The power of proximity – Australia’s next wave of global engagement in the Asian Century

Nearly half a century ago, Geoffrey Blainey’s The Tyranny of Distance argued that Australia’s geographic position shaped our psychological attitudes. The long distance between Australia and our colonial forebears in Europe, and also the United States, made us unsure of our future economic prosperity. At about the time Blainey was writing, Donald Horne’s The Lucky Country described a resource-rich Australia that lacked intellectual confidence to make the most of its natural endowments. Singapore’s long-standing Prime Minister Lee Kuan Yew also famously warned that Australia risked becoming the ‘poor white trash of Asia’ and advised that vast natural mineral wealth was neither necessary nor sufficient for long-term prosperity.

In these years, however, Japan had already succeeded the United Kingdom as Australia’s major trading partner: the Australian economy had begun its long journey toward greater engagement with the Asia-Pacific. Australia’s post-World War Two economic relationship with Asia can be seen in terms of four ‘waves’ – concluding that the rise of trade in services. This is a story of how by some crucial breakthroughs, Australia has replaced the tyranny of distance with the power of proximity.

The first wave – Black Jack’s beachhead: 1957-1972

In 1957, just 12 years after the end of World War II, Australian Trade Minister John McEwen signed a commercial agreement with Japan. This agreement gave Australia a ‘beachhead’ in Asia, and launched the Australian tradition of bipartisan support for increased trade engagement with the region. There followed a flurry of trade and, later, investment between Japan and Australia. By 1966 Japan had surpassed the UK in our trading partner ranks  – and Japan was transforming itself from a nation devastated by war into a huge and affluent economy.

The second wave – Sino-the-times: 1972-82

As Japan re-entered the world economy, followed closely by South Korea and the other ‘Asian Tigers’, China remained closed to the world with little economic engagement outside its borders. Australian relations with China, however, warmed dramatically after Gough Whitlam visited Beijing (then Peking) as Leader of the Opposition in 1971 and formally established diplomatic relations when elected Prime Minister in 1972. Whether because of this or our support for China’s entry into the World Trade Organisation, China now regards Australia as a key economic partner.

The third wave – Breaking down the tariff wall: 1983-2008

Lee Kuan Yew’s admonitions came back to haunt Australia in the recession of 1982-83 when, despite a resources boom, the economy was stagnating beneath double digit unemployment and inflation. In response, government reforms opened up the Australian economy and oriented it even more toward Asia – and did so while maintaining social harmony through an Accord with the trade unions (ACTU). The exchange rate was floated, financial markets were reformed, and universal health care and a pension scheme were introduced alongside education reforms aimed at boosting productivity.

As for trade, the tariff wall that had kept Australia isolated for a century was taken down brick by brick. Australia supported trade liberalisation through the GATT/WTO and the creation of APEC.

The fourth wave – Global engagement in the Asian Century

Now Australia is entering its fourth wave of engagement with Asia.

In terms of trading partners, China has superseded Japan – so further realignment of the global economic order will again alter Australia’s trade. The emergence of several ASEAN states, in addition to China and India will take us through this new phase of engagement.

The fourth wave will look very different. First, we are now well situated within established Asia and are able to expand into emerging Asia. We have formed beachheads in ASEAN, China and India and now some of the frontier markets – including Laos, Cambodia and Myanmar in the Mekong Delta and Mongolia and Kazakhstan in Central Asia – are opening up.

Secondly, whilst our larger corporates have already formed strong relationships in Asia, the nature of global supply chains and open regionalism means that Australian small and medium-sized enterprises (SMEs) will become increasingly enmeshed. Asia now provides seven out of 10 of our top SME exporter destinations.

Thirdly, while the first waves of our engagement with Asia have been focused on ‘rocks and crops’ (mining and agriculture), steel and iron ore, and pumping LNG offshore to the region, services will now play a more important role. ‘Rocks and crops’ will continue to provide the lion’s share of our export revenue to Asia – but our ‘points of engagement’ with Asia will expand as services trade promotes broader and deeper people-to-people relationships. Second tier cities in China like Chongqing and Chengdu are full of Australian architects and engineers, as are parts of India, Mongolia, Kazakhstan and South East Asia. We also need to raise the export orientation of ‘crops’ (agribusiness) side of rocks and crops so Australia can move ‘from the mining boom to the dining boom’.

Services complement the role that ‘rocks and crops’ and advanced manufactures play in our trade; they are not a substitute for (or alternative to) them. Goods exports build a platform that enables services trade to grow throughout the region and bring with it opportunities for investment, niches for SMEs, and richer global and regional integration.

There will be challenges as we pursue the fourth wave of Asian engagement, particularly given the ongoing risk and potential for external shocks within the global economy after the GFC. Climate change poses a serious threat, though it also represents an opportunity for Australian environmental services exporters – especially those engaged in sectors like green building and environmental transport and infrastructure in China, India and Indonesia.

Australia’s economic relationship with Asia has taken many twists and turns, as we have grappled with the changing economic landscape of the region. From our post-War engagement with Japan and recognition of China in 1972 – and then the transformation of our own domestic structure to become one of the world’s most open and successful economies – Australia now embarks with cautious optimism on a new phase. And as Australia looks for new sources of global opportunity in the 21st century, there are some positive early signs from this fourth wave of Australia’s engagement with the region – signs that we are really starting to benefit from the power of proximity in the Asian Century.

On the 9 of November, CEDA will release the last policy perspective for 2015. Global networks: transforming how Australia does business will examine the importance of global connectedness to Australia's future prosperity.