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CHAPTER8collaboration in the global system

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Key messAges

AustraliaandChinabothbenefitfromstrongglobalinstitutionsthatareinclusive,rules-basedandpromoteopenandefficientinternationalmarkets.AneffectiveglobalgovernanceframeworkwillbecriticaltothesuccessofChina’seconomictransitionandtheresilienceoftheglobaleconomy.Butmanyoftheseinstitutionswerecreateddecadesagoanddonotreflectcurrentrealitiesoftheglobaleconomy.Australia,Chinaandotherpartnerscaneffectincrementalchangeinreformingglobalgovernance.

AustraliaandChinahavepowerfulinterestsinentrenchingtheG20asthepreeminentforumforglobaleconomicgovernance.WithouttheG20,Australiamaybeexcludedfromasmalleralternativegrouping(suchasa‘G10’)which,dominatedbydevelopedratherthanemergingeconomies,wouldalsoseeChinawithlessvoiceinglobalrule-setting.AustraliaandChinashouldactivelyusetheG20,ensureitsagendaisinclusiveandtargeted,ensurecontinuitybyprioritisingitsmulti-year‘two-in-five’growthagenda,anddeepenitsworkonglobalgovernancereform.Mostimportantly,deficienciesintheglobalfinancialsafetynetcreatesystemicrisksthatthreatenthetrading,financialandproductionnetworksthatareintegraltotheAustralianandChineseeconomies.

• AustraliaandChinacollaboratewithintheG20onglobalfinancialsafetynetissuesonfourkeyfronts:thenextstageofIMFreform,implementingarrangementstomaketheIMFandregionalfinancingarrangementsmorecohesive,renegotiatingbilateralloansandstrengtheningdomesticmacroeconomicframeworks.

• Inthenearterm,Chinashouldworktobuild-uptheanalyticalcapacityoftheASEANPlusThreeMacroeconomicResearchOfficeandstrengtheninstitutionalcollaborationbetweenregionalinitiativesandtheIMF.Inthelongerterm,AustraliaandChinashouldencourageG20discussionsonthenextstageofIMFquotareform,assumealeadingroleinrenegotiatingbilateralloansbetweenG20countriesandtheIMF,andfocustheG20growthagendaonimprovingmacro-financialresilienceofallcountries.

AustraliaandChinabenefitmorefrommultilateraltradeliberalisationthanfromplurilateralorbilateralinitiatives.Butincreasedfragmentationisswellingbusinesscosts,reducingtradeflowsandweakeningproductionnetworks.

• AustraliaandChinashouldleadagreaterG20focusonthemultilateraltradingsystemandinitiateapragmatic,incrementalprocessonWTOreformanddefineapathwayforRCEPandotherarrangementsliketheTPPtoraisethestandardofregionalagreementsandstrengthentheWTO.TheyshouldalsoencouragetheuseoftheG20growthstrategiestoachieveambitiouscommitmentsundertheTradeFacilitationAgreement.

AustraliaandChinacantakeotherimportantstepstoprogresscollaboration.

• AustraliaandChinashouldinitiateastep-by-stepprocesstowardsamultilateralframeworkforinvestment,aswellasincreasingandstreamliningmultilateralfundingforinvestmentininfrastructure.AustraliaandChinashouldcollaborateintheG20towardsinstitutingmorestructuredcooperationbetweentheAIIB,theBRICSNewDevelopmentBankandexistingmultilateraldevelopmentbanks.

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PartnershiP for Change

• BothcountriesshouldworkwithintheG20topromoteglobalenergygovernancereformthataddressesthesubstantialgapsinexistingframeworksandinstitutionsliketheInternationalEnergyAgency.

• AustraliaandChinashoulddeveloptheirpartnershipwithintheglobalresponsetoclimatechange.Thiscooperationcandrawonavarietyofexistingforumsfordialogueattheofficialandpoliticallevels,includingministerial-levelconsultationsandacademiccollaborations.

Theglobaleconomicsystemhasmanydimensions:trade,finance,energy,development,security,climateandmanymore.Ensuringthatmarketsareopen,inclusiveandgovernedbyapredictableandstablesetofrulesandnormsiscriticaltotheirsuccessfulfunctioning.AustraliaandChinawillbothbeactivebeneficiariesofgoodoutcomesinallofthesedimensions.

Thesystemofrules,normsandinstitutionsthatgoverntheinteractionsbetweencountries,inallofthesedimensions,iscollectivelyreferredtoasthe‘architectureofglobaleconomicgovernance’.Thisarchitectureisbecomingmorefragmented.IntheaftermathofWorldWarII,theglobalgovernancesystemconsistedoflargemultilateralinstitutionsliketheUnitedNations,IMFandWorldBank.Today,itismorediversifiedacrossmultilateral,regionalandbilaterallayers.Thisfragmentationhaschallengedtheabilityofglobalpolicymakerstorespondadequatelytotheneedsoftheinternationalcommunity.

Thearchitectureofglobaleconomicgovernanceisnowinneedofreform.Thechangingstructureoftheglobaleconomyandtheriseofemergingmarketeconomies,particularlyChina,havepresentedimmenseopportunitiesfortheworldbuthavealsopresentedchallengesforglobalgovernance.Globalinstitutionsthathaveservedtheinternationalcommunitywellhavenotkeptupwiththesetransitions.Theyareinneedofreformandthegapsthathaveemergedinglobaleconomicgovernanceneedtobefilled.

TheG20isnowtheworld’sprimaryvehicleforsuchareformofglobaleconomicgovernance.ItisvitalthattheG20’sstatusasthe‘globalsteeringcommittee’isentrenched.TheG20istheonlyforuminwhichitispossibletodetermine,andremake,theprioritiesoftheinstitutions,forumsandorganisationsthattogethermakeupthearchitectureofglobaleconomicgovernance.Inaddition,theG20istheonlyforuminwhichadvancedandemergingeconomiescancooperateinthisgovernancereformonanequalfooting.

MakingsurethatthishappensissomethingthatisparticularlyimportantforbothAustraliaandChina.ThedeclineoftheG20wouldrepresentasubstantialriskforAustralia,giventhatAustraliaismuchmorelikelytobeexcludedfromthesmallerad-hocgroupingsofgreatpowerswhichwouldlikelythenemerge.AsforChina,thesesmallerad-hocgroupingsmightwellbedominatedbyadvancedeconomies,andChina’sinputinthemwouldbeaffordedlessweight.Asaconsequence,therewouldbelessinternationalbalanceintheglobalprocessofeconomicrule-setting.

AustraliaandChinaareinapositiontocooperate,inimportantways,inensuringthatthisobjectiveisachieved.Actingtogether,AustraliaandChinashouldensurethattheG20agendaremainsinclusiveandthatitsmembersworkcollaborativelyonglobaleconomicissuesina

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CHAPtER 8: Collaboration in the global system

waythatresonatesacrossthefullmembershipoftheG20andbeyond.Inparticular,AustraliaandChinacanpromotetheG20byactivelyusingitasaforuminwhichmajorglobalissuesareraisedandnegotiated,insteadofthatbeingdoneinanad-hocwayinotherglobalorregionalbodies.

