Based on the many column inches of newspaper speculation, and the many hours of talking heads on TV, it’s clear the outcome of the US election has created considerable uncertainty on the future direction of policy in a range of areas.
Now, I’m not a commentator or pundit, so don’t expect me to muse on what may or may not be when it comes to the specific policies of the new administration. I am, however, confident that it will, like its predecessors, pursue US national interests even if the modality might differ.
So while I will be discussing the merits of the US model of economic diplomacy, I am not assuming that the way in which it has been implemented in the past will continue into the future.
The US model of economic diplomacy relies largely on markets, with governments focusing their attention on setting global rules that can be applied equally to everyone.
I am not naïve enough to believe this is always the case. Some of the US businesses represented here today have, from time to time, no doubt approached your government for help with one issue or another. And no one should be surprised if that were also the case for some of the Australian businesses here today.
But I think as a general rule, over time, the US has had more care for the development of the international system of global trade and investment than many other countries – and certainly more than super powers of the past, who often acted with regard only to the unfettered exercise of power.
Indeed, rather than acting unilaterally, the US often deliberately constrains itself by acting through the IMF, WTO, World Bank and other multilateral bodies and fora.
In contrast, many countries seek to use explicit economic levers – such as infrastructure spending, concessional finance or highly preferential trade deals – to achieve their strategic interests.
While the US has used such tools at times, it has done so to a noticeably lesser extent than other powers. Why? I can think of two possible reasons.
Render unto corporate
First, the great and successful US experiment with constitutionalism has led to clearly defined and separate roles for the public and the private sector.
In general, the role of the state was codified and constrained by the separation of powers.
The Constitution constrains what various US administrations may do in the short run. But in the long run this increases certainty and enables businesses to prosper through hard work and ingenuity. Indeed, this constitutional framework facilitated conditions that have made the US economy the most prosperous large scale economy in the history of the world.
But it also limits the US Government in its discretion on how to achieve economic ends internationally.
The US has attempted at times to mobilise state economic resources for diplomatic ends, such as the Marshall Plan and the establishment of the European Bank for Reconstruction and Development.
But these are discrete events, notable both because they are unusual and because of the broader public good objectives they represent.
The US simply doesn’t have large state owned enterprises or development banks that can be directed to international ends.
And while I’m sure some US firms regret the Export Import Bank is not a bigger platform to advance their own narrow interests, many Americans would look dimly, or even fearfully, should their government attempt to develop such capabilities.
All roads lead to the NYSE
The second reason why I think the US has practiced such exceptionalism in economic diplomacy is pure ‘realpolitik’ – as the dominant global power the US benefited from economic activity almost irrespective of where it occurred around the globe.
Immediately post Second World War the US accounted for close to a third of global GDP.
When the US helped set up the institutions setting rules for all businesses around the globe it was, to a significant extent, setting rules for its own businesses.
However, as we transition to a more multi-polar world there is a risk that the link between what is in the interests of the United States economy and the global economy as a whole is becoming less clear cut, and certainly much more difficult for leaders to communicate.
Indeed, today politicians seem to receive more political credit for improving trade in certain products or worse, even impeding trade and investment, than they get for improving the global trading system or facilitating new investment.
Yet history shows that it is increased trade and investment that delivers job opportunities and rising living standards.
Like Australia, the US continues to benefit substantially from the global trade and investment system – it underpins its wealth, its global influence, its economic success and its ability to project both hard and soft power.
To give some context, US residents’ ownership of private foreign assets has risen from 6.5% of US annual GDP in 1950 to more than 140% of annual US GDP, or $25 trillion today. In other words, openness to trade and to investment abroad has directly contributed to a massive increase in the wealth of individual Americans.
One tangible benefit for the US is what some refer to as the ‘exorbitant privilege’ the US receives from being the world’s reserve currency.
US incomes are higher because the rest of the world wants to use the US currency to settle their financial transactions.
The US dollar was used in 88% of all foreign exchange trades in April this year, and over 60% of reported international reserves are today denominated in US dollars.
One of the key reasons for this dominance is the security the US system of government provides to investors.
So rather than see this as some ‘exorbitant privilege’ accruing unfairly in the US, countries that want to challenge for this privilege need to recognise they will ultimately need to restrain their own arbitrary financial market interventions, improve the rule of law and respect the sanctity of private property.
TPP furthers rules-based order
Let me be clear I am not looking at this through ‘starry and spangled eyes’.
Yes, the US continues to pursue commercial interests through economic diplomacy. But my point is that this is only rarely done for the exclusive benefit of its own businesses.
Even in intellectual property, where it is a net producer of ideas, the US argues for setting international rules rather than exclusively favouring its own businesses.
Similarly, while the US, Australia and 10 other countries were the initial signatories to the Trans-Pacific Partnership, it is open to all countries willing to comply with the agreed high quality standards. This open multilateralism has been a hallmark of US economic diplomacy over the decades.
And, the standards built into the TPP – ranging from investment rules to regulatory transparency – could set the bar for trade agreements for decades to come.
But the TPP is more than a trade deal; it is a sign of US strategic commitment to our region. US Secretary of Defence Ash Carter said the TPP is worth an ‘additional aircraft carrier’ as a sign of strategic commitment.
We don’t know the ultimate outcome of US deliberations on the TPP, but we do know that we have all benefited from the US inclination over decades for international rules over the exercise of arbitrary power.
Global rules and norms have allowed businesses, and even countries, to specialise in production and for investment to flow where it is most valued.
