Australia seeks new ASEAN ties as US-China rivalry grows – Nikkei Asian Review *

*co-authored cover story for the Nikkei Asian Review weekly print magazine. My reporting here.

Gloria Jean’s Coffees outlets are a common sight in cities across Southeast Asia. This one is in a central Yangon mall (Simon Roughneen)

JAKARTA — On February 23, while Australian Prime Minister Malcolm Turnbull sat in the East Room of The White House with US President Donald Trump, a car rammed into a security barrier outside the building.

There was no indication that the driver – a “35 yr old female from Tennessee” according to the US Secret Service Twitter account – was targeting either Trump or Turnbull.

Australia’s police said the apparently-random security incident had “no impact” on the visiting prime minister. But Turnbull was likely just as relieved that he made it back onto Pennsylvania Avenue without a reprise of the tirade he endured during a January 2017 telephone conversation with the just-inaugurated Trump, who tried to close that discussion by saying “I have been making these calls all day and this is the most unpleasant call all day.”

Taken together, the bizarre car-ramming episode and the tetchy phone diplomacy could be seen as ominous portends for the future relationship between two continent-sized former British colonial outposts.

While there is no clear threat from the U.S. to loosen its long-standing ties with Australia, some observers say the country may one day face a choice between its main security ally and its biggest trade partner. Graham Allison, author of Destined for War: Can America and China Escape Thucydides’s Trap?, said that China’s rise is forcing Asian countries with close ties to the U.S. to reconsider.

“Largesse, economic imperialism — call it what you will: The fact is that China’s economic network is spreading across the globe, altering the international balance of power in a way that causes even longtime U.S. allies in Asia to tilt from the U.S. toward China,” Allison said.

In 2013, a government blueprint called Australia in the Asian Century said the “alliance with the United States and a strong US presence in Asia will support regional stability, as will China’s full participation in regional developments.” Already that assessment feels more than a mere half decade old, with analysts such as Hugh White suggesting that not only is the game is already up for US influence in Asia, Australia needs to figure out its place in the inevitable Chinese-led order.

“No winners”

Such concerns are growing along with tensions between the world’s two biggest economies.

In its latest National Security Strategy, published in December, the U.S. said that China and Russia “challenge American power” — a sharp turnaround from the 2010 NSS, which claimed that the U.S. was building “deeper and more effective relationships” with the two countries.

At that time, the Obama administration was attempting its “pivot to Asia,” touted as a diplomatic and economic refocusing on the Asia-Pacific region. Sidetracked as uprisings and civil war wracked Egypt, Libya and Syria from 2011, the Asia pivot nonetheless culminated in the Trans-Pacific Partnership, a trade deal with 11 other Pacific rim countries, including Australia.

U.S. President Donald Trump ditched the TPP soon after taking office and in recent weeks has announced a series of tariffs that could prove the first shots in a trade war. Driven in part by raw materials exports to a booming China, Australia has, uniquely among developed economies, seen uninterrupted economic growth since 1991, a quarter century that included Australia coming relatively-unscathed through the 1997-98 and 2007-09 international financial crises.

But on March 1, less than two weeks after Turnbull visited Trump in the White House, the U.S. president announced a 25% tariff on imported steel and a 10% levy on imported aluminum — raising concerns in Australia about possible repercussions.

Though the measures will not affect Australia directly, the worry among trading countries is that they could birth a wider cycle of tariff imposition that would undermine cross-border commerce. “My concern remains that, off the back of actions like this, we could see retaliatory measures that are put in place by other major economies,” Australian Trade Minister Steven Ciobo told reporters in Sydney on March 2.

Sure enough, the European Union responded with a threat to tax American imports, only backtracking temporarily after the U.S. agreed to examine giving the Europeans an exemption.

Since then, China and the U.S. have engaged in tit-for-tat tariff threats. The hope is that this is merely a Trump tactic designed to force China to compromise on market access for U.S. companies. Shane Oliver, economist at AMP Capital, said that the U.S. could be trying to replicate recent negotiations with South Korea, which saw Seoul grant some concessions to the U.S. as a means of retaining a free trade deal sneered at by Trump. “It could well be President Trump trying out some of his art of the deal,” Oliver said, referring to the title of Trump’s 1987 book.

