrated economic entity across East Asia. It's the economic as much as the strategic set of objectives where the value of the East Asia Summit lies. Over time it would be our hope that we can take that set of ideas and translate it into a functioning and effective institution. At the moment we have the vehicle but I don't think we quite have the navigation system in the East Asia Summit. The challenge of our diplomacy – the diplomacy of all of the members of EAS – is to develop that navigation system.

The G20 picks up some of these issues on a different canvas, a much different canvas. The G20 is all about how you begin the process of modernising and refurbishing global institutions. The creation of the Bretton Woods system, the creation of public goods reflected in the United Nations charter, reflected in the International Financial Institutions, reflected in the architecture of global governments that we saw at the end of WWII and built through in subsequent decades, has served the global community extraordinary well.

We may well look back at the last four or five decades and be grateful for the fact that the strongest power of the post war period believed its best interests were served by the creation of international institutions and the concept of public goods, that's an ahistorical development. Normally great powers don't act in that way. Normally great powers have a narrower interpretation of where their interests lie.

However successful that project may have been, the reality is that it no longer is reflective of the world in which we live. The UN Security Council is no longer reflective of the balance of power, globally. The IMF, although it's been significantly reformed, is still just short of introducing a weighting, which better reflects the economic standing of Asia as opposed to Europe. If we want international institutions that reflect the world as it is today and the world it's likely to be tomorrow, we need to start building a different type of architecture.

That is where I think the G20 has potentially such a huge role to play.  It brings together the world's 20 largest economies, it's big enough to be able to represent where strategic and economic weight lie globally, but it is still small enough to be able to actually make decisions and work together. A country like Australia is very dependent on being able to make an institution like the G20 work and that's something that we will take into obvious account as we prepare for our own chairing of the G20 in November.

At the moment, the G20 is understandably seen essentially as a framework for economic and financial cooperation. Australia is a country which would like to see the G20 over time take on a role beyond that more narrow mandate. I don't think there's anything like a consensus in the G20 that we ought to go down that path. Ultimately our best interests are served if you have a G20 which acts more like a steering group for global issue than just dealing with the challenges of economic/financial reform. So those two institutions are going to be very important.

The N in the formula 6 +2 + N is the neighbourhood, ultimately for Australia if you don't get the neighbourhood right, you get nothing right.  Our diplomacy will be judged essentially by the effectiveness of our handling of issues in the neighbourhood. It is a very complicated neighbourhood and in the South Pacific, from a development point of view, obviously not a straightforward area to operate in.

That is the sort of broad framework that we operate in, and let me just say a few things about what sits under that broad framework. Clearly our economic interests and the economic diplomacy that must go with it is a natural and a high priority for Australia, as it would be for any of the countries that are represented in this room. Now that we have brought the aid program within the Department of Foreign Affairs and Trade, we are better placed to pursue an economic diplomacy which is more integrated and which better aligns our foreign trade and development cooperation interests.

What you'll see in terms of our aid program is: (1) that will be more narrowly focused geographically and the footprint will essentially be the Indo-Pacific; (2) it will have a slightly different mix between bilateral and multilateral with a preference leaning towards more bilateral aid; and (3) it will have a very pronounced focus on economic growth as the surest pathway to poverty alleviation.

Big success stories of poverty alleviation in the world in the last several decades have been countries like China, which have brought poverty levels down from the mid 80s to around 10 per cent or so. Hundreds and hundreds of millions of people who have been taken out of poverty all off the back, not of aid programs, but off the back of economic growth.

So it is about finding the best way for an aid program to contribute to economic growth and, in particular, finding the best way for the aid program to work with the private sector. Ultimately it's the private sector which is the engine of economic growth – this will be a very big ambition of our economic diplomacy and of our aid policy.

Trade negotiations, free trade agreements, bilaterally, regional arrangements like the Trans-Pacific Partnership or the Regional Comprehensive Economic Partnership, will be big features of our economic diplomacy, as will trying to find the best fit for plurilateral negotiations in the absence of being able to get the WTO Doha Round across the line. The challenges we face in an area like the Doha Round are indicative of a broader crisis, in my view, of multilateralism. We live in a time where multilateralism is never more important, but also never more difficult.

