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US Economic Diplomacy: A View from Afar

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US Economic Diplomacy: A View from Afar
US Economic Diplomacy – A View from Afar
by
Dr Martin Parkinson PSM
Griswold Center for Economic Policy Studies
Working Paper No. 246, September 2015
US Economic Diplomacy – A View from Afar 1
Dr Martin Parkinson PSM
September 2015
“…the only serious threat to the real interests of the United States can come
from a failure to adjust sensibly to the newer world order.”
Paul Kennedy, 1987 2
INTRODUCTION
The transition of power among nation states creates great complexity and
challenges for governments – for the incumbent powers, for the rising ones,
and for those countries which are spectators to the transition.
The world is currently in the midst of a marked shift in economic weight from
the countries of the trans-Atlantic toward those of Asia. Emerging Market
Economies (EMEs) have been supplying around ¾ of annual world growth in
recent years - they already comprise half of world GDP and are likely to be
approaching 60 per cent by 2030. Much of EME growth is driven by Asia,
especially China.
This phenomenon raises challenging questions for the United States about its
role in Asia, and more generally, and how it should respond to the efforts of
EMEs, especially China, to play a more assertive role in world affairs. Chief
among these questions include: whether the US can adopt the same posture in
the region as in the past; what responsibilities it can, and should, expect China
to take on; and what role the rest of the region should be expected to play
over the decades ahead.
1
This paper has been long in gestation and the ideas reflected in it have been developed through many
conversations with individuals too numerous to mention. I would like to express my appreciation, though, to
three people who have particularly influenced my thinking about international and strategic issues over the
years: Allan Gyngell, Heather Smith and Peter Varghese, none of whom can be held responsible for the views
expressed here.
2
The Rise and Fall of the Great Powers, Random House, New York, p534.
1
Whether, and how, to deploy power is always a conundrum and never more so
than in a fluid and changing environment. Today I want to focus on the
importance of economic diplomacy and the evolving role of new and
incumbent powers. While much of this discussion can be generalised, I will
focus particularly on Asia, drawing on my own experience as a practitioner of
economic diplomacy.
Let me start with three propositions.
First, the transition of economic weight from the trans-Atlantic toward Asia is
playing out in real-time and challenging the institutions and rules that have
governed global economic activity over the last 70 years. In particular, EMEs
have become more vocal about the failure of existing institutions and
governance arrangements to satisfy their objectives, leading to pressure to
“rewrite” the rules and for the creation of new institutions. 3
While it is important to acknowledge that the global rules are always being remade, much of this is evolutionary and is in the nature of re-tuning in response
to economic developments – in contrast, this challenge goes to the heart of
who writes the rules, not just the rules themselves.
Second, economic weight does not automatically bestow global strategic
power or influence. Accordingly, the key issue is not whether the US is in
relative economic decline or whether we are seeing the end of the American
Century. The US will remain central to efforts to galvanize institutions and
other nations to address global challenges and to deliver global public goods.
But the diffusion of power, both among nation states and from nations to nonstate actors, means that the US will need to operate differently than in the
past if it is to achieve success. In particular, it will need to be more strategic in
identifying its core national interests and to be more agile in its response to
events. As Joseph Nye has noted, in this emerging world ad hoc reactions to
3
Indeed, Michael Wesley has explicitly suggested it is time to question the “longevity not only of the content
of international order but of its global extent.” Feudal world ahead if great powers establish exclusive spheres
of influence, The Weekend Australian, September 5-6, p18. Drawn from Restless Continent: Wealth, Rivalry
and Asia’s New Geopolitics, Black Inc., 2015.
2
events will not be enough - success means the US needs a ‘smart power
strategy’. 4
The rising importance of non-state actors reflects a number of factors, but in
large part has been enabled by developments in information technology. The
information revolution has brought significant benefits – greater community
engagement via social media, for example – but it has also enabled the easier
creation of communities of (inimical) interest while media savvy entities such
as IS have been able to extend their reach beyond historic constraints. Both
these positive and negative developments strain government’s capacities to
respond carefully to unfolding events.
Third, if a strong international order is a worthwhile objective, change to global
economic governance arrangements is not only inevitable but necessary.
