The Hon. Warwick Smith AO
Speech to AIIA Annual Lecture – Government House Tasmania
Monday, 21st November 2022
“Foreign Policy within a Trading Nation, the Pacific, Asia and the World – the danger of mediocrity”

Introduction

It is an honour to be inducted in the AIIA as a fellow. My appreciation to Chairman, Alan Gyngell. An eminent Australian in the field of security, diplomacy and foreign policy thinking and action. An acquaintance spanning now 30 years.

To our host, Governor Barbara Baker and husband, Don Chalmers, a special greeting and thanks. We were all in the Law School at University of Tasmania – my congratulations and salute to you both. Eminent Governors have been many in our States long history. Sir James Plimsoll for 5 years served, having been ambassador to no less than Washington, Moscow, India, London and Secretary of Foreign Affairs Department. He was a mentor and example to many of us. Not mediocre by any measure.

But finally, the Governor of outstanding merit was Sir Francis Newdegate who employed my grandfather, L.W. Smith after his return from the First World War – prior to which he was employed by Government House Adelaide under Sir Henry Galway as a footman, as a 16 year old for his first job in Australia having arrived from England.

He went on to establish a wool, shipping and manufacturing business in Tasmania which was for many years the largest private business in Tasmania.

My Tasmanian heritage is sound and deeply committed. You will all understand the special feel of joy it is to me to be here tonight – still fighting on the front quietly for public policy discussion and uplift.

Australia does not have a strategy. Or, if it does, it’s a very simplistic strategy that is based in 1950s perceptions that has outlived its usefulness.

We have actually passed the literal peak of national performance if you take the usual metric: GDP per head. On that measure our standard of living rode a sharp upward curve from the 1990s and an almost vertical incline in recent years as China’s economy hit is peaks. But it then fell from about 2013 and is now down about 25% from its peak.

So much for the high level scorecard. The real issue is the broader atmosphere of the current world. Australia has had a relaxed run, having made some domestic reforms in the 1980s that opened the economy to global markets. At around the same time, the USSR had given up on it hegemonic ambitions. And then China and India, to different degrees, decided to engage with the global trading system.

We’ve had more than three decades of largely peaceful global conditions, characterised by rising standards of living and largely uninhibited trade. “Frictionless” trade and China joining WTO and bilateral trade agreement have been a stimulus. Australia saw its GDP per head doubled between 1980 and 2000 and then tripled between 2000 and 2010. China, in that time, cut the share of citizens in extreme poverty from around 80% in 1980 to less than 20% today.

Good times, for more than 30 years. But things have changed.

In a short space of time we have seen the rise of serious tensions between the US and China. COVID has cast a pall over trade and severely disrupted supply chains that, in many cases, had become heavily dependent on free movement. Climate risks have prompted changes in energy fundamentals and markets. Russia invaded Ukraine, turning upside down any thoughts we could be relaxed about international security.

The world is back to having two superpowers. China has emerged from a long period of economic progress to claim geopolitical standing. So now the US position is contested and inevitably, the rising power and the established power are exploring a new world order.

The new reality is the emergence of a grand coalition of China and Russia – this time with China dominant – based not on ideology, but grievances about the US led West. As the west seeks to contain China across technology, trade, minerals, food – states as Afghanistan, Algeria, Egypt, Congo, Iran, Columbia and others – will coalesce to the narrative that the west is not the way forward. A bifurcated world, decoupling of trade, currency and technology – impact us. What is our self interest? What is our strategy?

This past week at the G20 meetings, I witnessed China in action diplomatically. The Australian Prime Minister met for the first time at leadership level with China’s newly elected leader. It is important that dialogue is resumed. But, alarming it has been 6 years not talking to our major customer!

In a world where protectionism is heightened, where open trade is diminished – steps to move against China with curtailment of finance and chips makes no economic or geopolitical sense. Interconnected supply chains are needed. It must be by region not country by country, such as energy where the WTO global trade in green electrons is part of the future. Think of Sun Cable, solar power by cable from the Northern Territory to Singapore.

The middle kingdom is rejuvenating – it is being rebirthed in the modern age. Humiliation is overcome now by assertiveness – economic and military strength and a strive for internal harmony across 1.4 billion people. Broadly a policy of “he er bu tang” – a quest for harmonious relations with countries that do not share the same culture – offering beneficial trade offs, with no challenge to China’s core interests is essential for China.

Power is one thing that Australia does not have. We are a small population inhabiting a large land mass at the most isolated point of the planet. This has many merits, but none of them involves power. If any country should have a smart strategic outlook, it should be Australia. But we do not to any significant degree. I see some positive steps in recent weeks – yet more is now required.

Our recent 10 years have been mediocre. We have lost our frontier status as an opportunity nation. Rotating leadership of our nation – only rivalled by Greece, has destabilised a focus on strategy, productivity and growth. Resources extraction and merchandise trade has been our bulwark. Our progress reasonable, but our strategy mediocre.