TherearefivekeyareasofglobalpolicymakinginwhichAustraliaandChinashareaninterestinstrengtheningtheG20’sleadership.

ThefirstpriorityareaforAustraliaandChinaistoensurecontinuityintheG20agendabymaintainingitscorefocusongrowthandstrengtheningtherecoveryfromtheglobalfinancialcrisisof2007–2008.Itisnearlyadecadesincethiscrisisstruck,andyettheglobalrecoveryisstillnotcomplete.TheG20isinapositiontomakeadifferencetothestrengthofthisrecovery:the‘two-in-five’agendathatAustraliainitiatedwhenitheldtheG20presidencyin2014hasputitinapositiontodojustthis.Thisagenda,agreedattheG20Leaders’SummitinBrisbaneinNovember2014,isaprocessinwhichG20membersundertooktocarryoutpolicieswhich—whentakentogether—wouldensurethatglobalGDPis2percenthigherbytheyear2018thanitwouldotherwisehavebeen.Thisagreementwasasignificantachievement,butthefollow-throughsinceBrisbanethenhasbeenpatchy.Chinacanstrengthenthisfollow-throughbyreinvigoratingtheG20MutualAssessmentProcess(G20MAP).Thetwo-in-fiveprocesscouldalsoplayanimportantpartinaresurrectionoftheG20’sleadershiproleininternationalcooperationonmacroeconomicpolicies.ThiswasarolethattheG20heldin2008–2009duringtheglobalfinancialcrisis;itisimportantthatittakesthisroleagain.TheG20’sabilitytotakealeadinstrengtheningtheglobalrecoverywillalsobehelpedbyitsabilitytopromoteinfrastructureinvestmentworldwide.Thisagendaitemisdiscussedinmoredetailbelow.

ThesecondpriorityareaforAustraliaandChinaistoensuretheadequacyoftheglobalfinancialsafetynet.Therearebiggaps.Itistoosmallandtoofragmented.Thisreducesitscoverage,consistencyandresponsiveness.AustraliaandChinahaveacommoninterestinastrong,inclusiveandresponsiveglobalfinancialsafetynet,centredonarepresentativeIMFandwithstrongcooperationamongthemajoreconomies.AustraliaandChinashouldusetheirinfluenceintheG20,IMFandregionalarrangementstofocusonfivekeyissues:thenextstageofIMFquotareform;thenecessity,atbothglobalandregionallevels,ofcountriesbeingabletoobtainliquidityfinancingasnecessary,includingtheurgentneedforChinatogainaccesstothegroupofcountriesthatareabletoobtainverylargecurrencyswaps;theimplementationofarrangementstomaketheIMFandregionalfinancingarrangements,suchastheChiangMaiInitiativeMultilateralization(CMIM),morecohesive;renegotiatingbilateralloansbetweenG20countriesandtheIMF;andusingtheG20growthstrategiesandpeerreviewprocesstoboosteffortsonstrengtheningdomesticmacroeconomicframeworkstoimproveresilience.

Thethirdpriorityareaistrade.AustraliaandChinabenefitmostfromtradeliberalisationwhenitismultilateralratherthanbilateralorplurilateral.AustraliaandChinashouldworktosupportthecohesivenessoftheglobaltradingsystembyencouragingtheG20torefocusonthemultilateraltradingsystemratherthanonregionalorbilateralalternatives.ThisshouldincludeafocusonwhatincrementalandpragmaticstepscouldbetakenonWTOreform.AustraliaandChinashoulduseregionalarrangements,suchasRCEP,toraisethestandardforcohesiveregionalagreements,pushingforbettercollaborationbetweentheWTOandregionalagreementsandbydeliveringambitiouscommitmentsundertheTradeFacilitationAgreementbygivingthestructuralreformsundertheG20growthstrategiesastrongertradefocus.

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Thefourthpriorityareaisinvestment.ThereisscopeforAustraliaandChinatosupporttheG20inconsolidatingtheworkoftheWTO,G20,OECD,UNCTADandothersonaprocesstowardsamultilateralframeworkforinvestment.Thereisalsospecificscopeforgreatermultilateralcooperationoninfrastructureinvestment.AustraliaandChinashouldpromoteinfrastructureinvestmentintheG20asacross-cuttingthemetobringG20countriestogethertotakeactiononmultiplefronts,includinggrowth,macroeconomicmanagement,development,trade,energyandclimatechange.ThereisscopeforbettercooperationandsynergiesbetweentheAIIB,theBRICSNewDevelopmentBankandexistingmultilateraldevelopmentbanks.TheG20shouldcontinuetosupportdevelopmentbanksinoptimisingtheirresourcesbyleveragingprivate-sectorfinance.SuccessinthisareawillclearlybehelpfulintakingforwardtheG20’sagendaofpromotingasustainedworldwiderecoveryfromtheglobalfinancialcrisis.

ThefifthandfinalkeyareaforcollaborationbetweenAustraliaandChinaconcernsenergytransformationandclimatechange.Theglobalenergygovernancearchitecturehasfailedtokeepupwithsignificantchangesinglobalenergymarketsandtheglobaleconomy,andneedstobereformed.AustraliaandChinashouldsupportthepositivemomentumintheG20onglobalenergygovernancereforminbuildingandadaptingexistingorganisationsandensuringthattheyworktogethereffectively.CloselyrelatedtotheneedforenergycollaborationisthefactthatAustraliaandChinabothhaveavitalinterestinsupportingastrongglobalresponsetoclimatechange.China’seconomicandclimatechangestrategyisincreasinglygearedtowardslow-carbongrowth.Australiahasthepotentialtobecomeanexporteroflow-carbonenergy,whichcouldsupplyChina.AustraliaandChinashouldworktogetheronbothclimatechangeandenergystrategies.Thisshouldinvolvegovernment,industryandtheresearchcommunity.Anexistingresearch-basedcollaborationmodelcouldbescaleduptoaninternationalinitiative.

Australia and China within the global system

ThefoundationsoftheeconomicpartnershipbetweenAustraliaandChinaaremultilateralandglobalincharacter.TherearemanyareasinwhichcollaborationbetweenChina,AustraliaandtheirpartnersinglobalaffairswillbecomeincreasinglyimportantbecauseChina’sroleintheglobaleconomyisgrowing.Althoughparticipationinsomeglobalorregionalinstitutionsisuniquetojustoneofthetwocountries,AustraliaandChinahavemoreincommonthannotgiventhenatureoftheireconomictiesandtheirlocationintheworld.

AustralianandChineseleaders,ministersandseniorofficialshaveagreaterrangeofopportunitiesforregularengagementnowthaneverbefore.Figure8.1givesasnapshotofhowAustraliaandChinaengageinglobalgovernance—theinstitutionstheyhaveincommonandthosetheydonot.