It has become much more complicated now to arrive at a genuinely universal multilateral agreement partly because the number of players have expanded. When the UN was created, we were dealing with 50 odd countries. We are now dealing with 200 odd countries. Finding a consensus is proving much more difficult and we need to think creatively about how we will manage in an era where global multilateralism will inevitably struggle.

For most of us, we will end up looking much more at plurilateral arrangements, at bringing countries that want to do things together, and getting them to agree to do them. Then hopefully leaving the door open for anybody else that wants to join, rather than be trapped by the diplomacy of consensus and rather than being trapped by the proposition that nothing can be agreed until everything is agreed. That is going to create too big a hurdle for all of us.

Let me also mention a couple of other things which are quite central to the power of diplomacy and to the pursuit of diplomacy. One is the intersection of values and interests, we will hear much more about the intersection of values and interests into the future. There's nothing fundamentally new about the need to integrate values and interests. One way or another, that's been a feature of diplomacy from time immemorial.

For a country like Australia, which defines itself as a liberal democracy, it sees itself as a country that wants to give voice to core values, that accepts and promotes concepts of universal human rights. Obviously as we pursue our hard interests, our hard economic and strategic interests we will inevitably also want to give effect to the underlying values of the Australian community.

That doesn't mean an Australia that preaches to the rest of the world. It doesn't mean an Australia that insists that other countries do as we wish to do in Australia, because neither of those things are effective or conducive to the sort of diplomacy that we want to pursue. Equally, I don't think it's possible to pursue national interests completely devoid of the values base of the country and that needs to be a clear part of the way in which we engage the world.

The last issue I want to mention is the importance for all institutions to exercise power in a sustained way and certainly to exercise influence, you need a set of institutions that are capable of carrying the weight of your diplomatic and strategic strategies. You need foreign ministries and other ministries that have the horsepower and the wherewithal able to pursue diplomatic strategies. One of the big challenges for many of the large emerging economies is the mismatch between the strength of their economy and the weakness of their institutions.  Institutions are rather fragile creatures. They take a long time to develop, a long time to nurture, and unless countries get their institutional foundations right, they limit very significantly what they can achieve.

So let me end there. It is clear from all that I have said that power in the sense people normally think about it, raw power, the ability to impose your will, is not irrelevant in international relations. It would be a huge mistake for anybody to believe that it’s irrelevant to international relations. But it is certainly becoming far more complex these days to exercise power and far more difficult, irrespective of where you stand on the power gradient, to do it completely unilaterally.

I'll stop there. It's probably more useful if I try and answer questions or pick up any comments that you have with whatever time we have left.

QUESTION: …[Indistinct] from perception of Asia-Pacific to Indo-Pacific, but the current government and foreign minister are using Indian Ocean terminology, and I mean, it’s not necessarily semantics. How important is that different view of the definitions that we use this [indistinct]? Now, Asia-Pacific in the continent and ocean, Indo-Pacific is two oceans – Indian Ocean and Pacific Ocean, and the other term, you know, the Indian Ocean – Asia-Pacific is you know ocean-continent-ocean. Is it important?

PETER VARGHESE: Well, descriptors are important because, one, if you’re not clear in your own thinking, it’s not going to be much of a construct, and two, you need to convey what it is that you’re trying to get at. I don’t think there’s any substantive difference between the Indo-Pacific label, which was developed under the previous government and first given expression in the Defence White Paper in terms of strategic doctrine, and what Julie Bishop calls Asia-Pacific Indian Ocean, although, the government also uses the term Indo-Pacific in its speeches and in its documents as well. So the substance of it is the same, and driver for moving to an Indo-Pacific is pretty broadly accepted. But, every government has its own vocabulary. Over time it probably will settle with Indo-Pacific, but for a period I think you will hear both, but I think they mean the same, virtually.

QUESTION: [Indistinct] as we move to the Indo-Pacific, what do you see as your key challenge to using your diplomatic instrument to deliver national interest, and where that key challenge is, is there a role for military instrument in helping it, and if there is, what is that role?

PETER VARGHESE: Our challenges are at two broad levels. One, we have to have a very good analytical understanding of what’s happening in this part of the world. So we need to be able to make informed and clear judgments about how the interplay of economic and strategic interests is going to pan out, and in order to do that, obviously, we need to have a very good on the ground perspective as well as a capacity at headquarters to be able to bring all of these concepts together. So hanging on to our diplomatic footprint, and ideally, expanding it, is also very important from my point of view because like many countries, we’re going through budget pressures and I think we’ll face quite a tough budget in Australia when next year’s budget is brought out. By we I mean the public sector generally, not only Foreign Affairs and Trade. So that’s going to be very important for us.

