Australia in a Fragmenting World

Australia in a Fragmenting World

Published 20 Nov 2023

Speech by AIIA National President Dr Heather Smith PSM FAIIA to the 2023 AIIA National Conference, 13 November 2023.

I acknowledge the traditional custodians of the land on which we meet and pay my respect to their Elders past and present. I extend that respect to all Aboriginal and Torres Strait Islander people present with us today.


Assistant Minister for Foreign Affairs, The Honourable Tim Watts;


Shadow Minister for Foreign Affairs, Senator The Honourable Simon Birmingham;


Your Excellencies, Members of the diplomatic corps;


Can I particularly acknowledge Ambassador Suzuki and the Japanese Embassy. Thank you for your generous hospitality in hosting the AIIA and Vice President Aso last evening, and for your support of the AIIA.


Distinguished guests;


Ladies and gentlemen.


To our many sponsors, thank you for making this National Conference possible.


I would also like to acknowledge all the AIIA Fellows here today and my fellow AIIA board directors. I thank them for the tireless role they play, as Presidents of their branches, in fulfilling the mission of the AIIA.


I would also like to acknowledge former President of the AIIA, John McCarthy.


And thank you to our CEO Bryce Wakefield and the National Office team for all the hard work in bringing together the National Conference.


To our panellists and moderators, our sincere appreciation for giving your valuable time to this important day of discussion and reflection on the stormy seas Australia must navigate.


I would also like to pay tribute to two former National Presidents of the AIIA who passed away this year – Clive Hildebrand and Allan Gyngell. While I never met Clive, his leadership in putting the AIIA on a sustainable financial footing and in appointing the AIIA’s youngest CEO, Melissa Conley Tyler, were important achievements, among many.


Much has been said and written in honour of Allan’s life, the indelible mark he made on Australian foreign policy, and on his leadership in helping Australians understand and engage on international affairs.


Perhaps it is fitting we are holding the National Conference in the week of the APEC Leader’s meeting.  The irony would not have been lost on Allan that this year’s APEC theme of ‘creating a resilient and sustainable future for all’ seems rather at odds with the theme of this year’s National Conference.


Rather than the aspirational theme of APEC, today we face the risk of geopolitical competition teetering on the edge of conflict, technological decoupling, and a rise in populism.


Allan’s calm and wise reflections, his piercing intellect and his astute judgement is deeply missed.  I, like many here today, deeply miss his friendship and counsel. Many is the time when I find myself wondering ‘what would Allan think’.


A year ago, in my AIIA Plimsoll Lecture in Tasmania, I said we were living in a period of unprecedented strategic and economic turbulence.


I noted that Australia was being buffeted by the interrelated forces flowing from the after-effects of the pandemic, the Russian invasion of Ukraine, geostrategic competition, techno-nationalism, decarbonisation, and a myriad of unresolved international problems that were connected.


One year on, many of these trends have intensified. And a new crisis driven by old hostilities is upon us. Hamas’ attack on Israel, shockingly, has taken us back to an era we’d hoped had past. And there remains the risk of conflict spilling into a broader Middle East conflagration.


Conflict is also apparent elsewhere in the Middle East, Europe and the Indo-Pacific, reflecting the interaction of separate, but reinforcing tensions, related to the emergence of authoritarian powers.


In the Indo-Pacific, renewed dialogue between the US and China is to be welcomed and has seen tensions ease somewhat. But there is no getting away from the fact we are living in a grey zone.


Geopolitical tensions will be enduring.  Driven by different national ambitions, different approaches to innovation and market forces – and ultimately, by different ideologies.


The global economy, whilst being remarkably resilient, continues its weak recovery as the burden of debt, budget deficits, and sustained inflation limit the policy options available to governments.


Despite its political dysfunction, the US economy, once again, has shown its remarkable dynamism and resilience.


At the same time China’s economic challenges, much of it home grown in stifling its innovation, trade with the developed world and restricting the role of market forces, has triggered debate about whether it’s growth model has peaked, with all of the implications this presents for the world.


Against this backdrop profound paradigm shifts are underway.


The most visible is the enmeshment of economics and security.