Failure to recognise this risks eroding countries’ influence and capacity to
achieve national objectives. However, at this stage there is no clarity about
how such an evolved order might look, nor how the transition to it can be best
managed. This throws up multiple questions without answers, at least to date:
will it be more or less liberal than in the past?; will it have a greater range of
“acceptable” modes of behaviour?; how should economic diplomacy be
conducted in such an environment?; and what capabilities do our institutions
and policy makers (including diplomats) need to be successful in such an
environment?
THE FOUNDATION OF ECONOMIC DIPLOMACY
The long-term forces that shape the destiny of countries are fundamentally
economic – the response to globalisation, demographics, human capital, an
innovative and entrepreneurial culture, the strengths and effectiveness of
domestic institutions and the quality of the rule of law – and, arguably, are
little changed over the last two centuries. Failing to recognise this economic
underpinning, and failing to pursue policies that foster dynamism, help
manage shocks, and deliver citizens what they desire and value, risks the
capacity to project power and sustain influence. 5
4
5
Joseph S. Nye, Jr, Is the American Century Over?, Polity Press, Malden MA, 2015, p125.
Note that nowhere here is foreign market access defined as a measure of success, yet a recurring theme of trade
negotiation is to achieve improved market access, which is touted as a source of future economic dynamism and
3
Accordingly, economic success is a necessary, but not sufficient, condition for
the sustained deployment of power and the achievement of influence.
Without economic success, countries will not have a track record of high
employment and rising living standards, of sustained and stable growth, to
which others may aspire to emulate. Without economic success, a country will
also lack the resources able to be sustainably deployed to influence others –
whether they be military assets, aid programs, cultural and social outreach, or
even the effective distribution and use of missions and diplomats.
How countries choose to deploy their economic resources is key, as the
relation between economic success and power projection is neither
mechanistic nor linear.
Clearly, sustained economic success can provide resources that can be used to
deploy strong military or other forward-projected forms of power. But equally,
countries can erode their capacity to achieve economic success for a long
period of time, diverting resources from productive activities to military assets,
men and equipment. The former Soviet Union was a clear case of a nation able
to project military power for a long period in the absence of good economic
performance, but at the cost of immiserating its people and sowing the seeds
of its own collapse.
Economic success also influences the capacity to project soft power – countries
without rising living standards are unlikely to be able to enrich the world with
the key cultural industries, values, and foreign policies that constitute soft
power. However, economic success does not guarantee soft power success if
the underlying social model lacks other desirable characteristics. The US has a
long track record of developing and projecting soft power well – the Soviet
Union did not and, to date, modern China also appears relatively unsuccessful.
opportunity. In fact, the vast majority of the benefit supposedly flowing from free trade agreements can be achieved by
unilateral action since they arise from improved allocative efficiency in domestic markets as a result of additional
competition, not because a country can sell an additional tonne of beef or another machine tool.
4
Whether countries choose to deploy power is dependent on a range of other
issues. US isolationism during the interwar period could be seen as a failure of
power conversion though, to me, this appears to have been a perfectly
legitimate and deliberate policy choice rather than a sign of inability 6. In
contrast, Japan’s extensive aid program and sustained public diplomacy over
decades appears to have had only limited success, suggesting other factors
have undermined its capacity to achieve the outcomes sought. Similarly, while
China has been gaining economic strength for some time, it had shown little
evidence until the last few years that it was interested in deploying its strength
to influence others. 7
Interdependence, as a result of globalisation of trade, capital and labour
markets, brings with it great benefits for the global economy but also creates
new complexities for countries in the pursuit of their national interests. In
particular, rising interdependence combined with the increasing economic
weight of China and other EMEs, requires Western nations, and particularly the
US, to develop a more dynamic view of relative economic and strategic power,
and how best to shape and deploy economic power to achieve national
interest objectives.
Yet very few countries think about policy interconnectedness in a strategic
fashion. Indeed, very few countries could be said to do “joined–up”
government at all well as there is a recurring lack of coordination between the
strategic, military and economic institutions across nations. While it may be
hard for any country to achieve this outcome, and perhaps harder still for
democracies, history suggests that those which do can have a disproportionate
influence at key times in history.