Figure8.1providesseveralimportantinsights.First,itshowsthescaleofmultilateralcooperationbetweenAustraliaandChina.TheleadersofbothcountriescometogetheratleastfourtimesayearattheG20,APEC,EastAsiaSummitandUnitedNations.ThefinanceministersofbothcountriesmeetaroundfivetimesayearjustfortheG20,aswellasseparateregularmeetingsforAPEC,ASEAN,theIMFandtheWorldBank.CentralbankgovernorsmeetregularlyattheBankforInternationalSettlements,G20andAPEC.Foreachoftheseinstitutionsandforums,hundredsofAustralianandChineseofficialsareengagingonanalmostcontinualbasisinsupportoftheirministersandleaders.

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Second,Figure8.1illustratesthebreadthofissuesonwhichAustraliaandChinacooperatethroughmultilateralinstitutionsandforums.Today,almosteverydomesticpolicyissuehasaninternationaldimension,andmostinternationalissuescanhavesignificantdomesticconsequences.Asaresult,theagendasofinternationalinstitutionsandforumshaveincreasedexponentiallyovertime,coveringabroadrangeofissuesfromtrade,finance,development,tax,financialregulationandmacroeconomicpoliciestoissueslikesecurity,humanrights,climatechange,theenvironmentandreformingtheglobalgovernancearchitectureitself.

Third,AustraliaandChinahavemoreincommonintheseaffairsthannot.TheinstitutionsinwhichAustraliaandChinacooperatearemoreinfluentialandsystemicallyimportantthantheinstitutionsuniquetojustoneofthecountries.Theseprocesseshavehelpeddevelopextensivepersonalnetworksofleaders,ministersandofficials,aswellasrepresentativesfrombusiness,labour,academiaandcivilsociety.

Finally,Figure8.1highlightsthelargenumberofregionalinstitutionsinwhichAustraliaandChinacooperate,someofwhichcompetedirectlyorindirectlywithexistingglobalinstitutions.TheonlymajorglobalinstitutionsinwhichAustraliaandChinadonotbothparticipatearetheUnitedNationsSecurityCouncil(whichexcludesAustralia),andtheOECDandrelatedInternationalEnergyAgency(whichexcludeChina,althoughChinaparticipatesinbothinstitutionsthroughanassociatestatus).

Figure 8.1: Australia and China in the global governance architecture

China only Australia only Both China and Australia

• UNSecurityCouncil

• NewDevelopmentBank(formerlytheBRICSDevelopmentBank)

• ChiangMai

• Brazil-Russia-India-China-SouthAfrica

• OneBelt,OneRoadInitiative

• Trans-PacificPartnership

• AsianDevelopmentBank

• InternationalEnergyAgency

• PacificIslandsForum

• OECD

• ANZUStreaty

• CommonwealthHeadsofGovernmentMeeting

• G20

• ASEAN+6

• UNGeneralAssembly

• EastAsiaSummit

• APEC

• IMF

• WTO

• WorldBank

• RegionalComprehensiveEconomicPartnership

• InternationalEnergyForum

• AsianInfrastructureInvestmentBank

• BankofInternationalSettlements

Source:Authors’schema.

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the Australia–china relationship and sustaining international cooperation

TheAustralia-Chinarelationshipisofgeopoliticalsignificance,bothforeconomicreasonsandforreasonsofpoliticaleconomy.ThisisdespitethedisparitybetweenChinaandAustraliaintermsofeconomicandpoliticalweight.ItisthisfactthatmakesAustralia–Chinacooperationparticularlyimportant,bothinrelationtostrengtheningtheG20’sroleinglobaleconomicgovernanceandinrelationtothefivekeyareasofglobalpolicymakingdiscussedabove.

ThegeopoliticalsignificanceoftheAustralia–ChinaeconomicrelationshipstemsfromAustralia’sroleasamajorsupplierofprimarycommodityinputstotheChineseindustrialsystem,andtheemergingfutureofbilateralservicestrade,directinvestmentandeconomicpartnership.Prosperityinthetwoeconomiesgoestogether.Suchprosperityisvitalfortheworldeconomy.

WhileitseconomyiscloselylinkedtoChina,andtoAsiamoregenerally,Australia’sstrategicandpoliticalalliancewiththeUnitedStateshasbeenconfirmedasparamountbysuccessiveAustraliangovernments.AustraliahasastrongincentivetoavoidconflictbetweenitseconomicpartnersanditsUSalliance.Australia’sabilitytosteersuchamiddlepathisgreatlyhelpedbyitslonghistoryofengagementwithglobaleconomicinstitutionssuchastheIMF,WorldBank,WTOandUNagencies.FormanyyearsAustraliahasplayedanimportantrolebothinthegovernanceoftheseinstitutionsandinthedeterminationoftheirpolicystances.Australia’sabilitytokeeptheAustralia–Chinarelationshipwithinsuchabroadmultilateralframework,whileatthesametimebuildingonthebilateralrelationship,givesAustraliatheabilitytomakeasignificantcontributiontothetaskofaddressingglobalchallengesanddisputes.SuchacontributionbyAustraliamighthelptheworldtoavoidthecounterproductiveandunnecessaryfragmentationofrelationships,somethingthatwillhurtbothcountries.

Onmanyissues,themosteffectivewayforAustraliaandChinatoengagebilaterallywillbetoworktogetherwithinmultilateralframeworksandtodevelopcoalitionsoflike-mindedcountriesthatcanattractbroadersupportforaction.CollaborationbetweenAustraliaandChinaisitselfsymbolicofthesortofglobalcoalitionsthatneedtobebuilt—thosethatformacrossthedividesofadvancedandemergingeconomies.Thefocusofcoalition-buildingeffortsshouldbeonbothprocessandcontent.

Onprocess,AustraliaandChinahaveacommoninterestinensuringthattheglobalandregionalrules,normsandinstitutionsthatgoverninteractionsbetweencountriesareeffective,inclusiveandcomprehensive.ThisReporthasalreadyarguedthattheG20istheprimaryvehicleforachievingthis.Thischapterwillillustratesomeofthechallengesfacingglobalgovernancemechanisms,andwillidentifythecommoninterestswhichAustraliaandChinahaveinworkingwiththeirpartnersintheG20inaddressingthesechallenges.

Oncontent,AustraliaandChinashouldworkwithintheseglobalframeworkstopromotethecommonglobalintereststhatthetwocountriesshareinrelationtoparticularareas.ThisReporthasalreadymentionedfiveoftheseonwhichthischapterwillfocus:fosteringglobalmacroeconomicpolicycooperation;strengtheningtheglobalfinancialsafetynet;strengtheningthemultilateraltradingsystem;fosteringbetterglobalcoordinationofinfrastructureinvestment;andaddressingglobalenergypolicyandclimatechange.

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strains on the global governance architecture

AttheendofWorldWarII,countriessetaboutbuildinganewglobalordertogoverntheinteractionsbetweencountriesandpromotepeace,stabilityandgrowth.Thisglobalarchitecturehasservedtheglobalcommunitywell.IthasprovidedaframeworkwithinwhichAustraliaandChinahavebeenabletopursuetheirnationaleconomicandpoliticalgoals.Itscoredesignremainsimportanttoservingthoseobjectivesconsistentlywiththeinterestsofothercountries.Althoughithasbeenrelativelyresilientuptothispoint,anumberofrelatedforcesarenowstrainingthisarchitectureanditwillneedtobereformedifitistobeaseffectiveinthefutureasithasbeeninthepast.

