Politicians banging on about “security” should always be suspected of having ulterior motives, but when you to see the secretary to the Treasury giving a speech on security, that’s when you know the world has changed radically.
That’s what Treasury secretary Dr Steven Kennedy did last week. It was a sign of how much the distinction between economic issues and defence and foreign affairs has blurred as rivalry between the United States and China has grown.
We used to think of “Australia in the Asian century” as one big opportunity for us to make a buck but, Kennedy says, “we are facing a more contested, more fragmented and more challenging global environment, where trade is increasingly seen as a vulnerability as much as an opportunity”.
“In light of these challenges, it is incumbent on Australian policymakers to work together to develop sound policy frameworks and institutional arrangements that match the times. That take the long view and protect both economic and strategic interests,” he says.
We must strike a fine balance, he says. “If we fail to adequately adapt and respond to the new reality we face, we risk exposing our economy and our country to excessive risk...”
But “if we over-correct and adopt a zero-risk approach, shutting ourselves out of global markets and seeking to be overly self-sufficient, we will quickly undermine the productivity, competitiveness and dynamism of our economy,” he says.
Our economy benefited from decades of rising prosperity as international economic integration – globalisation – flourished under a stable, rules-based international order.
At the same time, economic reforms opened our economy to global competition by cutting tariffs (import duties), floating the exchange rate and deregulating the financial system.
But now, “tectonic shifts in the global economic order are underway” as the engines of global growth have shifted from west to east. China has gone from accounting for about 6 per cent of growth in the global economy in 1981, to more than 25 per cent today.
The United States’ share of growth has fallen from 26 per cent to 13 per cent.
However, this move to a more multipolar global order has brought with it “a sharpening of geostrategic [country versus country] competition and a far more contested set of global rules, norms and institutions,” Kennedy says.
As Treasurer Jim Chalmers has said, we are facing “the most challenging strategic environment since World War II” after a difficult decade and a half punctuated by the unmistakable signs of climate change, a pandemic and a European war, which exposed fragilities in our supply chains.
In this changing world, economic resilience – the capacity to withstand and recover quickly from shocks to the economy – is an essential component of assuring our national security.
The trade wars between the US and China during the Trump years have sharpened into an overt strategic rivalry and a contest for global influence.
The US has said it is not seeking to decouple from China – due to the significant negative global repercussions of a full separation – but is “de-risking and diversifying” by investing at home and strengthening linkages with allies and partners around the world.
In this new paradigm, Kennedy says, economic and financial tools are being deployed much more aggressively to promote and defend national interests.
According to the International Monetary Fund, more than 2500 new policies were introduced last year in response to concerns about supply chains, the climate and security. Since 2018, measures restricting trade flows have outnumbered measures that liberalise trade by about three to one.
Our primary economic and strategic (defence) partners are no longer the same. China now accounts for 30 per cent of our two-way (exports plus imports) trade, whereas the G7 countries combined account for just 26 per cent. China is now a larger trading partner than the US for more than 140 countries.
In the new world of greater rivalry, there is a small set of our systems, goods and technologies that are critical to the smooth operation of our economy and to the security of our country. Systems that are vulnerable to interventions and where a disruption could impact lives and threaten our national interest in a time of conflict.
In these parts of the economy there’s a clear role for government in regulating their operation and their ownership. This approach is called the “small yard, high fence” strategy, where a strong set of protections are put around a few critical economic activities.
But the key challenge in these types of reforms is to prevent overreach. The risk of foreign disruption has to be balanced in such a way that economic activity is not unnecessarily curtailed.
And there’s also a different kind of risk: that these types of regulatory regimes could be used as a form of industry protection, or to respond to community pressure, rather than to address genuine security risks.
Whereas our security and intelligence agencies are best placed to understand the vulnerabilities in our systems and the methods most likely to be used to exploit those vulnerabilities – including as part of the foreign investment screening process – they need to be in partnership with economic experts, such as Treasury.
We can’t afford to take the attitude that there should be zero risk of problems, nor dismiss the long-term economic costs of these restrictions.
There should be a high bar for what government puts inside the protected yard and each decision should be carefully weighed, we’re told, with both benefits and costs considered.
As for supply chain problems, it’s often argued that countries should build sovereign capability in areas of risk. This is often argued with little consideration of other ways of solving the problem, or of the cost of doing so.
But as Treasurer Chalmers has made clear, a Future Made in Australia cannot mean pursuing self-reliance in all things. That would undermine our key economic strengths and leave us less able to exercise strategic weight, not more.
Security, it turns out, is too important to be left to diplomats and generals.