Some have described it as the hijacking by the security establishment of the economic establishment.  The Economist, in labelling it the era of `homeland economics’ describes it as the biggest economic policy shift in a generation.


As someone who spent their early academic life studying North Asian industry policy, I tend to concur with The Economist’s, typically pithy assessment, that the world may well will come to regret this shift.


In particular, that this shift misdiagnoses what has actually occurred, will overburden the state with undeliverable responsibilities, and it will sabotage a period of rapid technological and social change.


Underpinning this paradigm shift is the revisionist interpretation of globalisation.  The loss of confidence in the economic policies that lifted hundreds of millions out of poverty is now assessed as having displaced workers and seen the gains of the last 30 years been captured by a small group.


These facts are correct. The cause and effect are not.


But the simplicity of this narrative is so beguiling that communities expect governments to be more interventionist.


And governments are responding.


Even if they don’t necessarily understand the consequences of those interventions. Or have the capacity to meet their citizens expectations.


The political focus is on addressing perceived and actual inequities through the rebalancing of labour over capital interests. I cannot argue with this given most of the economic gains of the last 30 years in the US have been captured by the top 1 percent.


But the consequent reweighting of security and resilience over openness and engagement will not, per se, correct this.


Self-reliance and friend-shoring are now justified as de-risking strategies and hedging tools against geostrategic tensions.


While a reasonable argument can be made along these lines, we should also recognise that populist sentiment can easily slip into sloppy protectionism.


Remember that Australia saw its relative living standards decline through the post-war years on the back of the mantra of protectionism for all.


That sense of history has been lost. Instead, today, the global economy is starting to splinter along geopolitical lines.


The most visible and far-reaching response from governments has been the resurgence of industry policy – virtually every country is pursuing this on an unprecedented scale and intensity.


A consensus exists that, in response to the supply side shocks of recent times, more diversification and `deconcentrating’ of some world markets makes sense and could be for the better for all if done well.


I don’t disagree.


But executing this requires a scalpel rather than a sledgehammer. Building small gardens with high fences sounds rhetorically easy.


It’s harder to achieve in practice.


For Australia, the objective should be to navigate a course that best preserves our national security, prosperity, and unity, while contributing to regional stability.


Yet, the emerging paradigms are deeply at odds with our history. One where a stable Indo-Pacific, the US as the dominant power, and a global rules-based system have underwritten our security and prosperity.


Australia’s approach of ensuring `strategic equilibrium’ will require constant calibration and re-calibration to safeguard our national interest. That in turn will mean deft, consistent, and sustained international engagement and coordination.


Australia, under the Albanese government, has handled the relationship with China with the right tone and with agency. And regionally we have struck an effective balance in seeking to persuade and project influence through our alliances, partnerships, and institutions.


But the year ahead portends the real possibility of another seismic shift.


The 2024 US election could be the most consequential of our lifetime.


Regardless of the result, the US seems destined to remain on a pathway of global retreat and rising protectionism. And doubts exist as to US reliability, at a time when US leadership is needed to shore up the global rules-based order and deter aggression from other powers.


As Robert Gates puts it in the latest edition of Foreign Affairs, says, ‘the United States finds itself in a uniquely treacherous position of facing aggressive adversaries with a propensity to miscalculate, and is incapable of mustering the unity and strength to dissuade them’ … `And yet a world without reliable US leadership would be a world of authoritarian predators’.


Much – perhaps – too much is asked of the US.


Too little is often contributed by allies – Australia included.


Paul Kelly recently posited Australia’s conundrum by asking whether, in a volatile and unpredictable environment of high inflation, weak productivity, energy transformation, great power rivalry and increased government intervention, the policy responses being proposed can defy the laws of economics.


The difficulty of balancing our strategic and economic interests is illustrated by the consequences of geopolitical shocks, such as the war in Ukraine, and the resultant high inflation resulting in a domestic policy debate focussed on providing financial relief for cost-of-living pressures for middle and lower-income Australians.


At the same time, the national budget is underpinned by another terms of trade boom driven by the disruption in energy markets from that very same Russia-Ukraine war, and by China’s demand for our exports.