Onesuchforceisglobalisation.Emergingeconomiesnowconstitutealargeshareoftheglobaleconomy(Figure8.2).Economiesaremoreconnectedandintegratedthaneverbefore.Figures8.3and8.4illustratethisthroughtwokeyandrelatedtransmissionmechanisms:tradeandcapitalflows.From1980to2015,globaltradeflowshaveincreasedsix-fold.Similarly,therehasbeenasignificantincreaseinthesizeofgrosscapitalflows.Globalgrosscapitalflowsincreasedfromlessthan5percentofglobalGDPduring1980toapeakofaround20percentby2007.

Thisincreasedinterconnectednessmeanscountriesaremoresusceptibletothepoliciesandeventsineachother’seconomies.Italsomeansthattheglobalinstitutionsandforumsdevelopedtogoverntheinteractionsbetweencountrieshaveamuchlargertaskontheirhands,requiringincreasedresourcesandabroaderfocus.

Figure 8.2: share of global gDP (ppp) Figure 8.3: global trade volumne of goods and services (1980=100)

100

200

300

400

500

600

700

35

40

45

50

55

60

65

1994

19

98

2002

2006

2010

2014

Advanced economies

Emerging market anddeveloping economies

19801987

19942001

20082015

Source:IMFWEO2015.

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Figure 8.4: global capital flows since 1980

%

20

15

10

5

0

-5

-10

-15

-20

Liabilities (inflows) Assets (outflows) Net flows

1980

1984

1988

1992

1996

2000

2004

2008

Source:Hawkinsetal2014.

Whilethesizeoftheglobaleconomyhasincreased,countries’relativesharesofglobalGDPhavechanged.Figure8.2showsthechangeinthecompositionofglobalGDPfrom1994to2015.EmergingmarketanddevelopingeconomiesnowcontributeagreatershareofglobalGDP(purchasingpowerparity)thanadvancedeconomies.Asthecompositionoftheglobaleconomychanges,sotoomustthecompositionoftheinternationalinstitutionsandforumsthatgovernit.Failuretodothisnotonlymeansthattheseinstitutions’decisionswillappearlesslegitimate,butitwouldalsoimpairtheireffectiveness,duetothereductioninthefundingandcoverageoftheiractivities.

Innovationandadvancesintechnologyalsoacttostraintheexistingglobalgovernancearchitecture.Newtechnologiesalterthewaysinwhichcountriesinteract,potentiallyrequiringnewgovernancestructurestodealwithemergingissues.Advancesintechnologyandtransportation,forexample,havechangedthewayinwhichcountriestrade,fromimportsandexportsoffinalproductstoglobalandregionalproductionnetworks.FinancialinnovationhassimilarlyposedchallengesthathaverequirednewregulatoryframeworksthroughthecreationoftheFinancialStabilityBoardandBaselIII.

Retaining the g20 as the preeminent forum for global economic governance

Formanyyears,theG20remainedbelowtheradar,workingquietlybuteffectivelyattheleveloffinanceministersandcentralbankgovernors(Hulst2015).Thischangedin2008when,facedwiththeglobalfinancialcrisis,theneedforsignificantmacroeconomicpolicycooperationledtotheevolutionoftheG20asaforumfornationalleaders.Leadersidentified‘inconsistentandinsufficientlycoordinatedmacroeconomicpolicies’asarootcauseofthecrisis,andrespondedwiththelargestcoordinatedpolicyresponseinhistory,consistingofliquiditysupporttostabilisemarkets,theuseofconventionalmonetarypoliciestosupportdemandandfiscalstimuluspackagescoordinatedacrossalmostallG20countries.

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In2009,underthepresidencyoftheUnitedStates,G20leadersdeclareditas‘thepremierforumforinternationaleconomiccooperation’.Itsattentiongraduallyshiftedfromfightingthecrisistoimplementingthelonger-termpolicies,bothmacroeconomicandstructural,thatwerenecessarytopromotestrong,sustainableandbalancedgrowth.AlthoughthelegitimacyoftheG20asa‘self-appointedclub’isquestioned,theG20istodayestablishedastheonlyglobaleconomicforumwhereadvancedandemergingeconomiescooperateonanequalfooting(Hulst2015).

Since2008,theG20’sagendahasexpandedsignificantly.Itnowincludesspecificagendaitemsdevotedtogrowth,employment,trade,anti-corruption,financialregulation,tax,infrastructure,investment,development,climatechange,energy,foodsecurity,remittancesand,attimes,pandemicsandterrorism.Aconsistentandcross-cuttingthemeoftheG20hasbeenglobalgovernancereform.TheG20hasemergedastheworld’sprimaryvehicleforreformingtheglobalgovernancearchitectureandinhelpingsteertheprioritiesoftheinstitutions,forumsandorganisationsthatunderpinit.TheG20isoftenreferredtoasthe‘globalsteeringcommittee’,withafocusonrules-basedandmarket-orientedapproaches.ThisisanareainwhichtheG20hasaclearcomparativeadvantagegiventhecompositionofitsmembership,reflecting,inparticular,thegrowingdynamismoftheAsiaPacificregionandtheglobalinfluenceofemergingeconomies.

G20decisions,whichtaketheformofpolicyproposalsratherthanenforceablepolicystrategies,mustinmostcasesbebroughtbeforethegovernanceorgansoftreaty-basedinstitutions,suchastheIMF,andbeadoptedbythemonbehalfoftheglobalcommunity.TheG20cannotdecideforothers,althoughthevotingpowerthatG20membershaveinmostinternationalinstitutionsmeansthattheirproposalsarelikelytobecomedecisions(DrysdaleandDerviş2014).

the importance of the g20 to Australia and china

UnliketheG7,theG8ortheformerG10,theG20includesAustraliaandChina.TherearenoguaranteestheG20willbeapermanentfixture,letaloneremainasaglobalsteeringcommittee.Leadershaveavarietyofmultilateral,regionalandbilateralinstitutionsandforumsavailabletothem,aswellastheabilitytocreatenewonesiftheyseefit.IftheG20stopsbeingeffectiveintheeyesofleaders,thentheG20mayquicklyfinditselfreplaced.

LosingtheG20wouldrepresentaparticularriskforAustraliagivenAustraliaismuchmorelikelytobeexcludedfromalternative,smallergroupingsthanisChina,asAustraliaislessimportanttotheglobaleconomy.ButChinafacesriskstoo.ShouldtheG20fallintodisuse,anewsmallergroupingmaybedominatedbyadvancedeconomies,whichmaynotshareChina’sperspectives,concernsandchallengesasanemergingeconomy.Thereisaworsedanger,still,thatcompetingnon-cooperativecentresofglobalpowerareestablished—suchasaBRICSversusG7dichotomy—althoughthesearetobeavoidedwithinaforumliketheG20too.

