Economic Tools for Statecraft and National Security

The postwar global order established at the Bretton Woods conference in 1944 secured economic prosperity and political security for Australia and its region. But it is under serious stress. Beyond the UN framework, its two main elements — the dominant power of the United States alliance framework and commitment of the major powers to the multilateral trade and economic regime — are less secure.

China’s rise and its flexing of raw political muscle and the US retreat from the multilateral system starting under President Donald Trump have dramatically changed the regional and global security environment in which Australia now shapes its national economic and security strategies.

The United States has neither the capacity nor the will to underwrite the multilateral economic system. Its share of global trade is now only 8 per cent; China’s is almost double at 15 per cent. Washington has frustrated the working of key multilateral institutions, such as the WTO dispute settlement mechanism. China’s rise and increased assertiveness has destabilised confidence in the existing order.

This behaviour by its two largest players has weakened the global trade regime. The rules needed to manage a modern international economy, to cover the digital economy, investment and the role of state-owned enterprises, are yet to be established.

Addressing this is a reform agenda that is at the very essence of Australia’s economic and security interests.

The trade system and its rules and institutions, with the WTO at the centre, underpins the confidence of all trading nations that trade and investment at their current extraordinary levels can be secure. So too does the IMF and World Bank on global financial stability and the ongoing need for economic development in most of the world. There is no appetite for, nor sense in, retreat from that.

National institutions and laws are the domestic counterpart that protect the contestability of and equitable access to markets, competition and innovation.

A new comprehensive national policymaking framework will mitigate risks and the unintended policy consequences of policies that make countries poorer, weaker and less secure, while maximising benefits from international engagement. Apart from a less secure global trading and economic regime, Australia also faces increasing political uncertainty and risk. Australia has thus strengthened national defence capabilities and leveraged national capabilities through alliance partnerships and hedging strategies. AUKUS, the Quad, the bilateral security arrangements with Japan and initiatives with European countries aim to strengthen Australian defence preparedness. In recent years Australian security policy has also responded to the reality that many international security challenges such as transnational crime, cyber threats and terrorism have domestic implications and has developed stronger response capacity.

But the heightened tensions and strategic competition between the United States and China and China’s attempt at trade coercion against Australia have encouraged calls to drastically divert economic ties away from China. Some switching of trade is inevitable because of increased uncertainties but breaking economic ties will isolate and make Australia significantly poorer.

This paper was commissioned by the Department of the Prime Minister and Cabinet.