US ECONOMIC DIPLOMACY
The US has a long and enviable record of effective economic diplomacy –
strategies that have effectively brought together economic, strategic and soft
power in the face of key challenges. It has been, perhaps, less successful in
6
7
Nye, op cit, p4.
This stands in contrast to Mao-era China which had identifiable soft-power aims.
5
more “normal” periods – that is, where change is more gradual – in part,
perhaps, because the stakes may be perceived as not as high.
Perhaps the pre-eminent example of joined up policy and the pursuit of
economic diplomacy as part of a clear strategic agenda can be found in the
Marshall Plan.
Equally, US leadership in creating the institutions that underpinned the postwar liberal economic order – the creation of the IMF, World Bank, GATT and
WTO – helped underpin post-war growth, trade and investment, lifted
hundreds of millions worldwide from poverty and delivered rising living
standards to billions more.
More recently, US leadership in the establishment of the G20, with strong
Canadian support, after the Asian financial crisis was recognition that the
world had changed and that solving global problems required the involvement
of a broader group of countries. The foresight embodied in that decisions
turned out to be particularly important when collaborative responses were
needed to the Global Financial Crisis (GFC).
But the question is not about the US’ track record. Rather, it is whether
diplomacy in its current form will be as successful going forward, particularly in
Asia.
The fact that Asia’s importance has risen, and will continue to do so over the
decades ahead, owes much to the US’ underwriting of the liberal economic
order. It is that regime of open markets, trade and investment flows, rules and
effective institutions that contributed to the environment in which Asian
economies have been able to grow and develop – from Japan to the Asian
Tigers of South Korea, Taiwan, Hong Kong and Singapore, and now China,
India, Indonesia and others.
And it has been US military primacy that has underpinned Asia’s fragile
strategic balance.
6
Without both of these contributions, Asia’s recent history and future promise
would look much different. This should be acknowledged more often than it is.
But what is striking about post-war Asia was the absence until the 1980s of
virtually any regional institutions to support economic growth and strategic
stability.
By the late 1980s this was changing, with countries acceptance of the concept
of an Asia region resulting in the institutionalisation of the reform processes
and openness to trade and investment flows which had been fostered by the
US and which had come to characterise Asia’s post-war economic
development. Geo-political change – the end of the Cold War – was a key
factor, leading to ASEAN’s expansion to cover all of South East Asia, and the
broader embrace of regionalism.
The 1989 APEC initiative – led by Japan, Korea and Australia and designed to
embed “open regionalism” – struggled to engage the US at the outset. The US
only became fully engaged after active lobbying of President Clinton by
Australian Prime Minister Paul Keating, who recognised that APEC couldn’t
succeed without the US, then Asia’s largest trading partner. This engagement
resulted in the first Leaders’ meeting in Seattle in 1993.
The initial US ambivalence reflected disparate views within Washington as to
the appropriate objective for APEC. “Community builders” saw it as fostering
greater understanding and encouraging collaborative responses to issues in
the region, helping countries become “normalised” to the idea of working
together. As such, they took the view that the APEC project required patience
and a long-term perspective. Others feared it was a vehicle to exclude the US
from security and foreign policy discussions in the region and hence should be
opposed, while a third group saw it predominantly as a vehicle to promote
economic reform and trade liberalisation. 8
8
For an elaboration on these viewpoints, see Charles E. Morrison, Alternative American Perspectives on AsiaPacific Regional Cooperation and the Future of APEC, in Kokusai Mondai (International Affairs) No. 585,
October 2009, accessed at http://www2.jiia.or.jp/kokusaimondai_archive/2000/2009-10_005e.pdf?noprint.
7
While ultimately the “community builders” prevailed, the tension between the
manner of Asian multilateralism, with its focus on processes to deliver “behind
the border” structural change, and the US’ more immediate focus on
reciprocity, has been an ongoing source of friction within APEC. This can be
seen in the approach to the 1994 Bogor Declaration aimed at achieving free
trade among APEC members by 2020.