As an organisation, we also need to make sure that we get the integration of AusAID into DFAT right, and that is an enormously time-consuming process, because we are bringing in two and a half thousand staff from AusAID and we’re taking our budget from one billion to six billion. That’s a big stretch for any organisation, and to do it at a time when you still have to deliver an active diplomatic and trade strategy is going to be in my view quite a challenge.

QUESTION: Imagine the move away from multilateralism to more pluralism is vital, in the region, particularly [indistinct] real preference for bilateral negotiations, and I guess that’s evidenced by the way [indistinct] Philippine UN action on arbitration in South China Sea. In that context, how do you see East Asia or Southeast Asia coming to consensus on the development of South China Sea resources?

PETER VARGHESE: Yes, well, not easily is my short answer.  This is going to be an extraordinarily difficult issue to solve and our focus should really be on how we manage the issue rather than think that we can quickly resolve it. Territorial disputes are always fraught, but a territorial dispute in the current context I think is particularly sensitive and particularly complicated.

Along with many other countries the position we take is, one, we’re agnostic on the merits of claims. There’s no Australian position on which party to this dispute has the stronger or the weaker or the best claim. We will remain agnostic on that. I think the big question here is really what kind of strategic culture do you want to engender and reinforce in this region at this time?

That is why talking about some fundamental principles that should guide the way in which you pursue territorial disputes is so important: the principle of respect for international law ; the principle of not taking action that can be disruptive action; and the principle of not using force to resolve the territorial dispute. They are very important normative issues for us to find agreement on, even if we cannot find agreement on the actual territorial claim that will take quite a lot of time.

There are many ways in which you can address competing territorial claims.  It is important for the parties to the dispute – and Australia’s not a party to any of these disputes in the East China Sea or the South China Sea – for the parties to the dispute to start thinking creatively about how they can do this.

The example of the Antarctic Treaty, where everyone basically freezes – Antarctic, that’s appropriate – freezes their claims and gets on with the business of cooperating on the use of Antarctica for scientific and not military purposes. Australia claims 40 per cent of Antarctica. We are the largest claimant state in Antarctica, we are more than happy to put aside that claim, not to give it up, not in any way to weaken it, but to put it to one side while we focus on a range of cooperative activities in the Antarctic region.

You’ve got examples of where you can have joint development of a disputed area, and an agreement between the parties on how you would share the profits that comes from exploiting resources in those areas. There are ways in which these issues can be managed which can preserve our previous positions but not disrupt the strategic equilibrium. It is very important that we reinforce those ideas at a time when, as I said in my remarks, our region is actually going through a very profound transition in its strategic outlook. If we can anchor those core principles in the region, have everybody accept them as core principles and therefore, principles that we would want to see upheld, then it makes it that much easier for us to get to the harder question of how you resolve territorial disputes.

QUESTION: Thank you Secretary. On the territorial disputes, I was very interested in your mathematical formula, being an aerospace engineer, but particularly liked the end. I want to focus in on East Timor, probably our newest neighbour. One of our closest neighbours, probably one of our poorest neighbours. You talked about the treaties, I think alluded to the treaties recently where we shared some of the oil, and so that's coming out of the Timor Sea. There's been a lot in the paper recently about Australia using excessive force, espionage, to get gains. There's been talk about Australia withdrawing from the jurisdiction of, you know, the ICJ, so that we can’t have a third party arbitrator on the situation. Listening to your earlier speech and your last answer are we guilty of hypocrisy? Are we in a situation that we are altruistic about these aims of being part of international courts and all the rest and organisations, but when it comes to oil we conveniently set them aside?  Do you see it as a diplomatic win? Or a loss, from Australia's perspective? A hard-pointed question, I know.

PETER VARGHESE: No, it will surprise you to know that I don't believe we are being hypocritical in our handling of this issue, because what's the reality here? We negotiated an agreement with East Timor, the Treaty on Certain Maritime Arrangements in the Timor Sea (CMATS), which deferred the question of maritime boundaries for a 50-year period. We set out a framework in the earlier Timor Sea Treaty for the joint development of resources in an area where the marine boundaries had not been defined and agreed, right?