But Australian businesses worry that tactics or not, the tariff trend will spread, perhaps uncontrollably, and that multinational production chains will be undermined.

“The risk is escalation, and hopefully the parties involved see that there are no winners from trade conflict,” said Angus Armour, managing director and CEO of the Australian Institute of Company Directors.

“Today, the global market is a complex web of trade of parts, ideas, products and more. I doubt that any one nation can accurately predict the outcome of any single change in a tariff, let alone multiple changes,” said Alan Oppenheim, managing director of Ego Pharmaceuticals, an Australian company that has been doing business in Southeast Asia since the 1960s.

Australian exporters prefer that countries in the region opt for reduced trade barriers, citing recent free trade deals as boosting business.

Anita Poddar, corporate affairs manager at Wine Australia, a government body, said, “Australian wine exports have benefited from improved terms of trade as a result of trade agreements with Japan, South Korea and China achieved over the past few years.”

With the U.S. arguably tarnishing the brand appeal of electoral democracy and open trade, China, where authoritarian governance has proved no barrier to economic growth, can portray itself as the world’s free market policeman.

“We should commit ourselves to growing an open global economy. No one will emerge as the winner in a trade war,” Chinese leader Xi Jinping said in an address at the World Economic Forum in Davos, Switzerland, in January last year. T the time, Donald Trump had just won the U.S. presidency after campaigning against free trade deals. Xi echoed these sentiments in comments this week at the Boao Forum for Asia.

“It is remarkable to see China — an illiberal, mercantilist nation whose increasingly revisionist behavior represents perhaps the greatest long-term threat to the existing international order — styling itself as champion of the liberal, cooperative system America forged,” wrote Hal Brands, a professor at the Johns Hopkins School of Advanced International Studies, in a recent article in Survival, an international affairs journal.

But as bilateral trade has grown, Australia has been riven by concerns about growing Chinese political influence. The country’s intelligence agency, known by the acronym ASIO, reported in 2017 that unnamed foreign governments are “clandestinely seeking to shape the opinions of members of the Australian public, media organisations and government officials in order to advance their country’s own political objectives.”

Widely seen as referring to China, the ASIO report fed into concerns reflected in Clive Hamilton’s “Silent Invasion: China’s influence in Australia,” a new book that was slammed by China’s foreign ministry as “malicious hype.”

On April 10, Turnbull warned China against building military bases near Australia after local media reported that Beijing had approached Vanuatu about building a permanent military presence in the South Pacific. Foreign military bases in the Pacific islands would cause “great concern,” he said. Both Vanuatu and China rejected the reports.

“Asia is hard”

Earlier, in mid-March, Australia hosted the ten governments that make up the Association of Southeast Asian Nations in Sydney, the first Australian-hosted event of its kind.

The meeting produced little by way of tangible outcomes, beyond a final “Sydney Declaration” mentioning trade, investment and increasing “people to people” links, but the timing of the summit suggested that Australia wants to forge closer ties with ASEAN as a hedge against getting trampled by Sino-American rivalry.

Some Southeast Asian countries, such as Singapore, a major port, and Thailand, which has a large trade surplus with the U.S., could be vulnerable to protectionism.  So, putting clear water between his country and the US, Turnbull told the visiting Southeast Asian leaders on March 16 that “protectionism is a dead end.”

During the Sydney summit, President Joko Widodo of Indonesia, ASEAN’s biggest member state, appeared to welcome the idea of Australia joining the group — a move that would add Australia’s $1.3 trillion GDP to the bloc’s current combined $2.5 trillion, a roughly 50% increase.

Australian Prime Minister Malcolm Turnbull speaks to members of the Liberal Party in central Sydney in the early hours of July 3 2016. (Simon Roughneen)

Even if Widodo was merely expressing some Javanese politesse to his hosts — Indonesia and Australia are struggling to finalize a bilateral free trade deal at the moment — there is scope for closer economic ties between Australia and Southeast Asia.

“It sure looks like the government is looking at ASEAN in this way, as a way to develop a broader set of relations,” said Jeffrey Wilson, Head of Research at the Perth USAsia Center at the University of Western Australia.