Moreover, even upon embracing APEC, the US has often looked to use
economic fora to advance broader multilateral interests. For example, the
expansion of APEC membership to include Russia, while probably desirable in
the longer-run, added challenging complexity to a nascent institution and likely
diminished its effectiveness for some period. The US also diluted the
economic focus by broadening the agenda to include non-economic issues
such as terrorism in the wake of 9/11. Each of these decisions seemed driven
by US broader interests and short-term imperatives, not the long-term
integration of the region. More recently, the same issues are presenting
themselves in the G20 Leaders’ meetings.
But it was the handling of the Asian Crisis of 1997-98 which fundamentally
changed Asia’s perception of itself and the nature of US-Asian economic
relations.
The US, through the IMF, was perceived as both misreading the nature and
causes of the crisis and then orchestrating a response which advanced its own
political and economic interests. The IMF’s overloading of the reform agenda,
arguably at the behest of the US, was seen throughout the region as ruthless
exploitation of the crisis to push countries in particular directions they may
otherwise have chosen not to pursue. While the region has conveniently
chosen to overlook the culpability of the countries at the centre of the crisis,
this perception of the US’ role is now deeply rooted in public and official
consciousness.
This experience also directly resulted in the longer-term trend of Asia looking
for new mechanisms for mutual support in order to reduce reliance on the
IMF. This has not only damaged IMF credibility and effectiveness in the region,
and arguably beyond, it directly triggered:
8
• the proposal for an Asian Monetary Fund, which was ultimately killed off
by vehement US and Australian opposition;
• the establishment of the Chang Mai Initiative, which created a network
of bilateral financing facilities and foreign currency swap arrangements;
and, most damaging to growth prospects,
• a widespread prioritisation on building foreign exchange reserves as a
(costly) form of insurance against refinancing risk.
Moreover, the region, at the time of the Asian crisis, contrasted US behaviour
with that of China, concluding that China’s decision to maintain the value of its
currency at the height of the crisis and in the face of depreciation and
devaluation elsewhere in the region, was a mark of leadership,
notwithstanding that this was clearly in China’s own narrow self-interest.
The recurring tension between the short-term outcome orientation of the US
versus the focus on the building blocks of future cooperation was seen again in
the context of the Manila Framework Group (MFG). The MFG emerged from
the Asia Crisis as a mechanism to build confidence in macroeconomic
coordination and operated successfully for several years until US reluctance to
continue participation triggered its demise. It is an unfortunate reflection on
regional inadequacies of the time that member countries couldn’t
countenance continuation of the MFG without US involvement. Again, the
apparent US rationale was that the payoffs, as defined by (unspecified)
concrete outcomes, were not obvious. In this regard, it echoed the initial
disinterest in APEC and the ongoing frustration with its performance.
Such attitudes are, of course, never universally shared within any government,
and senior Bush Administration officials privately described the decision to kill
off the MFG as “one the US would eventually rue”.
These three examples suggest that the US has not always understood Asian
attraction to open-regionalism via a suite of institutions or how the region
thinks about economic cooperation and coordination. An affinity for noninterference and relationship building deeply underpins Asian economic
diplomacy. The US’ default position of bilateral, rules-based, reciprocity, works
well with many countries and in some regions, but has a more limited track
9
record of success in Asia. 9 This is something that the US should keep in mind as
it responds to China stepping up its role in Asia.
Yet the US has also shown great flexibility in other areas, such as its
championing of the creation of the G20 to help strengthen crisis management
efforts and the global financial architecture in the wake of the Asian crisis.
The 2011 pivot to Asia is a reflection of how core US interests are at stake with
the transition of economic weight to the region, and to China in particular.
The pivot has embodied traditional elements of both economic diplomacy and
military power in the pursuit of strategic objectives.
As part of this, the Trans-Pacific Partnership was an initially well considered
initiative and, if successful, will deliver a strong benchmark for others to
emulate. As such, it would be a visible sign of US leadership in the provision of
global public goods. However, in practice, the US was arguably too obvious in
terms of its strategic intent, vis-a-vis China, as a motivator for the TPP.