So it's completely consistent with what I've been saying. One, it was a negotiated outcome, not a unilateral outcome. Two, it was a framework for joint development, and you can say the split should have been different, but it's pretty hard to argue against an 80-20 split when we're 20 and the other side is 80. So I don't think that goes against any of the things that I've been saying.

We're in arbitration now on CMATS, because East Timor is putting forward the proposition that Australia engaged in intelligence activities, and as a result the treaty ought to be declared null and void ab initio. I am not going to comment on whether Australia did or didn't engage in intelligence activity, and no Australian Government would do that.

The point I would make is this: even if it can be proven one way or another what happened in relation to intelligence activity, our very strong legal view is that it makes no difference to the validity of the treaty. That's the proposition that will be tested in arbitration, and we'll see whether the arbitrators agree with that perspective or not.

Australia has been a strong partner for East Timor; we want to see East Timor succeed, we want to see East Timor with a strong economy. One of the reasons why East Timor is a big recipient of Australian development assistance is precisely for those reasons. We have in CMATS a good framework, bearing in mind that agreement on maritime boundaries is a very, very difficult and usually enormously time consuming process. You can do this for decades, and decades, and decades, and still not arrive at a solution.

So far from being hypocritical, we've actually been giving effect to the principles that we've been espousing.

QUESTION: Secretary, do you believe the Chinese strategic and economic interests in the South-West Pacific, particularly Melanesia, are compatible with Australian interests? And if you do, do you see the potential for friction in the future?

PETER VARGHESE: I don't see why they should be inherently incompatible with Australia's interests. My sense of what drives China's interests in the South Pacific are firstly an interest in resources, and this is a global interest on the part of China. China is a resource-hungry economy, and it will look for opportunities in regard to resources where it can find it, and that's an entirely legitimate activity for China to pursue.

Secondly, and this is now much less the case than it was in the past, any Chinese interest in the South Pacific was driven in part by Taiwanese interest in the South Pacific, and as you know the South Pacific is one of the few regions in the world where a significant number of states recognise Taiwan and not China. Fortunately that rivalry between Taiwan and China has diminished very significantly, and all of the sort of chequebook diplomacy that went with it is now much less evident.

China is a power which is expanding its international engagement, it's not going to exclude engagement with the South Pacific from that broader global strategy. And again, there's nothing illegitimate about China also pursuing relationships with the South Pacific.

I don't think we're in much danger of being displaced in the region as the partner of choice when it comes to economic and other issues for most of the countries in the South Pacific.  Ultimately, Australia will continue to be in a position where we can do things that other countries may not be, or may not be particularly willing to do it.

When Julia Gillard was in Beijing on her last visit there we signed a MOU on development cooperation in the South Pacific. We will look at whether there are opportunities for Australia and China to work together on some development projects in the South Pacific.

So we need to keep all of these things in some sort of perspective. The South Pacific will not have the same strategic value to China as it does to Australia, just because of where we are and what our interests are.

QUESTION: I'm just wondering how you balance the principles versus the practical needs when deciding about foreign policies in international relations. So, for example, in the case of Fiji, principle over the practical need to engage.

PETER VARGHESE: Like all policy making, you've got to balance a number of different factors. All the factors don't pull you in one direction, inevitably they're going to pull you in different directions. In the case of Fiji, we took the view that the coup was not acceptable, that overturning a democratically elected government was not only a sort of violation of the principles that Fiji had signed on to, but was not something that we would want to see an established feature of the region.

We had solid grounds for taking the position that we did. It's in nobody's interests for Australia and Fiji to have a completely non-existent or dysfunctional relationship, and we would like to see Fiji return to democracy. We would like to see a Fijian economy strengthen. The two are not unrelated, a return to democracy I think would open up options for Fiji which currently are closed.

The fact that Fiji has now committed itself to hold an election by September, that they have started the process of organising that, that they've appointed an election commission, that they're getting the constitution in place and the rules of the road worked out. They're all very welcome developments.  We have indicated – and particularly, the Abbott Government has indicated – that we want to reset our relationship with Fiji. We want a return to a fully normal relationship with Fiji, and once Fiji has held an election and it's a credible election, which we will hope it will be, then we will very quickly return to a fully normal relationship.

