There are two necessary conditions for avoiding what Paulson has called a ‘long winter’.
First, China needs to continue the reforms it started in the 1970s, paying particular attention to those areas where the United States has legitimate concerns. Ironically, and despite the rhetoric, this will make China stronger, not weaker.
Second, international trade rules need to be improved, not discarded. As the Australian Prime Minister Scott Morrison said recently, ‘the rules based-order is in need of urgent repair’. This should be a priority for all countries that understand the fundamental importance of a trading system that supports ‘right, not might’. The answer to unacceptable trade practices is more effective rules, not throwing out the rules.
These two conditions can reduce trade tensions, but they cannot prevent the geopolitical competition in the region — competition that seems likely to define the region’s future. Even if the United States and China drop all recently imposed tariffs, confidence in the economic rules-based order has already been damaged.
Rapid technological change poses another challenge, but quite a different one, especially for low-income workers. Export-led growth has been the main path to development for emerging economies in the region and manufacturing has been the backbone of that growth model.
But new technology may be reducing the development benefits from manufacturing industries. A key global trend worth keeping an eye on is how fast manufacturing productivity is improving relative to services.
Nowadays you simply do not need as much capital to deliver the same output in manufacturing as in the past. This may be one reason why global interest rates are so low — investment is historically low because businesses can now get more out of their capital than ever before.
This means more and more economies in the region will become like Australia more quickly with services being an increasing share of their economies. While it is difficult to impose tariffs on services, the shift to a service economy risks an easy slip into protectionism. ‘Behind the border barriers’ are often easier to disguise and have fewer international rules to limit them than tariffs.
Technology may even be one reason why western countries are finding it difficult to lift inflation. Many see a flattening of the Phillips curve, and a shift to lower levels of unemployment consistent with stable inflation, as in part due to technology making the supply side of the economy more responsive.
New technologies deliver benefits that transform society. But they also raise important policy issues. Large online platforms are posing new economic problems, including in the areas of cross-border data flows, data privacy, artificial intelligence, competition policy and taxation. Like great power competition, these questions are likely to be around for a long time.
Much of the post-war order that is being contested was created by the United States out of a desire to never again see tragedies like the Great Depression and Second World War. The post-war period was unique in constraining the exercise of power by countries in Australia’s region.
Intensifying great power rivalry — or at least a rivalry unconstrained by rules — now poses a risk to that prosperity. This is a region that has weathered significant storms in the past. But it means countries in our region stepping up to ensure collective leadership.
Australia is well-placed to manage the challenges and use its position to its advantage. The region is likely to remain fast-growing and dynamic, even if global growth slows. The region continues to supply around three-quarters of annual world GDP growth and constitutes well over half of global GDP.
Australia has demonstrated willingness to work closely with partners in the region to reinforce market-based systems. Trade deals expand trade opportunities, rather than diverting them, and reinforce the rules, rather than abrogating them.
Australia has entered into 11 free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) and an agreement with ASEAN, and are working with others to deliver the Regional Comprehensive Economic Partnership (RCEP) this year.
The region faces significant challenges. Competition between the great powers is intensifying. Technology is transforming regional dynamics, creating immense benefits and raising significant questions. Despite the challenging outlook, future growth in the region and the role Australia will play in shaping global rules is cause for optimism.
This article was published by the East Asia Forum. It was adapted from a speech delivered at the Economy and Business Session of Asia Briefing LIVE in Sydney in August 2019.