Specifically, if true liberalisation is the aim it seems short-sighted to keep out
the world’s largest emerging economy from a core trading group, one in which
it is the major trading partner of most if not all members. Moreover, it stands
in sharp contrast to the approach taken by Asia toward involving the US in
APEC. 10
And whereas the US has prioritized the TPP, and its partner Trans-Atlantic
Trade and Investment Partnership, China has put multilateralism and the WTO
at the core of its approach to trade policy, an approach which appeals to much
of the developing world and to the other EMEs.
9
The default for Great Powers tends to be toward bilateral dealings as they are more likely to prevail. In
contrast, multilateralism tends to constrain their capacity to act. Recognising this highlights the enlightened
nature of US statecraft in the aftermath of World War 2.
10
While the TPP is theoretically open to any country in the region, Wesley asserts that in reality the costs
would be heavy for many developing countries. As a result, it’s existence has spurred China’s “One Belt, One
Road” trade, investment and infrastructure initiative.
10
Looking back, it is hard to avoid the conclusion that overall US economic
diplomacy has become increasingly more tactical rather than strategic. Far
from the clarity of purpose and commitment that underpinned US leadership
in the formation of global institutions – from the IMF and World Bank to the
G20 – and their initial direction, US strategic intent has been increasingly
difficult to discern. This can be seen repeatedly – from the failure to deliver on
US-championed IMF quota reform to the response to the proposal to establish
the Asian Infrastructure Investment Bank (AIIB), or the willingness to
undermine US credibility with the pursuit of short-term domestic political
agendas across multiple fora.
To some extent this echoes criticism of US diplomacy more broadly made by
commentators such as Mead, Garfinkle and Haass. 11 What I conclude from
their writings is that the collapse of the Soviet Union took away the organising
framework for thinking about how to achieve US national interests and
allowed the pursuit of short-term, single issues without any strategic
connection.
The US’ apparent focus on short-term expediency at the expense of longerterm goals around APEC, TPP and even officials-led fora like MFG, all raise
questions about what has been, and what may become, the organising
framework for US economic diplomacy in the region. This question becomes
more important as it becomes harder to unilaterally determine the rules of the
game – the costs of short-termism are rising.
11
Walter Russell Mead, Adam Garfinkle and Richard N. Haass. Mead, for example, argues that “For a full
generation we have not had to think too much about whether something done or undone in foreign policy
promotes or endangers our vital interests and the security and prosperity of the American people”, arguing
that the absence of serious strategic consequences to anything that happened in the immediate post-Cold War
era resulted in issues being treated in isolation, without anyone ever having to “connect the dots”. [Mead, The
End of History Ends in The American Interest, 2 December 2013.] Garfinkle suggests that the US grand strategy
that prevailed till the end of the Cold War has been replaced by a sense of determinism that has resulted in the
error quotient of US foreign policy rising, policy becoming largely reactive, and the US’ reputation for
consistency and competence suffering as a result. [Garfinkle, The Silent Death of American Grand Strategy in
American Review No. 15, Feb-April 2014.] Haass has argued that foreign policy mistakes have hurt the US’
reputation for competence, that US advantages are neither permanent or sufficient to ensure continued
primacy without reform at home, and that “US foreign policy should focus not so much on what other
countries are within their borders and more on what they do outside their borders.” [Haass, Put America’s
House in Order, in American Review No. 15, Feb-April 2014.]
11
This raises two intriguing questions. First, does China risk becoming a new
organising principle for US policy if it pursues a determined strategy to displace
the US as the pre-eminent power in the Indo-Pacific? Second, will the
structural slowing in China’s economic growth rates change perceptions about
the speed of US relative decline? If so, it would be a clear case of economic
outcomes with strategic consequences.
Far be it, though, for an Australian to criticise US diplomacy – Australia’s recent
history of economic diplomacy is, at best, a mixed bag.
As a small open economy, Australia has benefited from the US-led liberal
international order. It was Australia’s “mates” who wrote the rules and
Australians have benefited from that – but increasingly it will not be the West
holding the pen, so we also ask ourselves how should we respond?
Australia faces a reality different to many other countries. As the Secretary to
Australia’s Department of Foreign Affairs and Trade, Peter Varghese, has
noted, Australia belongs to no natural global, regional or cultural grouping, and
“cannot bully or buy its way in the world”. 12 This has made us firm advocates
of multilateralism alongside our bilateral relationships – indeed, both are
“anchored in our national interests”.