TheG20isthebestavenueforAustraliaandChinaininfluencingtherules,normsandinstitutionsofglobalgovernanceandthedeliveryofglobalpublicgoods.WorkingwithinthisframeworkisoneofthemosteffectivewaysforAustraliatoengagewiththeinternationalsystem.Australiahasastrongincentivetohaveaseatatthetableandinfluencehowthisframeworkdevelops.Asakeybeneficiaryofglobalgovernancereform,Chinaalsohasa

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strongincentivetoplayanactiveroleinthesediscussions.Asglobalgovernanceevolvestoreflecteconomicrealities,Chinawillfinditselfplayinganincreasingroleinglobalinstitutionsaswellasinshapingtherulesandnormsthatunderpinthem.

IncreasedChineseleadershipinglobalgovernancewillbeofsignificantimportanceintothefuture,particularlywithintheG20.Vines(2015)hasarguedthattwothingsarerequiredforeffectiveChineseleadership.Thefirstisdomesticcompetence.ThisrequirestransformingChina’smodelofeconomicdevelopmentfromexport-ledgrowthtoconsumption-ledgrowth,supportedbyaresilientfinancialsystem(seeChapters1and2).Thesecondisgloballeadership.Thismeansdevelopinganunderstandingofhowtoactontheworldstageandanunderstandingofhowtheactionsofdifferentcountriesmightbebroughttogether.Mostimportantly,thisrequiresChina,andallcountries,tonurtureaforuminwhichinformationisexchanged,preferencesarticulated,discussionstakeplaceandcompromisesreached.TheG20istheidealforumforthistotakeplace.Assuch,maintainingtherelevanceandeffectivenessoftheG20shouldbeatoppriorityforChina.

TheG20isnotjustameansforAustraliaandChinatoinfluenceglobaloutcomes.Itisalsoameansforinfluencingoutcomesandprioritiesdomestically.Whenusedstrategically,theG20canbeaneffectivewayofprovidingpoliticalcovertohelpundertaketoughdomesticreforms.Thiswasondisplay,inparticular,inhowcountriesrespondedtotheglobalfinancialcrisis.Coordinatedstimulusgavepoliticalcovertogovernmentsinimplementingtheirownfiscalmeasures.Showingthatothercountrieswereundertakingsimilaractionsnotonlygavethesepoliciescredibility,italsohelpedalleviateconcernsthatothercountriesmightfree-rideonthefiscalleakagesfromonecountrytoanother.Thecoordinatedlooseningofmonetarypolicysimilarlyhelpedreducetheriskofalossofconfidenceorcurrencyattack(Vines2015).

maintaining the relevance and effectiveness of the g20

TherearepracticalthingsAustraliaandChinacandobothindividuallyandjointlytohelpmaintaintherelevanceandeffectivenessoftheG20.AustraliaandChinamustensureitsagendaisinclusive.Theyshouldworkcollaborativelynotonlyonissuesthatare\importanttotheglobaleconomy,butalsoonissuesthatbothcountriescanexhibitstrongleadershipontohelpmotivateothers.Importantly,AustraliaandChinamustensurethereiscontinuityintheG20’sagenda.

Thetwo-in-fiveagendahasputtheG20inapositiontoensurecontinuityandsupportfortheglobaleconomicrecovery.In2014,countriesputforwardover1000reformswiththegoalofensuringthattheG20GDPin2018is2percenthigherthanitwouldotherwisehavebeen.Countrieshavesinceimplemented,revisedandaddedtothesereformsin2015and2016throughacomprehensivepeerreviewprocess.ThisprocessshouldplayanimportantpartintheresurrectionoftheG20’sleadershiproleininternationalcooperationonmacroeconomicpolicies.Thetwo-in-fiveagendacanhelpovercomethe‘growthversusausterity’debatewithintheG20byprovidinganacceptablemeansforcountriescommittedtoausteritytoundertakepublicinvestmentwhileallcountriessimultaneouslyundertakesupply-sidereformstoboostpotentialoutput.This,inturn,helpsboostglobalaggregatedemandandtakessomepressureoffmonetarypolicy.

Astrategyofinvestingmoreininfrastructureandcarryingoutsupply-sidereformswillstimulateglobaldemand.Thiswouldleadtothecreationofcapitalassets,whichincreasethesupply-sidepotentialoftheeconomy,andwouldalsoincreasedemandduringtheinvestment

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period.Whilepublic–privatepartnershipscanhelpoptimisepublicresources,infrastructureinvestmentwillalsoenableamoderationofausterityinadvancedcountriesthathavefiscalspaceforpublicinvestment.Thejustificationwouldbethatinvestmentininfrastructureleadstothecreationofassetsthatcanbeusedascollateraltotheadditionalpublicsectordebtincurred.Policymakersmaybemorewillingtomoderateausterityintheknowledgethatadditionalinfrastructureinvestmentwillnotleadtoaworseninginthepublicsectorbalancesheet.

IntermsoftheG20agenda,anotheroptionforachievingcontinuitywouldbetocreateapermanentG20secretariat.G20countrieswouldcontinuetotaketurnshostingtheG20Summit,butthesecretariatwouldhelpmanagetheexpandingagendaandensurecontinuityfromoneyeartothenext.Thecostofhavingapermanentsecretariat,however,isthattheG20losesitsstatusasaninformalforum;itmakestheG20lesscountry-ownedasthesecretariatwillbecomeitsownpoliticalentitywhichmustthenbenegotiatedwith,slowingdownreformprocesses.Pastexperiencewithotherinternationalforumsthatcreatedpermanentsecretariatswouldalsosuggestthatthisdoeslittleinimprovingcontinuityandthat,instead,itisthepoliticalwillofcountriesthatdetermineswhetheranyparticularsummitissuccessfulornot.GiventheG20hasroutinelyrejectedthenotionofapermanentsecretariat,emphasisingtheG20’slong-rungrowthagendaislikelyabetteroptionforpromotingcontinuity.

AustraliaandChinacanalsopromotetheG20byactivelyusingittoraiseandnegotiateglobalissues,insteadofusingotherregionalorglobalalternatives.ThisincludeshavingleadersandministersusetheG20forkeyannouncementsthatareofglobalsignificance,aswellasusingtheG20astheplatformforimportantnegotiations.AustraliaandChinacanalsopromotetheG20bybeingambitiousinthecommitmentstheymakeandinencouragingothercountriestodothesame.

