Taking advantage of a changing global order


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Transcription of Finance News Network Interview with Professor Geoffrey Garrett,Dean of the University of Sydney Business School and Professor of Politics at the US Studies Centre.
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today is Professor Geoffrey Garrett, Dean of the University of Sydney Business School and Professor of Politics at the US Studies Centre. Geoffrey, welcome to FNN.
Geoffrey Garrett: My pleasure.
Lelde Smits: We have just witnessed two remarkably different leadership transitions in both the US and China: Have you been surprised by any developments that have taken place?
Geoffrey Garrett: Well actually both transitions ultimately are going to look pretty boring, in the sense that they were what most people were expecting anyway. So, on the US side what we’ve got is essentially a replication of the balance of power in Washington that’s has been there since President Obama was elected in 2008. And, on the Chinese side we have Xi Jinping, the new leader having been anointed probably at least five years ago and he’s going to take control. So at the level of leadership, it looks like incredible stability.
Lelde Smits: What are the most significant changes we could expect as the US and Chinese leaders step into a new term?
Geoffrey Garrett: I think the US China relationship is probably one that is misunderstood a little bit. A lot of people are worried that we’re really on the verge of a second cold war and that the US and China are going to come to blows militarily at some point, frictions in the South China Sea, East China Sea, Taiwan. I actually don’t see the relationship that way. Yes, the US and China have very, very different world views. But, both countries know that it’s their economic co-dependence that defines their relationship.
Lelde Smits: Looking closer at China, the pace of the nation’s growth has slowed, much to the concern of our local mining industry: Do you believe this is also cause for concern for the ruling Communist Party?
Geoffrey Garrett: Absolutely. The legitimacy of the Communist Party is completely contingent upon delivering enough growth to improve living standards enough that average Chinese won’t be too upset that they don’t have political voice.
Lelde Smits: So in the short term, what action would you anticipate from Beijing, could we expect stimulus any time soon?
Geoffrey Garrett: On the one hand the Chinese government knows it must rebalance away from investment and towards domestic consumption. And inevitably that will mean that we won’t be staring at 8-10 per cent Chinese growth rates let’s say within 10 years, it will probably more like 4-5 per cent. That’s got to happen. However in the short term the Chinese government has the leavers to juice up the growth rate again.
Lelde Smits: Despite a slowing of growth the Chinese economy is still forecast to overtake America’s as the world’s largest economy within the next decade or so. What do you believe will be the greatest implications for Australia as China prepares to topple America off the top economic spot?
Geoffrey Garrett: When China becomes the world’s largest economy, probably in 2025 or something like that, it won’t be the world’s most powerful country. The average Chinese citizen will probably be about a quarter as rich as the average American. American military power is unsurpassed and will continue to be unsurpassed. The US’ political power, its network of alliances, will probably also be unsurpassed as probably is its cultural power.
So, China will be the biggest economy but it won’t be the most powerful country. That means we’re going to living, I think, in a G2 world where China and the US are going to be far the dominant world economies where their relationship is going to be mostly about economics and less about national security. So, I think for Australia that is a very good news story. Australia sits at the sweet spot in a China, US, Australia economic triangle, not at the pointy end of a dangerous geo-political triangle.
Lelde Smits: Australia is of course historically much closer to the US, but do you believe our foreign policy sufficiently accounts for this global economic shift to China?
Geoffrey Garrett: Obviously that is the thing that Australia’s leaders are worrying about on a daily basis. They understand that the security relationship with the United States is really the core of Australia’s national interest. But, at the same time China is the growth opportunity for Australia. So, the question is whether you must choose between the two giants. I think the answer is, no choice is necessary and that Australia can continue essentially what has been its policy for 30 years, which is, ever closer economic ties with China against a backdrop of a rock-solid political military security relationship with the United States.
Lelde Smits: What do you believe Australian leaders and businesses need to do in order to position the nation to take full advantage of the changing global order?
Geoffrey Garrett: If you look at China, what we’ve seen up until now is that Australia has benefitted essentially from China’s infrastructure boom where coking coal and iron ore have been the biggest exports. In the next decade that is likely to transition to gas, coal seam gas or convention gas. After that it might be uranium and after that it might be food. Because after all, we will have hundreds of millions of middle-class Chinese consumers wanting more and better food. So I don’t think it’s right to say that the mining boom will soon be over, because Australia’s comparative advantage remains natural resources. And, that will be the case for a long time and China will be the biggest market.
What we’ve got to do I think is figure out ways to ensure that the concentric circles out from the pure resource extraction industries are more and more productive for Australia. So, think high end services associated with mining, associated with agriculture, associated with massive mega projects. Those are the kind of areas where I think Australia can expand its economy without worrying about losing its comparative advantage in natural resources.
Lelde Smits: Professor Garrett, thank you so much for your views today.
Geoffrey Garrett: My pleasure.