Same Bed, Different Dreams– Asia’s Rise: A View From Australia. A Talk By Malcolm Turnbull

I highly recommend this talk that Malcolm Turnbull recently gave at the London School of Economics. Turnbull is a senior figure in the Australian Liberal Party, is a member of Parliament, and has been a journalist, lawyer, successful Internet entrepreneur and banker at Goldman Sachs. He provides a very articulate and important Australian perspective on the rise of China and the relative decline of the Anglo-Saxon world.

Listening to him made me wish America had such articulate and thoughtful politicians.

The full transcript is available here. I have highlighted several interesting segments but the are many more and I encourage you to listen to the entire discussion, embedded at the end of this post.

His talk is relevant to today’s news that Sinopec Will Acquire Canada’s Daylight Energy, part of a trend in which “Asian buyers may spend $150 billion by 2016 to secure energy resources for their faster-growing economies and targets could include Tullow Oil Plc, Canadian Oil Sands Ltd. and Kosmos Energy Ltd., according to Sanford C. Bernstein Co.”

China is scouring the globe for resource deals, and Australia is one of its top targets and partners. As Turnbull explains:

So resource security (energy, minerals and food itself) is a growing pre-occupation of Beijing. The Chinese rush to acquire access to natural resources, including in Australia, is therefore entirely understandable. Rapidly growing demand for resources in China and elsewhere in emerging Asia is largely why in 2010 a quarter of all Australia’s exports went to China (and a third to China and India combined).

And the financial crisis which began in 2007, eased after 2009 and now threatens to return offers great opportunities for a cashed-up China to acquire as many premium resource assets around the world as it can, so it emerges with a global portfolio of sufficient scale and diversity to secure long term low cost access to the minerals and energy it needs.

It would be quite reasonable for Australia to deny Chinese enterprises the right to acquire Australian resources until such time as Australian firms had reciprocal rights in China. But it is in our interest to welcome Chinese capital that develops our resources, while still taking a discriminating approach to bids for strategic resource assets by Chinese state owned enterprises.

Indignation in some quarters in China when Chinalco’s takeover of Rio Tinto – listed in Sydney as well as London and with 45 per cent of its assets in Australia – appeared likely to be blocked was quite unreasonable – China should respect the right of the Australian people to stand up for our national sovereignty too.

 He also gives a pithy explanation of the Opium War that probably would not be appreciated in London, even 170 years later:

Chinese also recognize the blackest period of their history resulted from weakness that was exploited by stronger nations. Leave aside the brutal invasion and occupation of China by the Japanese in the 1930s, just reflect on the Opium Wars which began in 1839

In its search for something other than silver to exchange for Chinese tea and other goods the British East India Company hit on the great idea of selling opium to China. When the Chinese government of the day cracked down on drug trafficking and destroyed the opium, the British response was to send in the gunboats to insist Chinese ports remain open to free trade in British drugs – and the drug traffickers be compensated for their losses by the now utterly humiliated government of China.

It is as if the Medellin Cartel sent gunboats up the Potomac to shell the Capitol until the Americans disbanded the Drug Enforcement Agency.

Turnbull discusses the “relative decline” of America and other Western countries:

Now this sense of being outclassed by China is not limited to Americans.  Nobody who has visited Shanghai could not be impressed by their subway – with 434 kilometres of track it carries more than 6 million passengers a day.  And yet the first line opened only in 1995.  As a resident of Sydney and passionate believer in mass transit, it grieves me to tell you that over the same period in my city, despite increasingly acute congestion, only 13 kilometres of new track has been constructed.

But advanced economies cannot blame Asia for our own choices.  If bridges and roads and subways in our developed country are not in good repair, that is our problem.  If our young people are leaving school unable to read and write, then there is another problem for us.  Too often we ask ourselves the wrong question (‘why are we declining relative to China?’) when we should be asking why are we not as good as we can be?

Put another way, we should be less worried about relative decline and more concerned to address absolute decline.  The fault is indeed in ourselves.