Australia projects commitment to a strategic security alliance. But its fair to say that when the chips are down we can’t show that we attend to our alliances. By that I refer to Australia’s important role in maintaining stability and healthy governance across the Pacific. But I would also point to our largely inert relations with near neighbours, notably Indonesia and PNG. We have failed ourselves and the Pacific in the last 15 years.

In short, an objective observer might say, fairly, that Australia enjoys a pleasant global status without really engaging or in fact doing much. In my view Australia needs a strategy. The outline now is a global outlook that is far more complex, nuanced and risky than the one we have enjoyed and obtained great benefit from in recent decades.

The world has changed a lot. We need to change our strategy.

The strategy starts with fundamental self interest. We need to maximise the potential for the two superpowers with which we have critically important relations to find a path to co-existence. Failing that, we must have a strategy that accommodates both our security and broader interests. An important part of that involves embracing our location in the world.

We must engage our neighbours. We are the vested interest society with most means to nurture healthy societies in the Pacific. We should take that seriously, which may mean – for example – extending our labour market and trade posture to embrace those communities. Deeper sport links also. A review of aid / finance outlined in the recent years reviews with Japan and USA in finance and Pacific infrastructure are welcome. It is important to Australia’s security that Pacific nations are stable, healthy and economically sustainable. We simply don’t take that priority seriously enough. Change has begun.

We really must engage Indonesia in a continued serious way. No significant Indonesian students are present and very few business people are in Australia. Last weeks first business MOU with BCA and KADIN (Indonesia business group) witnessed by Prime Minister and Treasurer was a first. 260 million people on our doorstep. This cannot be dealt with by inertia. There is much more to do.

PNG needs to be taken seriously. We should look at our relations and take responsibility for outcomes we can effect. Aid, for example, must deliver tangible social benefit and innovative financing involving business as well as sovereign funds from government.

I suggest that we review Austrade. We need a firm, strategic trade focus that targets outcomes. The strategy must have a premise based on the reality that we have to work hard to maintain our living standards. We are already going backwards from a recent peak. Both large, medium and small business, education, tourism could benefit from a more encompassing Australia inclusive approach – involving more the States also.

Austrade, various public programs and a lot of public resource is tied marketing. Activity without purpose. Not the fault of the staff, but of policy. Because our trade, industry, agriculture, technology, resources, education and many other government facilitators don’t have a cohesive Australian strategy. I did a global review of Austrade in 2017. Once Austrade had formalised business links. Chair was a businessperson. Active business advisory board. No longer. We don’t do laissez faire. What we do is passive, almost inertia with some elements of real achievement but more must be done. Mediocre outcomes are not enough in the new challenges in global trade.

We are so abjectly lacking in strategy that we became the world’s biggest gas exporter yet failed to guarantee delivery of gas to our own homes and businesses at a time when gas is even more critical than normal as a firming energy source in the renewables transition. Only in recent months has a new government taken action to ensure our domestic gas needs will be met. Yet it is not clear if a reservation agreed system will prevail as the preferred economic approach.

The times require that we have an Australian strategy. A strategy requires that we sharpen our focus. We need to accept our reality and choose those few strategic priorities that work for Australians.

Principled realism. This is the strategic approach. Our values, our democracy, our rule of law are sacrosanct. Yet realism must be part of our discussions. Balance – we support our major strategic alley and our major trading partner. China and Australia both require the trading relationship – now and into the future.

Realism is essential.
As J W Howard recently wrote in his book titled A Sense of Balance, ‘self respecting pragmatism should always guide our approach to China” “Fundamental beliefs should never be compromised but school boy point scoring should be shunned.”

Australia is a nice place to live. We must aim to stay at the higher value end of employment. So we should make sure we are really good at education. Really good. And we should be focused on delivering value to our neighbours, which means finding ways to support quality vocational education and training at low cost. WE need to rebirth our export education capability and attractiveness in an export competitive world for education – courses, accommodation, visa and work stays. Comprehensive strategy is required now for this to grow. It once was our 4th largest export earner. Global specialisation such as Antarctica, Oceanography, Maritime studies – and more are important for Tasmania.

We need to remain politically stable. Prosperity is a good starting point, but we also need to ensure that fairness and access to opportunity remain characteristic. We need only look at the troubles our friends in the US and UK are having with what is a populist surge of often magical reasoning.

Our savings pool is deep and we are surrounded by growth markets. Yet we don’t foster as many regional headquarters as, Malaysia. In NSW, our biggest state, the 6th largest economy in Asia, dismal recent performance by the current government on the Trade agenda… was alarming. We really need some competitive energy in our strategies for investment and trade. Outcomes in policy need to be more firm and part of the discipline. It needs more competitive tension, especially if our businesses are to succeed internationally. The thesis of the Competitive Advantage of Nations – by Michael Porter is that domestic competitiveness and productivity leads to global success. We have lost our dynamic in so many areas, productivity lags alarmingly.