We've also said under the Abbott Government that even before the election there are things we can and are willing to do to help rebuild the relationship. We would be happy to send or return our defence attaché to Fiji. We would be happy to sit down with Fiji and talk with them about what a defence cooperation program post-election might look like. We very much want our high commissioner to go back to Fiji, and we will do things in terms of governance arrangements in Fiji, capacity-building the public sector. We'll do that straight away with Fiji as an indicator of our interest in setting up a normal relation post-election.

If this goes as we hope it does, we would have both upheld an important principle, and a principle that has practical implications, not just an abstract principle. Seeing Fiji return to democracy and the resumption of a fully normal relationship. However it's only February, and a lot can happen between February and September, so we'll have to wait and see.

QUESTION: The previous speaker highlighted that [indistinct] in our education system [indistinct] In terms of developing our skills in negotiation and persuasion [indistinct], are we doing nothing else in correction? Are we sending enough people offshore to study other cultures and other nations so that we have those people return to your organisation and have those skills and knowledge of other cultures?

PETER VARGHESE: The New Colombo Plan, which we launched a little while ago, is intended precisely to lay the ground for that kind of engagement. For those of you who don't know what the New Colombo Plan is, the old Colombo Plan brought a generation of students from Asia to Australia to study at Australian universities. The New Colombo Plan is intended to bring a generation of Australians to study in Asia for a semester or longer, and to have a work placement at the end of it. Another way the Foreign Minister thinks about this, she sees this as becoming a rite of passage for Australian undergraduates; they would see it as a normal part of their undergraduate degree that they would go and spend time in Asia studying. I think that's a very worthy idea, and we'll work very hard at making sure that the New Colombo Plan is up and running.

The level of engagement that Australians have with the region is increasing all the time, and is a factor of the fact that we now have a level of economic engagement which is high. It's also a reflection of the fact that we have diaspora communities in Australia which are contributing to the relationships with Asia and which are leading to a lot more Australians going backwards and forwards. So the so-called Asia literacy objective is important to our future.

You can arrive there through many different ways, but it is seen as very important. Earlier this week I spoke to our new batch of graduate recruits in the department.  The number of those who had spent time studying and in some cases working in Asia and who were fluent in an Asian language were very high. And certainly you know when I compare it with when I joined the department in the late '70s, completely different. So I think you are seeing an engagement with Asia which goes well beyond just what's happening at the elite level, or just what economic engagement does require.

QUESTION: Sir, I was particularly interested in your discussion on multilateralism in Southeast Asia and what you described as the alphabet soup. I'm reading about the Five Power Defence Arrangements at the moment, and some of the reviews of that are actually classifying that as mini-lateral. So we talk about multilateral, we now talk about mini-lateral, and you're now talking about plurilateral. Could you just expand on that term a little bit, please?

PETER VARGHESE: I normally use multilateral to suggest, universal multilateral. In other words, an arrangement that's open to any country to participate in it. Multilateral doesn't have to mean that, but for the purposes of the point I was making, that's what I was using multilateral to mean. Plurilateral is an arrangement where you get together a group and a large-ish group of countries who want to do something and can agree on it and get on with the job of doing so.

So for instance to give you a concrete example in the area of trade negotiations, the Doha Round, is multilateral. Any member of the WTO, which is most countries in the world – not all of them, but most countries in the world – participate in the Doha Round, which at the moment is not going very well. So a group of countries in Geneva have got together to negotiate a services agreement, which is a plurilateral negotiation, because it brings together – I can't remember the number, probably about 70 countries – together to negotiate an agreement on services. So it's taken one bit of the Doha agenda and decided we're going to work on that. We're going to come to an agreement, and then we'll open that agreement to anybody else who wants to join it. So that's a very good example of plurilateral negotiations. Mini-lateral is just a smaller group of plurilateral, so if you've got more than two, you can have mini-lateralisation. Whether you call the EAS plurilateral or mini-lateral is really a matter of choice.

QUESTION: It's clear from your presentation that economics and Australia's diplomatic power go hand in hand. You mentioned the size of Australia's land mass; you mentioned sea lines of communications on trade. You didn't mention the fact that you've got the third largest exclusive economic zone in the world. Is that an opportunity that we've fully leveraged, or is it something that over time, as technology improves and our access to resources at [indistinct] improves, that we'll become a more significant player as time goes by?