As I have said elsewhere, rules-based order effectively under‑wrote the massive explosion of regional incomes – from Japan, to the Asian Tigers of South Korea, Taiwan, Hong Kong and Singapore and now China, India, Indonesia and others.
Australia has benefitted from a comparative advantage in the resources that are inputs to Asian production, which itself is consumption in the US and other Western countries. So, were the US to close itself off to trade from its major trading partners by succumbing to the temptations of protectionism; it would have direct consequences for Australia’s own capacity to sustain incomes and jobs.
Now some may argue that the model of US economic diplomacy is out-dated, or at least unfit for the dynamic competition provided by rising emerging powers.
However, there is clearly a need for the US to be increasingly strategic and agile in our region and to resist the temptation to focus on short-term expediency at the expense of longer-term goals.
Allowing a short term domestic focus to be the only prism through which policy is made surely risks the gains the US has made in our region. Or to put it another way, there is a clear external dimension to any commitment to ‘make America great again’.
As I said at the beginning of these remarks, the framework is shifting and none of us can predict what will happen in the future.
But what we do know is that US economic diplomacy has been very important for the growth, security and stability in our region.
And despite some shortcomings at times in the way it may have been implemented, in my view, the model of US of economic diplomacy is still the right bet for our region.
Here are some reasons why.
- It’s flexible.
The rules-based order creates the conditions for markets to flourish. And I don’t need to tell you, markets ‘pivot’ faster than governments.
Businesses will seek profit from places and build relationships that Governments don’t even recognise.
- It’s also voluntary.
Countries want to participate in setting rules in processes that make the overall cake larger.
Relying on markets fits neatly with the ASEAN way of doing economic diplomacy which emphasises non-interference and relationship building.
- It is a strength of the system that the rising emerging countries now want to participate in setting the global rules.
We all need to recognise these aspirations as legitimate and even welcome, and that the alternative scenario of competing trade and investment blocks is deeply unappealing.
Positive sum games are much more rewarding and certainly less abrasive than zero sum games.
- It involves all countries choosing to constrain themselves, in so doing growing the pie so we all benefit.
- The rules‑based order is pervasive and encourages countries to implement best practice policy settings.
For example, in recent decades we have seen US multinationals bring expectations around the rule of law and transparent regulations to markets around the world.
Trade and investment flows have also driven corporate governance reforms that eventually spill over into wider market reforms.
- Finally, and perhaps most importantly, the US model of engaging internationally – with soft power and economic dynamism – is a success.
Economic success is the foundation of economic diplomacy – “failing to pursue policies that foster dynamism, help manage shocks, and deliver citizens what they desire and value, risks the capacity to project power and sustain influence”.
Economic success makes the US society attractive around the world, and it is US businesses abroad which help sell the American dream.
US soft power remains unsurpassed. For many people around the world, the US remains the ideal place to start a new life.
US universities attract the best and brightest from throughout the world, with over one million foreign students in the US today.
Of the 9 largest tech companies in the world, 8 are based in the U.S.
More than 45 million people living in the U.S. today were born in a foreign country. In absolute numbers, that is almost four times higher than the next highest country, although proportionately Australia does even better.
American film, television and music have done more for American soft power than any amount of “public diplomacy”. Indeed, US films now vie for top position at the Chinese box office – despite only 34 being allowed in a year.
Moreover, the role of soft power may be set to increase with the rise of the Asian middle class, which is expected to grow from around 500 million people in 2009 to around 3.2 billion by 2030.
Trump and the pressures on economic diplomacy
Without a doubt, developments during President-elect Trump’s term will have a lasting impact on how the US does business in this region.
Yet, if the US retreats, whether in terms of economic, trade or military engagement, there is really only one other single player that could attempt to fill the vacuum.
China’s economy is as big as the next 13 largest emerging countries combined (when measured at market exchange rates).
Yet China’s GDP growth is obviously slowing as it approaches the technological frontier and with its ageing and shrinking working population.
Despite this, the shift in economic weight toward the Indo-Pacific will continue. By 2050, the United States will be joined not only by China, but by India, Japan and Indonesia, to comprise the five largest economies in the world.
There are two clear responses.
First, it’s clear that the US needs help in maintaining support for global rule setting. The US needs the support of its friends and allies to maintain its focus on this region and on far‑sighted and open regionalism. This is in our interest — indeed, in the interest of all countries in the region.
With the breakdown of the post war relationship between global trade and global GDP growth, and the slump in trade growth, the world has lost a key engine of economic growth that benefits all in the world.
This constitutes a risk to living standards throughout the region. If this is accompanied by an erosion of the rules-based order, the risk is likely to be larger still, more pervasive and longer lived.
This requires others than the US to step up and do more of the heavy lifting to advocate for:
- the promotion of open markets;
- the importance of foreign investments;
- the criticality of trade; and
- the benefits of immigration.
Second, we also need to make way for the emerging powers to participate in helping to set these rules. We all need to get used to US dominance being replaced by pre‑eminence.
In practice, this means giving emerging countries representation in global institutions that better reflect their economic weight. It also means supporting them in their own initiatives commensurate with them complying with international standards and norms.
Continuing to develop the rules-based order could be the most important legacy bequeathed to our region from the US primacy of the 20th century.
US President Calvin Coolidge famously said that: “After all, the chief business of the American people is business. They are profoundly concerned with buying, selling, investing and prospering in the world”.
This is a legacy that has made us all both richer and safer.
Since business is certainly something the new US President-elect knows a lot about, we should all aim to ensure that this legacy will continue.
This article is based on a speech delivered by Martin Parkinson to the American Chamber of Commerce in Australia in Sydney on November 16.