Australia stuck in the middle

There is a lot of talk right now about Big Australia and the boom that will just go on and on and how we’ll all be rich. And how we need ever more people to fill the skills gap and achieve optimal economies of scale and even avoid invasion.

All this ignores a whole raft of problems currently emerging - like global warming, peak oil, a shaky finance system yet to be fixed, and overall lower growth rates due to the debt caused by the global economic crisis - that will radically impact on Australia’s future prospects.

But here I want to comment on another issue: the coming contest for global primacy between the US and China. This problem is of the utmost importance to Australia because we rely on the open world trading and investment system guaranteed by Washington and our most important trading and increasingly investment partner is China. Furthermore, although we live in the Anglo-American cultural sphere, geography puts us in China’s sphere of influence.

Right now the US and China are entangled in a relationship full of contradictions. Economically they are interdependent as China has soaked much of the huge US debt and so the Chinese want the dollar to stay high. Also Americans want to continue to buy cheap Chinese goods and the Chinese want them to keep buying them.

But the Chinese have already indicated that they do not play the western-style economic game. The Communist government remains in control of economic development and they are willing to flex their muscles for economic gain. The Stern Hu incident, when the government took on one of the world’s largest mining companies, Rio Tinto, has sent shockwaves around the corporate world.

The US faces huge economic problems, as indicated by sovereign debt and unemployment being so high. Militarily the US will begin to go into decline as the economy weakens; by contrast, under current conditions China’s economy and military spending will continue to grow. It has been projected that the two militaries could achieve rough military parity around 2020 but the volatile global economy could change that either way. The Chinese have announced a slowing down of defence spending just recently, but it is believed that they underestimate official military spending statistics anyway. The Rudd government’s recent Defence White paper was focused on the rise of China as a military threat, much to Beijing’s annoyance.

In fact, the US and China appear to be already fighting a low intensity war in cyberspace as the Chinese try to steal American technology and disrupt cyber-systems. They in turn seem to think that the US is using entities like Google to attack China.

Both the US and China are chauvinistic societies believing absolutely in their own ways of life and ultimate destiny. American exceptionalism, as it is called, claims that the US is a special nation outside the usual laws of rise and fall. Behind this is a nebulous but real sentiment that the US is God’s own country and destined for greatness. As the US heads into decline and its global hegemony wanes, we can expect a rise in the tenor of patriotism and sabre-rattling from important sections of American society. If that translates into political force, a military posture that makes Bush II’s aggressive stance look pale by comparison could arise.

Furthermore, both the US and China have launched strategies to achieve and maintain superiority in the great global energy contest. They both know cheap oil is running out and they both want to control what’s left and the alternatives like gas. In addition, both have been backwards on developing policies to counter global warming; China showing its reluctance to accept super-power responsibility at Copenhagen.

China has always considered itself, with some justification, to be the centre of the world. After the humiliation of the 19th and early 20th centuries and its withdrawal from global affairs during the mid-20th century, China is most definitely back. It is expressing a newfound confidence in its role in the world, from cultural expression to going into space.

There are ready-made flash-points if either the Chinese or the Americans want to try their luck, most obviously Taiwan. Just recently China objected to the sale of more advanced military equipment by the US to Taiwan. Even a serious stand-off, let along some shooting, would clobber the world economy, and likely flatten Australia’s exports.

Perhaps most worryingly, a declining US and shaky China (if one of several troublesome issues was to blow up and threaten internal stability) might both be looking for a little aggro as their ruling elites scramble to keep control.

The thing most likely to change this scenario is political upheaval in China. The US has its own problems with a growing gulf between the progressive and conservative parts of the nation, otherwise known as the red-blue divide, or coasts versus middle divide, but this is unlikely to actually tear it apart within the next decade or so. China, on the other hand, faces huge problems from environmental (including a critical water shortage) to political. China currently experiences about 100,000 demonstrations a year and spends more on internal security than it does on external. If growth rates drop much below current levels and unemployment rises, the ruling Communist Party will almost certainly face a challenge to its power.

There have been maybe a dozen challenges to the prevailing global power structure over the last five centuries and none have been resolved without warfare. Even the Soviet challenge to US power resulted in 40 years of Cold War and proxy hot wars in places like Korea, Vietnam and Afghanistan; and the USSR never challenged the US in the way China does. Furthermore, given the reality of a global economy, even the serious threat of war let alone actual fighting would hammer global markets. So this needs to be the first such transition without fighting.

Given this fraught scenario, what does Australia do? We have been the beneficiaries of the American era with peace, low energy prices and cheap money, and now we take all that for granted. We relied on the American nuclear umbrella and our security has never been seriously challenged since World War II. The Indonesians have never had the military capacity, and just as the Soviets looked like they were putting together a blue water navy, they went bust. The price for this situation has been sending a few Australian troops off to Vietnam, Iraq or Afghanistan, but overall it has been cheap.

The difficulty with dealing with a few boats of refugees shows how hard it is to defend this country. And we now have some very expensive assets offshore - like oil rigs - to defend as well.

If the US is weakening while China is growing stronger and getting more assertive, do we switch sides and accept Chinese influence? But who knows what a Chinese new order would be like.

One thing is for sure - the dreams of an endless boom-time, of multimillions of people and of vast cities that so excite politicians and businessmen, will not eventuate. The next few decades will be very rocky as the economy staggers along, limits to Chinese growth kick in and the world governance system suffers growing strain. And then the need to attend to the climate crisis and the energy crunch will play their part as well.

Australia has a lot of real advantages - a well educated population, mature institutional arrangements, and of course great wealth, but the options are about get a good deal harder than some people think. It may well be time to start building some resilience into our economy - after all, we have the cash right now - instead of just relying on largesse from overseas.

The solution for us lies in developing a more diversified and resilient national economy, which would fit in well with measures to deal with the carbon and energy challenges. The other thing we must do is support a new global order to minimise the effects of any power shift between the superpowers, which is also needed to deal with the global carbon/energy issue.