Our trade approach needs to have in mind the opportunity that will come if we participate in the development of our neighbours, not by just selling them resources but by developing their infrastructure and services. Our largest market is at the stage where its big driver, construction, has run out of steam. China’s focus will be on higher value activity and services – essentially, technology-driven industries and domestic consumption. We need to have domestic policies that allow competitive and effective Australian participants in the variety of high value activities in demand across our region.

We need action to avoid mediocrity.

The next few years will be quite disruptive. Australia will need to be much more conscious and focused on its strengths and weaknesses. We have had more than a decade of loose fiscal and monetary policy. Our broad economy has floated on the back of China’s surging demand and our own low interest rates. Both are going in the wrong direction and we should anticipate serious economic challenges.

We have one very large, unusual strategic asset in the coming period. Australia is naturally advantaged for renewable energy and many of the minerals required for the post-carbon economy. This should be a strategic issue already, given that the “transition” is already underway in much of the world. The scale of what is required cannot be underestimated – nor the degree to which Australia’s strategies will be intrinsically linked with others. Notably those who do not have great options when fossil fuels phase out.

Our key energy users will not forever be in Tasmania. Our export energy revenue – environmentally most acceptable is a future wealth enabler. The Tasmanian economy is fragile. The economy relies on 60% income from GST and the Commonwealth. Own earned, on-island income, is essential to grow, to avoid mediocrity.

Australia is not well placed for the energy transition. Our base load electricity plant is old and our enthusiasm for household solar now generates so much energy that the daytime hours are uneconomic for coal, which is phasing out faster than many expected. But the absence of an energy strategy leaves us with no clear investment plan to replace that plant, which is likely to be largely gone within a decade. Marinus is important in a macro sense for Australia and for Tasmania.

Strategically, we have an opportunity to be a valuable partner in our region to help re-balance energy supply chains and industrial activity. The fundamentals are in our favour: we have the makings of low cost renewable energy and reliable supply of some materials important to the next generation of industry. But we will not capture that opportunity without strategy.

The last similar opportunity: the 1970s oil price watershed caused disruption on a massive scale. The “resources boom” and infrastructure borrowing program, which paved the way for new power stations and other related assets along Australia’s east coast together with rapid expansion in thermal coal one could export. We witnessed savage competition among Australian States meant that some very large public investments – notably in power – were effectively subsidies to displaced aluminium producers.

Globally, the scale of the coming energy transition is enormous. It will inevitably impose very large costs on communities, yet also presents unprecedented opportunity. Australia’s strategy will require changes in some of our least flexible attributes. Strengthening of our eco-systems, a focus on critical minerals also.

• We will need government co-ordination.
• We will need a close understanding of the strategies of our
  neighbours.
• We will need land use planning over large areas in a timely fashion.
• We will need standardisation in some areas of technology and
  engineering for both economy and timeliness.
• We will need to accept that the national benefits largely flow from
  the operation of energy assets – and not to the people who build
  them.
• We will need to have a strategy that pursues value for Australians in
  what will be a highly risky environment.

Complexity, uncertainty, volatility and ambiguity. These are the descriptors most commonly used today in talks about our global environment. The contrast with the picture just a few years ago is remarkable and it’s understandable that responses are slow. The friction-free, low-inflation, cheap-money world we were in has gone. Protectionism, nationalism and populism are intrusive, powerful features of the environment and Australia simply cannot afford to maintain a worldview that has none of the usual national disciplines, even those of self-interest. To do otherwise is to be a mediocre somewhat tired nation at the bottom of Asia. Just as Argentina now finds itself in South America. It once was a great economy.

Finally – we need a redefinition of Australia – to embrace new strategy to avoid mediocrity. It is an urgent endeavour. Others describe our need as to recreate our Frontier nation – of economy, of society – our resilience, independence and fortunes depend on it.

My formulation is my acronym – E.C.S – :

In summary:

Economic

• Industrial relations
• Taxation, monetary, fiscal
• Trade

Care

• Aged care
• Child care
• Social engagement and support
• Health and mental health
• Indigenous

Security

• Foreign policy
• Defence
• Security and climate

Clear policy manifestos across E.C.S is demanded. A trust deficit in our democracy is apparent. We must pursue Principled realism – to engage with trading partners and with security strategic partners. Trade is our cornerstone of our wealth creation and must have vibrancy. To stagnate is to consign Australia to a mediocre future – where opportunity, wealth and growth will evade us. Deeper strategic and adaptive direction to the regional and global change upon us is now required – we ought as a community urge our leaders to do better.