EnsuringtheG20remainsaneffectiveforumrequiresAustraliaandChinatoactivelyavoidG20gridlockbynotsupportingorparticipatingintheformationofdamagingstrategicblocs.Inparticular,thismeansavoidingaG7versusBRICSscenariowherecountriesagreetopre-aligntheirpositionswithintheG20.ChinaandAustraliashoulddeliberatelyandpubliclyapproachtheG20onanissue-by-issuebasisandseektobuildcoalitionsonindividualissuesacrossadvanced,emerginganddevelopingdivides,aswellasgeographicallyacrossEurope,Asia,theAmericas,AfricaandtheMiddleEast.

supporting a stronger global financial safety net

Theglobalfinancialsafetynetconsistsoftheinternationalfinancialresourcesandinstitutionalarrangementstohelpcountriesexperiencingafinancialoreconomiccrisisandpreventingitscontagion.ItisoffundamentalimportancetotheAustralianandChineseeconomiesthroughthestabilityitprovidestotheglobalfinancialsystembyensuringcountriescanaccessliquidityfinancingasnecessary.Itsupportsstabilitybyactingasafinancialbackstop,providingemergencyfinancingwhereacountryisunabletomeetexternalpaymentsandcannotaccessmarkets(Sterland2013).Thesafetynetalsoactsasaformofinsurance(Shafik2015).Countriescontributeresourcestothesafetynetand,knowingtheywillreceiveassistanceiftheyexperienceproblemswiththeirexternalpayments,aremorewillingtoopentheireconomies.BothAustraliaandChinahaveplayedkeyrolesinstrengtheningthesafetynetin

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thepast.ThisincludesthroughtheirquotaandbilateralcontributionstotheIMF,theirsupportforG20-ledinitiativesaroundIMFreformand,forChina,throughitsleadershipinregionalinitiativesandestablishingcurrencyswaplinestobolsterthesafetynetintheAsiaPacific.

ItisthereforeimportanttoensuretheadequacyandeffectivenessoftheglobalfinancialsafetynetaspartofthereformoftheinternationalmonetarysystemthattheIMFshouldadvance.AsPBoCGovernorZhouXiaochuanstatedonbehalfofChinatotherecentInternationalMonetaryandFinancialCommittee(Zhou2016),thisrequiresenhancingtheroleoftheIMF,improvingitslendingfacilities,allowingregionalfinancialarrangementstoplayabettersupplementaryrole,andfurtherimprovingthesovereigndebtrestructuringmechanism,withbettercoordinationamongcreditorsanddebtorsandwideruseofitsenhancedcontractualclauses.

Giventhestronginstitutions,macroeconomicpolicyframeworkandflexibilityoftheAustralianeconomy,itisunlikelythatAustraliawillrequireanydirectsupportfromtheIMFinthefuture.ThisissimilarlythecaseforChinagiventhesignificantdomesticbuffersandpolicyspaceavailabletoChineseauthorities—andalsobecause,intheeventthatChinadidrequireexternalassistance,thesheersizeofitseconomywouldmeantheamountofsupportrequiredwouldutterlydwarfthecapabilitiesoftheIMFandallregionalinstitutionscombined.Externalsupportwouldinsteadcomefromcountriesintheregionandthereserve-assetcountries,particularlytheUnitedStatesandtheEuropeanUnion.BigplayercooperationhastobetheanchorforanIMF-basedfinancialsafetynet.TherelevanceoftheglobalfinancialsafetynettoAustraliaandChinaisinthefundamentalroleitplaysinstabilisingtheglobalfinancialsystemgivenitsprovenabilitytotransmitshocksintotheAustralianandChineseeconomiesthroughtradeandinvestmentchannels.

Australiaisanopeneconomythatisdependentonforeignsavingstofinanceinvestment,particularlyforitsminingandresourcessectors,andoninternationaltradeformaintainingitshighstandardofliving.Australianauthoritiesholdlimiteddomesticreserves,relyinginsteadontheeconomicflexibilitythathasbeendevelopedintheAustralianeconomyovermanydecades.AlthoughtheflexibilityofAustralia’seconomy,particularlyitsfloatingexchangeandinflation-targetingmonetarypolicy,helpsitweathervolatilityfrominternationalmarkets,theAustralianeconomyisneverthelesssusceptibletoglobalandregionalshocksthroughtradeandinvestmentchannels.Australiasignificantlybenefitsfromthestabilityderivedfromthesafetynetandfromhavingstrongmechanismsandinstitutionsunderpinningit.AustraliaalsobenefitsfromensuringtheIMFremainscentraltotheglobalfinancialsafetynetbecause,unlikeChina,AustraliadoesnotyetparticipateinanyregionalfinancingarrangementssuchastheCMIMortheEuropeanStabilityMechanism(ESM).

WhileChinadoesparticipateinregionalinitiativesandhassignificantdomesticreserves,theChineseeconomyhasshownitselftobeincreasinglysusceptibletointernationalshocks.TheAsianfinancialcrisis,theglobalfinancialcrisisandmorerecentlytheso-calledTaperTantrumin2013havehighlightedthesusceptibilityoftheChineseeconomytoglobalshocksthroughfinancialchannels.Theseshocks,particularlytheEuropeandebtcrisis,havealsohighlightedthesusceptibilityoftheChineseeconomytoreducedglobaldemandthroughtradechannels.ChinaisakeybeneficiaryfromglobaleffortstohavetheIMF,andglobalgovernancemoregenerally,betterreflecttheeconomicrealitiesofthe21stcentury.ThesereformswillbekeytofacilitatingChina’seconomictransitionandhavingitplayamoreactiveroleintheglobalfinancialsystemofthefuture,aswellasinhavinginputintohowglobalrules,normsandinstitutionsdevelopovertime.

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Ensuringthatcountriescanaccessliquidityfinancing,bothregionallyandglobally,intimesofdifficultyisofcriticalimportance.Theresponsetotheglobalfinancialcrisis,particularlythroughthecurrencyswaplinesestablishedbetweencentralbanks,showedboththeimportanceofensuringadequateaccesstoliquiditybutalsotheadhocandunpredictablenatureinwhichthisiscurrentlysupplied.TheglobalfinancialsafetynetisparticularlyimportantforAustraliaandChina.Emergingmarketeconomiesaremoresystemicallyimportanttotheglobaleconomythaneverbeforeandmanyofthemarefacingdifficulttransitionsandsignificantrisksintheshorttomediumtermthatthreatentoreducetheconfidenceofinvestorsinholdingassetsintheseeconomies.CapitaloutflowsfromemergingmarketshavesurgedtowardUS$1trillionover2014–2015.Thatisapproximatelydoubletheamountthatexitedemergingmarketsduringtheglobalfinancialcrisis(NNInvestmentPartners2015).AccordingtotheBankforInternationalSettlements,investorsareincreasinglyfocusedongrowingvulnerabilitiesintheemergingmarketeconomiesastheyreassesstheglobalgrowthoutlook(BIS2015).

Figure8.5showsthateconomicactivityintheseeconomiesisnowprojectedtoslowforthefifthsuccessiveyear(IMF2015a).Thesedowngradesreflectcommonaswellascountry-specificfactors.Commonfactorsincludeweakerdemandfromadvancedeconomies,weakergrowthinoilexports,adjustmentsintheaftermathofcreditandinvestmentbooms,aweakeroutlookforexportersofothercommodities(includinginLatinAmerica),aswellasmoredifficultexternalfinancingconditions.Shoulddownsiderisksincreaseormaterialisefortheemergingmarketeconomies,theglobalfinancialsafetynetwillhaveacriticalroletoplayinpreventingcontagionandbufferingitseffectsontheAustralianandChineseeconomies.But,asthefollowingsectionexplains,thesafetynet,atpresent,istoosmall,toounresponsiveandtoofragmentedtoplaythisrole.