Could it work? If ASEAN was a country, it would be Australia’s third biggest trade partner. “The Department of Foreign Affairs and Trade (DFAT) has highlighted the significance of the ASEAN economies collectively as partners with whom Australia’s trade is now larger than that with the US or Japan,” stated a March 1 report on Australia’s relations with Asia, published by the Australian parliament.

But while trade has grown, investment remains low. A survey carried out in 2014 by PwC’s Australia office found that only 9% of Australian businesses were operating in Asia and of the rest, 65% “have no intention of changing their stance towards Asia in the next 2-3 years.”

“Australia has invested more in New Zealand than all ASEAN countries combined,” PwC said.

Judging by the PwC survey, Australian businesses give the impression of being out of their comfort zone when operating outside Anglophone or Western countries. “It is easy to consider Asia as ‘hard,'” said Oppenheim of Ego Pharmaceuticals. “ASEAN, as a subset of Asia, is 10 nations, each of which is unique,” he said.

But despite the apparent reluctance of Australian companies to expand into Southeast Asia, the majority of companies already operating in the region are branching out. The Australia-ASEAN Chamber of Commerce reported in March that, of Australian businesses operating in Southeast Asia, 62% of respondents “had expanded their trade and investment in the region over the past two years.”

There are indications that more Australian companies are looking at expanding into neighboring countries. AICD’s Armour says he has seen an increase in Australians taking instructional courses on how to become a director in Asian markets.

In 2017, the trade ministry opened a “landing pad” to assist Australian businesses trying to get a foothold in Singapore’s tech startup scene. However, the ministry declined to reply when asked if the scheme would be expanded to other Southeast Asian cities where investing is more of a challenge than in Singapore, which regularly tops the World Bank’s annual “Doing Business” rankings.

Over the longer term, Australia should be able to forge closer ties with Southeast Asia. Since 2014, over 13,500 Australian undergraduates have studied in ASEAN countries through the government’s New Colombo Plan, meaning that in the coming decade Australian businesses will have a cadre of potential recruits with regional experience to choose from.

Frank Bongiorno, a historian at the Australia National University, said that the country’s perceptions of Asia have shifted since the 1970s, when it began to take in more immigrants from the region.

The last census in 2016 recorded nearly 900,000 respondents stating one of the 10 ASEAN member states as their country of origin, offering ample scope, it would seem, for regional networking.

“Many more Australians have now traveled to Asia. Many have spent time working there, or they do business there on a regular basis. Asians now comprise a large proportion of Australia’s immigrants — a much larger proportion than when Australian had an anguished debate about such matters in the mid-1980s,” Bongiorno said.

But even if business links grow and cultural differences are diluted, Australia cannot expect to form a seamless alliance with a diverse regional grouping where, Widodo’s welcoming words notwithstanding, other leaders, such as Singapore’s late prime minister Lee Kuan Yew, have in the past insulted Australia as “white trash.”

Lee later walked back his criticisms, but old habits die hard. Last month Lee’s old sparring partner Mahathir Mohamad, a vituperative critic of Australia and the West while prime minister of Malaysia from 1981-2003, told Australian media that their country remained “an outpost of Europe.”

ASEAN’s 638 million people live in a mix of Muslim, Buddhist and Christian-majority countries where political systems and economic development vary widely. Vietnam and Laos are one-party communist states, Thailand is a military junta, and the Philippines and Indonesia are electoral democracies. Singapore, a trade and investment gateway to the region, is among the world’s richest countries per capita, while Myanmar and Cambodia place near the bottom of any such ranking.

And just as Australia is being pulled in two directions by the U.S. and China, ASEAN too is divided, with some countries more closely aligned with China than others, such as Laos and Cambodia. Thailand and the Philippines are treaty allies of the U.S., while a potential flashpoint for U.S.-China tensions is the disputed South China Sea, home to overlapping claims from China — which has been building artificial islands there — and Vietnam and the Philippines.

Such differences mean Australia cannot expect a seamless alliance with ASEAN, according to James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology Sydney.

“It’s also important that Australia appreciates that there are diverse strategic interests within ASEAN,” he said. “Imagining that somehow they can be convinced as a bloc to support ours is naive.”

ANZ bank banner hanging on Yangon’s Union Financial Centre. ANZ was one of the first Western banks to establish operations in Myanmar during the country’s democratic transition, opening a representative office in 2013 and its first local branch 2 years later (Simon Roughneen)

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