He is clearly not a believer in free trade absolutism:

It is becoming all too clear that in the developed world the rising tide of convergence and globalisation will not lift all boats, and certainly not at the same rate.

Michael Spence has pointed out globalisation was until recently seen as having a benign impact on the distribution of income in advanced economies, but this is changing:  “As the developing countries became larger and richer, their economic structures changed in response to the forces of comparative advantage: they moved up the value-added chain. Now, developing countries increasingly produce the kind of high-value-added components that 30 years ago were the exclusive purview of advanced economies. This climb is a permanent, irreversible change.” [23]

Spence shows that between 1990 and 2008, 97 per cent of the 27 million jobs added in America were in the non-traded sector (40 per cent of them in government and health care).  His work shows that in the barely-growing traded sectors of the US economy, increasing opportunities at the top of the value chain for highly-paid highly-skilled workers are offset by much larger decreases in routine jobs, as these functions are relocating to emerging markets. [24]

While US firms in sectors such as finance or technology generate more value-added than ever, most is from complex tasks such as management, design and engineering.

Not only is this supported by the data, it rings true.  Just read the label of your Apple product of choice:  “Designed by Apple in California, assembled in China.”  Apple is worth $US350 billion despite not making anything itself – assembly of its products is sufficiently commodified as a process to be entrusted to a contractor.  It all makes economic sense – but where are the jobs?

Meanwhile improved communications and technology are opening up previously non-traded sectors in advanced economies to competition: not just call centres or low-level software development, but semi-professional and professional services such as financial analysis, accounting, sub-editing, technology consulting, graphic design and video special effects. [25]

Anything where a service can be transferred to customers as a stream of bits is fair game.

Inured to losing low skill low wage jobs to the developing world, now the advanced countries are losing high skill high wage jobs to workers just as smart, just as educated, but prepared to work for lower wages.

Turnbull discusses the rise of China’s military power and how the world should prepare:

The best and most realistic strategic outcome for East Asia must be one in which the powers are in balance with each side effectively able to deny the domination of the other.

With its energy and resource security depending on long global sea lanes, it is hardly surprising that China would seek to enhance its naval capacity.  Suggestions that China’s recent launch of one aircraft carrier and plans to build another are signs of a new belligerence are wide of the mark. [37]

This is no time for another “long telegram” or suggestions of containment. [38] China, unlike the Soviet Union, does not seek to export its ideology or system of government to other countries.

It makes no sense for America, or its allies, to base long-term strategic policy on the contentious proposition that we are on an inevitable collision course with a militarily aggressive China.

In that regard, I disagree with the underlying premise of the 2009 Australian White Paper that we should base our defence planning and procurement on the contingency of a naval war with China in the South China Sea.  Prejudice is not a substitute for coolly rational analysis.

This is no counsel for complacency – but our strategic response should be to hedge against adverse and unlikely future contingencies as opposed to seeking to contain (futilely in all likelihood) a rising power.

Of course cool heads are required on all sides. China needs to be more transparent about its goals in the region and on the basis of that build confidence with its neighbours so that misunderstandings can be avoided.

We in Australia have to adopt a clear eyed appraisal of the strategic balance in East Asia. America is our closest ally, its institutions and democracy as close to us, as indeed, they are to those of the United Kingdom. When the mantle of world’s greatest power shifted from Britain to America it shifted, in our perspective, from one family member to another.

However, as China rises to become the world’s largest economy and in time a military rival, if not an equal, of the United States we are presented with a nation whose institutions and culture are very different to ours.  Yet China is, as I have noted, our largest trading partner and in large measure responsible for our current and prospective prosperity. [39]

We have every reason, and indeed every prospect, of remaining close and becoming closer friends of both these giants. But in doing so, and as Australia becomes accustomed to a multi-polar world, we have much to do to draw closer to the other countries in our region, including India, as we deepen our relations and trust with our neighbours.

 The full talk: