Comparative Connections a Triannual E-Journal on East Asian Bilateral Relations

Comparative Connections A Triannual E-Journal on East Asian Bilateral Relations Australia-East Asia/US Relations: Australia-US Alliance Enhanced as Economies Decouple Graeme Dobell Lowy Institute for International Policy Australia has a close alliance with the US and deep emotional and cultural ties, but the new reality is that the two economies have decoupled. Twice in the past decade the US has gone into recession, but Australia has kept growing; that is a huge change from the 20th-century experience when Australia’s fortunes were closely tied to the health of the US economy. Asia now sets Australia’s economic temperature, even as the Australian military draws closer to the US through parallel reviews of the posture of their defense forces. The great question for the alliance partners is how much they can still align their strategy and interests in what Canberra has started to describe as “the Asian Century.” All these elements could be detected when Australia’s Prime Minister Julia Gillard addressed the US Congress in March and finished her speech of praise for America with a memory of her schooldays in Adelaide. She said that Americans are still, “the same people who amazed me when I was a small girl by landing on the moon. On that great day I believed Americans could do anything. I believe that still. You can do anything today.” Australia’s first female prime minister comes from the left of the Labor Party. But the tenor of her speech differed little from that of the Australian prime minister who took the same podium in Washington in 2002: Liberal Party leader John Howard. While Howard and Gillard are deeply contrasting personalities from the two poles of Australia party politics, on the US alliance they reflect a commitment and a consensus that has united both sides of Australian politics for decades. Even former Liberal Prime Minister Malcolm Fraser, who is most critical of the workings of the alliance, affirms the importance of the US relationship while lamenting that Australia is “too compliant” and “subservient” in its dealings with Washington. Gillard was in Washington to mark the 60th anniversary of the signing of the ANZUS alliance. The health of the pact is shown by how it is evolving today: Australia’s defense minister says plans for greater US use of Australian military facilities will “be the single biggest change or advancement of alliance relationships” since the 1980s. The alliance, though, is also being reframed for Australia by the changes throbbing through Asia. These two themes define much of this review of Australia–East Asia/US relations: the continuing vigor of the alliance and the unfolding realization of what the “Asian Century” will mean for Australia. The economic decoupling from the US Australia’s alliance commitment with the US no longer mirrors, as it once did, the economic ties to the US. The rise of Asia over the last decade has seen Australia decouple from the US Australia-East Asia and US relations September 2011 economy. Both ends of the decade were bookended by symbols of the decoupling. At the start, the US dipped into recession when the “dot-com” bubble burst. Near the end, the US suffered its worst crash in nearly 80 years. Both times, Australia’s economy sailed on without dipping into the red. Important links remain. For much of the 20th century, Australia’s economy always caught cold when the US sneezed. In the 21st century, that automatic linkage has been severed. The Asia boom has delivered Australia its best terms of trade in 140 years as Europe and the US grapple with recession. In its Regional Economic Outlook in April, 2011, the IMF depicted the shifting of the economic continents for Australia over the last 20 years. In the 1990s, the US could still feed major negative impacts into the Australian economy. But the decoupling completed in the first decade of the 21st century means the US negative effect is ‘no longer statistically significant.’ Asia is what matters, for good or ill. Here is the IMF on the 20-year transformation: During the last decade, shocks from emerging Asia have overtaken those from the United States as the most important external factor influencing Australia’s business cycle. For the sample period 1991–2010, a 1 percent shock to US GDP is found to move Australian growth by about 0.4 percent. In contrast, GDP shocks from emerging Asia have an almost negligible impact on Australian growth. This result changes dramatically when limiting the sample period to 2000–10, for which a 1 percent shock to emerging Asia’s growth is found to shift Australian growth by ⅓ percent, whereas the impact of US GDP shocks on Australia is no longer statistically significant. The past 10 years witnessed fast-growing trade integration between emerging Asia and Australia. In 2010, almost 60 percent of Australia’s exports – dominated by commodities – headed to emerging Asia, compared with 40 percent 10 years ago. At the same time, about half of Australia’s imports came from emerging Asia, up from one-third a decade ago. The decoupling from the US economy is part of the reason that in the annual budget for 2011-12, announced in May, the Gillard government could pledge to return government spending to surplus by the following financial year, 2012-13. Opposition leader Tony Abbott said the government can take little credit for getting the budget back into the black, arguing that if the federal budget does return to surplus in two years, it will be “made in China, not made in Australia.” Official analysis and political debate is telling Australia that it is being altered by Asia and that those changes will go much further. The Treasury budget papers discussed the transitions facing Australia under the heading, “The Asian Century and the changing structure of Australia’s economy.” In the opening moments of his statement to Parliament on the annual financial statement, Treasurer Wayne Swan hit the same note: “This budget is built on our firmest convictions: that just as our focus on jobs helped Australia beat the global recession, so too can a focus on jobs maximise our advantages in the Asian Century.” Modern Australia is the creation of 200 years of settlement during what were clearly Western centuries. At the very least, the Asian Century will cause shifts in where and how Australians work, a theme the treasurer returned to in the closing moments of his budget speech: “Labor governments of the past managed the transition from a closed economy to an open economy competing in the world. Now that the world is changing, we must change as well. Ours is again Australia-East Asia and US relations September 2011 an economy in transition. Global economic weight shifts from West to East – bringing growth and dynamism closer to Australia than ever before.” Using the heading “How fast is Australia’s economic geography changing?”, the Treasury answers: “Since the mining boom commenced, the pace of change in the distribution of economic activity between the different states and territories has been unprecedented in recent history, and even more marked than the pace of change in industry structure.” Much is on the move when the Australian Treasury starts using words like “profound” and “unprecedented” to describe economic shifts while the treasurer can embrace the “Asian Century” as a key image in the first minute of his annual budget address to the nation. Australia did much to promote the concept of the Asia-Pacific through the creation of APEC, so it is a shift in standard Canberra language for the focus to be simply Asia, not the Asia-Pacific. The US and Asia Prime Minister Gillard traveled to Washington in March for talks with Obama administration and to address Congress. The following month, the prime minister performed almost a matching tour to North Asia, visiting Japan, South Korea, and China. The two tours illustrate the twin themes of the alliance and Asia. Following three previous Australian leaders who addressed the US Congress (Robert Menzies, Bob Hawke, and John Howard), Gillard said she came to repeat a simple message that had been true in war and peace, in hardship and prosperity, in the Cold War and in the new world: “You have a true friend down under.” The regional dimension of the speech reflected Australia’s fervent hope that after the decade of Iraq and Afghanistan, Washington is giving full attention to its role as an Asian power. Gillard said the US will be as indispensable as it was in the Cold War in underpinning stability and strengthening institutions to manage the frictions caused by Asia’s growth: “I believe it is in the Asia-Pacific where the global order is changing most.... The centre of global strategic and economic weight is shifting to this region. The rise of the Asia-Pacific will define our times. Like you, our relationship with China is important and complex. We encourage China to engage as a good global citizen and we are clear-eyed about where differences do lie.” In media terms, the images that mattered to Gillard came from her visit to the White House for talks with President Obama and then going with Obama to a Washington school to talk to students. For many Australian voters, the defining photo was Gillard in the Oval Office playing ball (or hand balling) an Australian Rules football with the president. The same symbolism shaped Gillard’s visit the following month to Asia, going first to Japan, then South Korea, and finally to China. Australia-East Asia and US relations September 2011 Going to China first in their initial bilateral visit to Asia was judged as poor message management by President Bill Clinton and by Prime Minister Kevin Rudd.

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