Figure 8.5: imF gDP forecasts for emerging market and developing economies

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the evolution of the global financial safety net

In2003,thesafetynetconsistedpredominantlyoftheIMFandtheUS$365billionitheldtofightcrises(AustralianTreasury2014).Sincethen,thesafetynethassignificantlyincreasedinsizebuthasfragmentedincomposition.Thereareseveralreasonsforthisfragmentation.ThemostsignificantistheslowpaceinreformingtheIMFsoastoboostitspermanentfundingandmakeitsgovernancestructuremorerepresentativeofthecontemporaryglobaleconomy.

TheslowpaceofIMFreformhasmadetheIMFmorereliantonsecondarysourcesoffunding,suchasbilateralloancommitments,andhasmadetheglobaleconomymorereliantonregionalandbilateralalternativesoutsideoftheIMF.In2010,theeuroareacreatedtheEuropeanFinancialandStabilityFund,whichlaterbecametheEuropeanStabilityMechanism,torespondtotheEuropeandebtcrisis.Similarlyin2010,BRICScountriescreatedtheUS$100billionBRICScurrencyreservepoolandthe13ASEANPlusThreecountriescreatedwhatisnowtheCMIM—apoolofforeignexchangereservesthatexpandedtoUS$240billionin2012(Kawai2015).

Fortheemergingmarketeconomies,theseinitiativesoccurredbecauseofinsufficientIMFresourcesaswellasdissatisfactionwiththeIMF’sresponsetotheAsianfinancialcrisisandtheslowpaceofIMFreform.Thishasalsoseencountriesincreasedomesticandbilateralbuffersthroughforeignexchangereservesandbilateralswaplines,respectively.ForeignexchangereserveshaveincreasedfromlessthanUS$2trillionin1990tooverUS$11trillionin2016whilethevalueofcurrencyswapsutilisedduringtheglobalfinancialcrisiswasoverUS$600billion(AustralianTreasury2014).

ThesechallengesaremoreapparentinAsiathananywhereelse.WhileAsiaislargecomparedtootherregions,thesafetynetinAsiaishighlyfragmentedandpatchyinitscoverage.Asof2016,itconsistsoftheIMF,CMIM,BRICScurrencyreservepool,bilateralcurrencyswaplines,domesticforeignexchangereservesand,potentially,theWorldBankandtheADB—whichprovidedliquiditysupportduringtheAsianfinancialcrisis.

Ofcourse,this‘fragmentation’isnotnecessarilynew.Historically,mostcriseshaverequiredsomeformofacoordinated,adhocresponsebetweendifferentinstitutions,organisationsandcountries,whetheritbeMexicoin1994(requiringacoordinatedresponsefromtheUSadministration,USFederalReserve,theIMFandBankforInternationalSettlements)orAsiain1997(withresourcesfromtheIMF,WorldBank,ADB,theUnitedStates,Japanandothers).Butthesizeofthecurrentdesignatedsafetynetistoosmalltoassisteventhoseeconomiesthatarerelativelysmallandnotnecessarilysystemicallysignificant.

Quantifying the size and adequacy of the safety net

Quantifyingthesizeofthesafetynetmeansaddingtogetheritsmultilateral,regionalandbilateralcomponents(Figure8.6).TheglobalcomponentconsistspredominantlyoftheIMF.AsofJune2015,theIMFhastotalresourcesofUS$1.3trillion,whichincludesitsquotaresources,resourcesfromtheIMF’sNewArrangementstoBorrowandGeneralArrangementstoBorrow,andbilateralloanswiththeIMF.TheregionalcomponenttotalsaroundUS$840billioniftheresourcesavailableinthemajorregionalarrangementsareaddedtogether—theEuropeanStabilityMechanism,theCMIMandtheBRICScurrencyreservepool.Finally,agoodproxyforthesizeofswaplinesduringatimeofcrisisistousethepeakvalueofthedollarswaplinesduringtheglobalfinancialcrisis.Thesepeakedataround

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US$600billion,althoughitshouldbenotedthatmanyoftheseswaplinesnolongerexist(theUnitedStatesstillhasunlimitedswaplineswiththeUnitedKingdom,EuropeanUnion,SwitzerlandandJapan)andadditionalswaplineshavebeencreatedsincethen,particularlybyChina.

Addingthesecomponentstogether,theoverallsafetynetisaroundUS$2.7trillion:about50percentcomesfromtheIMF,20percentfromswaplines,20percentfromtheEuropeanStabilityMechanismand10percentfromBRICSandtheCMIM.TheIMF(2016)estimatesthesafetynettobearoundUS$3.7trillion.ThislargernumberappearsbecausetheIMFincludesadditional,albeitsmaller,regionalfinancingarrangements.Ifweweretoincludeevenmoreregionalarrangements,includingregionaldevelopmentbanks,whichhavehistoricallyplayedaroleincrisisresponse,thesizeofthesafetynetisevenlargerstill,calculatedinthisReportataroundUS$4.6trillion.Howeverastheanalysisbelowshows,theadequacyofthesafetynet’ssizeisquestionableevenusingtheselargerestimates.

Whiledomesticforeignexchangereservescouldbeaddedasafourthcomponent,thesereservesaregenerallyacountry’sfirstlineofdefence.Althoughimportant(asdiscussedbelow),itcanbearguedthattheyarenomorepartoftheglobalfinancialsafetynetthandomesticmacroeconomicpolicy.

Theadequacyofthesafetynetrelatestoitssizeandcomposition,which,inturn,influencesitscoverage,consistencyandspeedinrespondingtoacrisis(IMF2016).Countriesarenowmoreexposedtofinancialcontagionthaneverbefore,soalargersafetynetmakessense.ButtheUS$2.7trillionfigurerepresentedabove,ortheIMF’sUS$3.7trillionfigure,overstatethesafetynetthatisactuallyavailable.

First,Figure8.7showsthat,ifweexcluderesourcesthatarenotimmediatelyavailable,thesizeofthesafetynetdropstoaroundUS$1.75trillion.FortheIMF,muchofitsresourcesaretiedupinexistingprogramsorcomefromborrowingcommitmentsthathavenotbeenpaid-in.Asaresult,itsresourcesdropfromUS$1.3trilliontoUS$421billion.Similarly,theforwardcommitmentcapacityoftheESMdropsfromUS$500billiontoUS$369billion.ItshouldalsobenotedthatthedollarswaplinesfromtheUSFederalReservemaynotnecessarilybeofthesamesizeorextendedtothesamecountries.HowtheUSFederalReservechosethesecountriesalsoremainsunclear.

Second,whetherasafetynetofUS$1.75trillionisadequateornotdependsonthesizeofthecrisisthatitisrespondingto.TheIMF(2016)notesthatthesizeofthesafetynet,andparticularlytheIMF’sresources,havenotkeptpacewiththe25-foldincreaseinglobalcapitalflowssince1980(Lagarde2016).Ithasalsofailedtokeeppacewiththeincreasingstockofdebtamongtroubledeconomies.Greece,forexample,representsjust0.25percentofglobalGDP(PPP;IMF2016).ButiftheIMFwererequiredtoshouldertheburdenoftheGreekbailoutonitsown(approximatelyUS$279billionsince2010),thiswouldabsorbalmost70percentoftheIMF’scapacity.Aworsescenariowouldbebailingoutalargereconomy,suchasSpain.Spainrepresents1.5percentofglobalGDP(PPP;IMF2016)andhasUS$669.5billionofdebttorefinanceinthefiveyearsfrom2015to2020(Gilbert2014).ThiswouldexhausttheIMF’scapacityandmostoftheESM.