Some of that revenue will need to be directed to shoring up our national defence. But this is currently happening at a rate and quantum that seems out of step with the magnitude of the threats we face.


At the same time, the politics of economic reform appear insurmountable.


Governments are looking to ‘re-construct markets’ in response to a mixed set of drivers that range from concerns over ‘supernormal’ profits, cost of living pressures, concentrated domestic markets and stagnant wage growth.


For Australia, with our long history of piecemeal and fragmented industry policy, the political economy concerns of industry policy interventions haven’t changed.


What has is the importance now of doing it well – the how, to what end, and the definition of success.


It will require integrated policy design and implementation. In particular, it requires designing incentive structures that better mobilise and align private sector capital with national priories. As such, I can’t help but note in passing that the anti-business approaches and low investment rates of the last decade are not unrelated.


Perhaps the US and China can afford the sledgehammer approach to their industry policy. We cannot.


And though we will benefit from preferential access to the US market under the CHIPS and Science Act and the Inflation Reduction Act, we cannot compete with the scale of the spend. And there will be costs for some sectors of our economy as others ramp up their own industry policies.


Australia’s trade strategy rightly has been multi-pronged, with varying degrees of success: focussed on defending and reforming global trade rules, encouraging business to diversify trading relationships, working to stabilise our relationship with China, and pursuing new free trade agreements linked to new markets and supply chains.


In the case of foreign investment, Australia has adopted a more stringent screening regime since 2021, which is now more designed to manage national security concerns than capture economic opportunities.


Let me be clear – these are not `either/ors’ between security and economics. They are `ands’. That point is at risk of being lost in the popular discussion.


There is no escaping the fact that higher productivity growth will be required to manage our domestic and international interests.


And as a middle power we will have to work harder with others to ensure markets remain open and as transparent as possible.


In the end, few countries can realistically decouple from China without inflicting considerable self-harm.


We are, as Joe Nye has put it, locked into a cooperative rivalry with China and in need of a strategy that can advance contradictory objectives.


In terms our social cohesion, these are also dangerous times.


As a nation, we will need to exercise all elements of national power in ways we haven’t had to do before.


To do this we will need to be more at one as a nation that we currently are in terms of our interest and priorities.


Yet as a country, we are more divided economically, socially, and geographically. We now live, socialise and partner in circles that have very little overlap.


We need to acknowledge community anger and a sense that `the system’, is seen to have let people down. Technology allows anger to be expressed with immediacy and little consequence, while media fragmentation is reinforcing differences not commonalties.  Both are inimical to our national interest.


Even before the referendum on `The Voice’, this year’s Edelman survey of trust showed Australia was on a dangerous and divisive path of polarisation.


Almost half of Australians say our nation is more divided today than in the past. Only 30 percent of Australians believe they will be better off in 5 years.


And worryingly for Western democracies as a group, not a single developed nation has over 36 percent of its people confident they will be better off in 5 years.


To conclude.


Trade-offs are coming that we are not prepared for and that will test the social license of our leaders.


Yet arguably our decision-making institutions are not structurally configured, and we as a nation are not culturally prepared, to manage this complexity and uncertainty.


That is why in my Plimsoll lecture I said that Australia’s strategic circumstances demanded a more wide-ranging and inclusive national conversation.


The interdependencies we face require different ways of thinking, how we work and how our institutions are organised. In an age of fragmentation, we need to build in as much flexibility, agility, and speed of response as we possibly can.


The challenges we face are existential and inter-generational in their impact.


What is striking to me is how geopolitics isn’t part of that inter-generational conversation, even as the implications are so profound.


Perhaps as Walter Russell Mead said recently in the Wall Street Journal “we need less Barbie and more Oppenheimer”.


Meaning the economic, ecological and social challenges we face are daunting. But they pale into comparison to that of the emerging geopolitical order.


The last sentence of the first edition of Allan’s seminal book, Fear of Abandonment, as we would expect, remains enduring. `Everything that Australia wants to accomplish as a nation depends on its capacity to understand the world outside its borders and respond effectively to it’.


That is why we are here today.


And that is why the role of the AIIA has never been more crucial.


Thank you.