But Australia has also long recognised that our economic weight and influence
in global fora are a direct consequence of what we do at home – that is, policy
success begets both greater economic weight and global influence. But unlike
the US, we lack what economists call “market power” – we are effectively a
“price-taker” rather than a “price-setter” when it comes to global rules and
institutions. Accordingly, we have a long history of trying to use our limited
influence to strengthen existing global institutions, to the point that some
might say we are annoying in pursuit of these goals.
12
Peter Varghese, The Challenges of Multilateralism, Sir James Plimsoll Lecture, 7 November 2013. Available at
http://dfat.gov.au/news/speeches/Pages/sir-james-plimsoll-lecture.aspx.
12
But, like the US, we haven’t always been as strategic as we could have been in
pursuit of our national interests – witness our strident opposition to the Asian
Monetary Fund proposal, which damaged our credentials within the region for
several years, and the opportunity missed to shape the AIIB with our initial
rebuff of China, notwithstanding their genuine efforts to respond to our
concerns.
On the other hand, successive Australian Governments have recognised the
centrality of a successful and effective G20 to the pursuit of our national
interests. We are only too aware that, were the G20 to fail, we may not have a
seat at its successor. It is this realisation that underpins the extensive efforts
we make in this fora, and especially during our Presidency in 2014.
CHALLENGES
While the collapse of the Soviet Union left the US the dominant power
economically and militarily, that dominance of the last quarter century has
come to an end, replaced by continuing US pre-eminence accompanied by the
rise of other countries, each individually weaker on each dimension of power,
yet able to stymie or challenge, although never displace, the US on different
issues at different times.
As a result, we now have a world where no one country indisputably leads and
this makes for a more fluid environment where regionalism and plural
narratives are more likely to be the order of the day. 13 This is a change in
circumstances in terms of the breadth of issues, and the number of countries,
able to constrain the US’ capacity for unilateral action, or required to be “onboard” for effective multilateral responses to issues.
Arguably, the issues confronting the world – transnational threats like weak
global growth, terrorism, pandemics and climate change – and the diffusion of
power from nations to non-state actors, make multilateralism critical at a time
13
For a comprehensive discussion of this concept, see Amitav Acharya, The End of American Order, Polity
Press, 2014.
13
when it appears in crisis. What is unclear is whether this crisis is transitory or
permanent. 14
While economic power has been multi-polar since well before the Global
Financial Crisis, with the emergence of the European Union and the strength of
Japan in the 1980s, the rise of multiple other countries, especially those that
don’t automatically share Western liberal values, creates greater complexity
than that offered by either Japanese or European economic success, or indeed
that when faced by one single rival in the Soviet Union. And while the
transition of power among individual large nations is tricky, history can offer
something of a guide. What is unknown is how best to manage the likely more
difficult diffusion of power among multiple states and away from governments
to non-state actors.
For the world, the US’ role in galvanising institutions and groups of countries to
address transnational challenges will remain crucial. How best to use US
power to accomplish joint objectives, in circumstances where absence of
support from other key countries will assure failure, is something that will only
be determined over time. But what it will require is an agility in approach that
can both embrace unilateralism on some issues while recognising the
importance of multi-polarity and collective action on others. Again, to some
extent this is not new – rather, it is that the balance of options is moving away
from unilateral action and, hence, constraining the US’ degrees of freedom to
act, and raising the value of agility.
It will be an uncomfortable journey for all of us!
CHINA
It is clear that China has neither the capacity nor inclination to step forward, at
this stage, as a consistent supplier of global public goods. However, while it is
generally content to support the existing global institutions and rules, it clearly
wants a greater role in being able to help shape governance arrangements,
including through the creation of new institutions.
14
Varghese, op cit.
14
In the mid-2000s, then US Deputy Secretary of State Robert Zoellick couched
the emerging situation as one where success would see China become a
“responsible stakeholder”. 15 While this concept garnered support in many
circles, for emerging players it invoked the reaction of – “responsible” in the
eyes of whom?
