An ASEAN future

An ASEAN future article image

One of Australia’s great, unrecognised virtues may not be its cosmopolitan cities, beautiful landscapes and world-class produce.

Another equally wondrous national treasure is the dexterity of its diplomatic corps.

Navigating the newly unpredictable relationship with the United States and a trading relationship with strategic rival China, Australia has become adept at operating in the grey zone between the proverbial rock and the hard-place.

As one correspondent put it: “the world order, never very orderly, is in a new state of disorder.”

There is a simple calculus at work – Australia must be as close to the United States as necessary to ensure its defence, and as close to China as it must be to sell its wares.

Those two great geopolitical competitors are well aware of Australia’s world-class fence-sitting, and its diplomats’ uncanny ability to forge a middle ground between seemingly irreconcilable objectives.

Welcome, neighbours

The recent ASEAN special summit held in Sydney was curious for what it wasn’t. It wasn’t a summit of equal partners – Australia isn’t a member.

It wasn’t a summit dealing with issues dominating global headlines, and it didn’t launch any grand plans. What it did was to demonstrate the importance of middle-power diplomacy in multi-lateral and regional initiatives to further Australia’s objectives.

ASEAN as a bloc operates by consensus – “the ASEAN way,” which is to say any decision is necessarily the lowest common denominator.

For a grouping with membership as diverse as the globally innovative Singapore, to largely recalcitrant Cambodia and Laos under Chinese suzerainty, ASEAN operates more as a bulwark against an expansionist Middle Kingdom than a coherent economic entity, reflecting its genesis as a defence against the encroachment of communism.

Marking the 50th anniversary of ASEAN last year, Indonesia’s President urged members to maintain their unity lest they be drawn into the great-power rivalry that threatens to undermine their collective security.

Musings on Australia’s potential membership of the bloc have arisen frequently over the years, more fantasy than theoretical. Australia would have to relinquish too much sovereignty, such as allowing the ASEAN Chair to speak on its behalf to third parties such as the US or the EU, and bite its tongue on issues of national importance, such as human-rights – not something to which Australia is likely to ever acquiesce.

If not through membership, how does ASEAN benefit Australia in a practical sense? The Sydney Declaration following the summit announced a shared commitment to trade, counterterrorism and a code of conduct for the South China Sea – i.e. one of the major geopolitical headaches of the combined signatories.

The logic behind this group approach appears to be one of strength in numbers, particularly when confronted with the awkward truth of relying on Chinese markets while opposing Chinese expansionism.

Shall we play?

What then, if the unthinkable were to happen and Australia had to choose? As unlikely as this scenario may be, its exactly the kind of economic doomsday commentators vowed would never come to pass between the US and China – until US President Trump arrived, and all the models had to be re-written.

With Sino-Australian relations currently in the freezer, the question is one that gives pause for thought. So, what then would happen if China closed the door – if it began sourcing its beef, cheese and seafood from New Zealand, and sent its students to Canada and the UK instead – how would Australia cope?

It’s an interesting exercise in game theory. Would Vietnam’s claims to the Paracel Islands look quite so essential to Australia in light of the threat to our own prosperity? Would Australia buckle, or could it look northward to ASEAN, a bloc with a combined GDP of US$2.5 trillion in 2016, representing the world’s sixth largest economy and already Australia’s fourth largest trading partner and invest in that relationship?

Australia already enjoys A$101 billion in two-way trade with ASEAN, greater than our trade with the United States and Japan, with over 12,000 Australian businesses exporting to the region. However, those numbers pale in comparison to our A$183 billion in two-way trade with China.

The supposition is of course vanishingly unlikely. Relationships between modern rational nation-states transcend trade, and the secondary implications of such action would be punitive to the point of unbearable.

Australia, as the junior economic partner, cannot afford to lose either China’s trade, or the US’s protective security umbrella, and the bulwark of ASEAN in-between acts as a shield.

Changing the rules

As the Chinese market matures, it offers different challenges, presenting opportunities in other markets that were previously overlooked. China increasingly demands high-quality products for its burgeoning middle and wealthy classes, forcing Australia to supply further up the value chain. Products that were once deemed “good enough” no longer are.

The Australian dairy industry is currently experiencing that reorientation, as a report last year by Rabobank noted “Chinese dairy demand is slowing as the market matures, and now exporters should look to South East Asia”. As Australia scales-up capacity to supply the top end of the value chain, ASEAN offers the opportunity to supply the full range of goods and services demanded by its ten economies, all at differing stages of development.

Conveniently, Australia signed a free-trade agreement (FTA) with ASEAN, entering into force in 2010. This provides significant benefits for Australian companies including extensive tariff reductions and regional rules of origin, and access to supply chains across the region.

Whilst the ASEAN FTA (known as AANZFTA given New Zealand is also a member), doesn’t entirely eliminate tariffs and could benefit from modernisation, it has provided a base level of improved access, ensuring Australian exporters have an advantage over their European and North American counterparts.

The Department of Foreign Affairs and Trade is currently reviewing AANZFTA, with recommendations to be presented to ministers in August or September this year.

The review could add chapters on dispute settlement and government procurement modelled on the recently concluded CPTPP. It could also address non-tariff barriers such as quotas and simplify rules of origin, allowing self-certification and electronic submission for example.

If enacted, these measures would provide tangible, cost-saving benefits to Australian businesses.

Full House

Of course, none of these measures, even if implemented in their entirety, would be enough to offset trade with a market like China.

What ASEAN does provide is an alternative destination for Australia’s diverse export offerings.Sam Lawrence2

While not grand in the traditional sense, some initiatives arising from the Sydney Declaration, offer real, tangible benefits for Australian businesses to further integrate into the region.

This includes the Digital Trade Standards initiative which aims to develop and adopt international standards in digital trade, and the Infrastructure Cooperation initiative aimed at developing a pipeline of high-quality infrastructure projects to attract private and public investment and improve regional connectivity.

In a time of increasing uncertainty, as physical and philosophical walls rise all around, perhaps the most valuable outcome of the summit was its most surprising – the strong signal that both parties are open for business.

For a bloc known more for its glacial progress and lack of ambition, Australia’s diplomatic dance might have secured the best outcome possible, as we need all the dance partners we can get.summit was its most surprising – the strong signal that both parties are open for business.

Sam Lawrence is an international trade specialist with expertise across Asia and the Middle East. He is a former diplomat with the New Zealand Ministry of Foreign Affairs and Trade, and has engaged in every major Australian free-trade agreement negotiation representing industry over the last eight years.

Sam Lawrence … ‘Australia can’t afford to lose US or China trade’



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