PETER VARGHESE: I'm not sure to what extent having one of the biggest EEZs affects the way in which we pursue our interests. It had a big impact on the resources we put into the negotiation of the Law of the Sea Convention because we obviously had a very big stake in the principles governing the Law of the Sea Convention, and it's a kind of driving force of our diplomacy.

Given my point that the big challenges and the strategic side of the future are going to be maritime challenges, then obviously that has some implications for the point you have made. Over time it can only get more important as access to resources and the technology for accessing resources changes and more resources are perhaps discovered within the EEZ. So it probably will become more important than it might be seen at the moment.

QUESTION: [Indistinct] Could you outline you views on India’s strategic interests as they relate to Australia?

PETER VARGHESE: Well, my view is that the strategic interests of India and the strategic interests of Australia are increasingly converging and so the sort of strategic partnership that we want to build with India ought to be as broadly based as possible. We obviously have a shared interest in a lot of maritime related activities and the fact that we are now going to do a regular joint naval exercise is a good reflection of that. So navy to navy cooperation ought to get stronger.

If you look at what we're actually doing on the defence side with India, we've got a very promising set of connections service to service. Our service chiefs meet annually, we've now got an exercise program agreed. Beyond what we might do service to service, there's a lot of scope for us to strengthen our strategic dialogue with India and, for instance, India ought to be a natural partner of ours in the East Asia Summit.

The sorts of things we want to do in the East Asia Summit fit very neatly with India's broader objectives because the maintenance of that strategic stability in the region, the need for countries to have an inclusive view of regionalism and an outward looking approach to trade and economic activity. These are all things that ought to bring Australia and India closer together.  Over time we will see that relationship deepen and strengthen and the fact that we had, for the first time ever, an Indian Defence Minister come out to Australia last year is a reflection of that.

QUESTION: This is actually goes on quite well from the – and you've answered in part with the last question – ASPI released the paper yesterday called China's New Dream, which talked about that China would be the biggest foreign policy challenge for Australia in the 21st century. China does take up a lot of our time in discussions because of its increasing presence in the region. There was also talk in the paper of where this lies with Australia's interests economically versus our traditional US alliances.

And one of the things that the paper said that the only Asian country with the potential to offset China's growth was India and that Australia should, therefore, hedge its best bets with the US and China by pursuing better relations with New Delhi. So what's your perspective on this?

PETER VARGHESE: Well, we have been doing a lot with India and we've been building the relationship with India quite diligently and taking India as a serious partner on that. I said it was one of the six countries that most matter to Australia. I don't think that necessarily has to be driven by a China calculation.

There are reasons for us to do things with India that stand on their own merits and that don't have to be linked to China. We are dealing with a strategic environment where we can't really say with complete certainty where we're going to land and I don't think we can say with complete certainty where China's strategic landing point is going to be.

So there are lots of views around about what China's strategic ambitions are, but we don’t really know for sure. One of the reasons why I think institution building and norm setting and all these other activities are at the core is that they provide a framework for dealing with an inherently unpredictable and uncertain environment.

So you don't lock in policy settings on the basis of a guess of what you think is going to happen. You've got to be very careful about how you manage the relationship. China will no doubt face many big challenges. The thing that struck me about David Hale's paper, which you mentioned, I was at lunch with him yesterday, is that like a lot of analysis, it rests on straight line assumptions in both directions. It rests on straight line assumption of where China is heading and it rests on straight line assumptions of where the US is going – one going up and one going down essentially.

The reality is that you can't take projections completely with a straight line. Nations zigzag their way through history more than they work their way up a clear incline in terms of projections. So we need flexibility in the way in which we approach our policy choices as a result.

CHAIR: I think we could probably go on for some time, Secretary, but in the interests of sticking to schedule and not taking up too much of your time, I think we'll call a halt at this point.

Thank you for your presentation. I think you framed Australia's diplomatic power with clarity and insight through the presentation and question and answer session, in particular the approach of persuasion anchored in mutual interests, your explanation of Australia's relative place in the world, in our assets and what we bring, our focus of diplomacy in your construction of 6 + 2 + N, and the importance of economic diplomacy in the role of institutions.

I think the results of those expressions in the presentation and the Q and A have created a better understanding and appreciation of how sustainable security is pursued and managed and, importantly, you've illuminated the diplomatic and foreign policy context in which defence contributes or to which defence contributes and in which it must operate.

Secretary, thank you again for coming out the Centre for Defence and Strategic Studies.