If it meant Chinese conformity to Western modes of behaviour and a passive
agreement to rules and institutions created without its input, China was never
likely to accept its role being defined in this way. And this was the case even as
China recognised the importance of those rules and institutions for its own
impressive economic development.
Indeed, how we respond to China’s rise will itself help shape China’s
behaviour. A more realistic objective should, therefore, be to “shape the
environment for China’s decisions” 16 – and indeed, for the decisions by
emerging economies more generally.
Chinese economic diplomacy has been remarkably deft in recent years, geared
to its long-term objectives and clear in its support for open markets (especially
in other countries) and strong multilateral institutions, even if its broader
strategic impact has been undercut by fears of increasing militarization and
regional assertiveness.
Some of this is clearly strategic positioning and in China’s own interests as the
world’s largest trading nation. Some is clearly designed to reflect well on
China’s model of growth in order to amplify its attraction to others (for
example, exchange stability in the midst of crises, notwithstanding the recent
devaluation). But some of it is also because China recognises it has been a
beneficiary of the US-created global economic order and that the robustness
and credibility of this regime is important to its own longer-term prosperity.
Equally, China is building a track record of effectively using various multilateral
fora. In 2014 it successfully hosted APEC, working closely with Australia to
ensure the APEC and G20 agendas were mutually reinforcing. On a number of
occasions during Australia’s G20 host year, China was a critical and highly
effective supporter for ambitious action.
15
Whither China: From Membership to Responsibility, Remarks to National Committee on US-China Relations,
21 September 2005. Available at http://2001-2009.state.gov/s/d/former/zoellick/rem/53682.htm
16
Nye, op cit, p 124.
15
Looking forward to 2016, China’s hosting of the G20 will be a significant
opportunity on a number of grounds. It will clearly invest in the G20 as a
mechanism to build trust and better coordinate growth initiatives in the face of
continuing weak global outcomes. It is also highly unlikely China will overload
the agenda. Rather, it is likely to focus on delivering existing commitments and
a small number of high impact key initiatives – given its own history, I
anticipate a focus on development, outward-oriented growth and inclusive
institutions.
Considered strategically, China’s hosting also provides a significant opportunity
for the US to work closely with it on issues of mutual importance – the
question is whether the US is willing or able to take advantage of this
opportunity.
That questioning of US willingness and ability may sound harsh but it reflects
an increasingly strongly held view in parts of the region that, in recent times,
the US has not displayed leadership on key economic issues other than
bilateral ones – this is seen as reflecting an unwillingness to lead on some
issues and ineffective attempts on other occasions because of an unwillingness
to accept that the world has changed.
In particular, the US’ often singular focus on global imbalances and exchange
rate manipulation is widely seen as a reflection of domestic political
imperatives. In part this seems to reflect a concern that the US cannot be
expected to be the sole driver of global growth – but the reality is that this
hasn’t been the case for quite some time. Moreover, a continuing tendency to
criticise Chinese exchange rate policies will challenge the abilities of the US and
China to cooperate to ensure that minimal global dislocation results from
China’s impending capital account liberalization. This requires a huge transition
in approach in both countries.
The critical point from all this is to acknowledge that most of the emerging and
developing world does not share the West’s “world view”, and that changing
economic weight makes it harder to ride roughshod over their objections to
either the West’s objectives or means of achieving those objectives. Carrying
on business-as-usual in a world where others are able to effectively block what
is desired is a recipe for frustration, disillusionment for all involved and risks
further eroding support for multilateral responses to transnational issues, not
to mention guaranteeing no actual progress on addressing issues of real
importance.
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Let me cite three examples of where US relative influence has been, or is at
risk of being, damaged if current positions are maintained.
First, the failure of Congress to support IMF quota reform – something that
comes at virtually no cost to the US and which has been championed by
successive – Republican and Democrat – Administrations.
If we are to succeed in delivering the broad outcomes we seek, there needs to
be a greater willingness to allow others to help shape situations and
institutions. Notwithstanding the US efforts to drive reform in global
institutions, supported by Australia, Canada and a few other like-minded
countries, the degree of emerging market economy angst that global
institutions have not reformed quickly enough to reflect their economic weight
and that insufficient attention is given to their concerns is not well appreciated
here. It is a key factor in emerging economies desire to consider alternative
crisis management and financing arrangements, such as CMI, and new types of
institutions, such as the AIIB and the BRICS bank.
If Congress fails to pass IMF quota reform it will create additional incentives to
build institutions outside existing structures.
Second, US behaviour aimed at emasculating the establishment of the AIIB
achieved two outcomes, neither in the US’s long-term interest.
While a legitimate debate can be held about how best to support provision of
infrastructure, the outcome was a widespread belief that the US is unwilling to
acknowledge the real infrastructure needs of developing and emerging
economies.
Moreover, by making the establishment of the AIIB a contest of wills between
the US and China – which China won – the US elevated the issue from a useful
contribution to the global institutional framework to an issue of global
leadership. This was exacerbated by the anonymous spokesman for the White
House whose “throwing the toys from the crib” response to the UK decision to
join the AIIB alienated many. 17
17
In a comment that harked back to British Prime Minister Neville Chamberlain’s acquiescence to Hitler’s
territorial ambitions in 1938, the Financial Times of 12 May 2015 reported a White House official as criticizing
the UK for “a trend to constant accommodation of China, which is not the best way to engage a rising power”.
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Third, putting aside the economic merits of the TPP, failure to have it
completed and enacted this year will damage significantly perceptions of the
US’ ability to deliver on its own initiatives – the consequences of such an
outcome will be long-lasting and widespread. The value of a high quality TPP
should be as a spur to drive domestic economic reform in member and other
countries, not as a device to constrain emerging powers.
Taken together, these three experiences, and the need to help manage
increasingly complex capital and exchange rate issues, suggests the US needs
to be more sophisticated and nuanced in its economic diplomacy. At some
stage, virtually all US Administrations are confronted with the limitations to
their freedom to operate imposed by the structure and nature of the US
political system. Sustaining US influence will, therefore, require the broader US
polity to develop a more shared perspective on national interests, and how to
achieve these internationally, over the decades ahead.
CONCLUSION
The world has changed and will continue to change as power transitions
between nation states - changing the relative power balance – and diffuses
across more countries and non-state actors. In a world of continuing fluidity,
clarity of strategic objective will be critical to the pursuit of economic
diplomacy.
While the changes discussed here are important, they are not existential for
the US – US dominance is being replaced by US pre-eminence but it will remain
critical to the world’s capacity to act on global problems. The key challenge for
the US will be how to frame its strategic objectives and economic diplomacy
strategy for the long-term, and against a different backdrop to that of the last
quarter-century. Importantly, the US has time to make these changes and to
prepare itself for a more challenging environment in which to conduct its
economic diplomacy.
For all countries a few key messages are common.
First, while non-state actors are increasing in importance and will complicate
the pursuit of objectives in ways never previously seen, only nation states can
negotiate and then deliver economic frameworks. However, how these
outcomes are negotiated internationally, and then implemented domestically,
need to change to reflect the changed realities of the 21st Century.
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Second, policy success begins at home – delivering growth and economic
outcomes that citizens’ value. It is domestic success which is the foundation for
successful economic diplomacy. Good domestic outcomes both increase
relative economic weight and creates models to which others may aspire to
emulate.
Third, it will be increasingly important to reflect on the skills and capabilities
required by foreign ministries, treasuries and other economic institutions, if
they are to produce the economic diplomats who can succeed in this new
environment. Efforts will also be needed to ensure greater coordination among
institutions in national capitals.
Finally, the world needs more combined US/Chinese leadership in shaping
global institutions and addressing transnational issues. China, ultimately
cannot avoid this responsibility but it will fall on the US to facilitate, and
ultimately accommodate, this. As such, clarity of strategic objective and a
flexible and adaptable style of leadership will be central.
US economic diplomacy in Asia since the 1990s has been characterised by
periods of strong and effective leadership interspersed with periods of
ambivalence and short sightedness. When the US was the world’s
indispensable power, such an approach carried limited costs for sustained US
influence. That world, though, is rapidly receding.
Thank you.
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Fly UP