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Figure 8.6: The components of the global financial safety net

Total IMF resources; $1,312

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Third,theadequacyoftheglobalsafetynetdependsonwhatismeantbytheterm‘global’.Theactualsizeofthesafetynetdependsonthecountryinquestion.ForAustralia,thesafetynetconsistsentirelyoftheIMFanditsswaplinewithChina,sinceAustraliadoesnotparticipateinanyrelevantregionalinitiatives.Similarly,swaplinesareonlyavailabletothosewhocannegotiatethem,anditisworthnotingthatemergingmarketsanddevelopingeconomieswereexcludedfromtheUSFederalReserveswaplinesintheglobalfinancialcrisis.TheIMF(2016)acknowledgesthatthesafetynet’scoverageisincreasinglypatchy,whichisaparticularriskfornon-developedcountries.

Fourth,marketconfidenceisreducedwheninvestorsareunabletoseeadesignatedwarchestandnecessaryinstitutionalarrangementstorespondtoacrisis.Assumingthatonlyadhocinternationalcooperationwillbeforthcomingduringatimeofcrisisisnotconducivetomarketconfidence.Italsoerodestheimplicitinsurancepolicy,whichencouragescountriestoopentheireconomiesinthefirstplace(Shafik2015).Havingastrongsafetynetcanhelpencouragecross-borderinvestmentandincreaseconsumptionthroughreducedprecautionarysavings.

Fifth,increasedfragmentationmeansgreaterdependenceontheabilityofdifferentinstitutionsandarrangementstocoordinatewithoneanotheratatimeofcrisis.Thiscanmeanaslowerandlessconsistentresponsefromonecrisistothenext(IMF2016).TheG20identifiedtheseconcernsasreasonsfordevelopingprinciplestoguidecooperationbetween

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theIMFandregionalfundingarrangements(RFAs)(G202011).TheIMF(2016)hasalsofoundthatmostcountrieswouldneedtouseseveralelementsofthesafetynettofullycovertheirfinancingneeds,thecoordinationofwhichtheIMFcalls‘astrongassumption’.

Figure 8.7: Total resources compared to available resources

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Total IMF resources; $1,312

Total IMF resources; $421

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BRICS; $100

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Finally,theseregionalfinancingarrangementsareweaksubstitutesfortheIMF.Theclosenessofcountriesthatparticipateinregionalarrangementsmeansthatimposingpotentiallypainfulbutnecessaryconditionalitycanbedifficultanduncomfortable.Thenarrowerbaseofresourcesmeanstheyarelessreliable,lessdiversifiedandmoreriskyforcontributingcountries.Surveillanceactivitiesalsotendtobepartialastheglobalpictureisnotasobvious.

Forthesereasons,theIMFshouldremainatthecentreoftheglobalfinancialsafetynet.ItsdiversemembershipandlonghistoryprovidestheIMFwithseveraluniquefeaturesthatareirreplaceableataregionalorbilaterallevel.TheIMFhasthegreatestcapacitytoraiseresourcesintimesofneedandtoensurethatcreditriskisdiversifiedgloballytothegreatestextentpossible.Assuch,itprovidesthemosteffectiveandlowcostinsuranceagainstcrises.

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Avenues for collaboration between Australia and China in the g20

ReformingthesafetynetwouldbenefittheAsianregioniftheIMFtakesaholisticapproachthataddressestherootcausesofitsfragmentation.ThisrequiresafocusonincreasedandmorepermanentfundingfortheIMF,bettertailoredfinancingfacilitiestomeettheneedsofAsianeconomies,anewphaseofreformstogiveAsianeconomiesagreatervoiceintheIMF,andbettercooperationbetweentheIMFandRFAs.

TheglobalfinancialsafetynetisapolicychallengethatG20financeministersandcentralbankershavebeenatthefrontierofforcloseto15years.ItisanissueuniquelysuitedtotheG20asallcountriesbenefitfromthepositiveexternalitiesthatflowfromaneffectiveglobalfinancialsafetynetthattakesinglobal,regional,bilateralandnationalarrangements.

TheG20isuniquelysuitedtoaddresstheinadequaciesofthecurrentsafetynet.One-thirdoftheIMF’sfundingfrombilateralloanswillstarttoexpireover2016and2017,andtheG20willneedtodiscussthenextstageofIMFreformfollowingtherecentratificationofthe2010quotareformsbytheUnitedStatesCongress.TheG20’shistoryhasshown,however,thateffortstoachievesweepingchangestoglobalgovernance,so-called‘grandbargains’,havebeenunsuccessful,exceptperhapsinthecontextofanemergencyonthescaleoftheglobalfinancialcrisis.ThefocusoftheG20undertheFrenchpresidencyin2011,forexample,wastotakeaholisticlookattheinternationalmonetarysystemwithafocusonradicalreforms.Theoutcomesachievedfromthisprocess,however,weresignificantlylessthantheamountofpoliticalcapitalthatwasexpended.

Instead,theG20shouldfocusonwhatpragmaticstepsitcantakeinsupportinganincrementalprocesstostrengthenthesafetynet.Tothisextent,AustraliaandChinashouldsupportG20effortsontheissueoftheglobalsafetynetfromfourkeyperspectives:thenextstageofIMFreform,implementingarrangementstomaketheIMFandRFAsmorecohesive,renegotiatingbilateralloans,andstrengtheningdomesticmacroeconomicframeworks.

imF reform

IMFreformisthelinchpinforaddressingthechallengesfacingtheglobalfinancialsafetynet.China’sG20presidencyin2016presentsanawkwardcontradictionwherethecountrychairingtheglobalsteeringcommitteeremainsgrosslyunderrepresentedinmanyoftheworld’smostimportantinstitutions.Whiletheratificationofthe2010IMFreformshelpedaddressthis,thereisstillmuchtobedone.AustraliaandChinashouldencouragetheG20tostartaconversationonthenextstageofIMFquotareform.Thiswillbeanincrementalprocessovermanyyears,anditisreasonabletoexpecthesitationfromsomemembers,notablytheUnitedStates,inwantingtoadvanceanewroundofreformssoquicklyaftertheratificationofthelastround.However,momentumfromtherecentsuccessofthe2010reformsshouldnotbelost.

ThereareanumberofotheraspectsofIMFreformthatsimilarlystillneedtotakeplace.Thisincludesbringingforwardthe15thGeneralReviewofQuotasandimplementingtheagreementreachedin2010wherebyadvancedEuropeancountrieswouldfreeupanIMFboardchairforanemergingmarketeconomy.ThereisalsoadditionalworktodoinreviewingtheIMF’squotaformula,althoughresolutiononthisissuewillrequireapoliticalsolutionandwillnotbesolvedthroughtechnicalreviews.Finally,thereisalonger-termopportunityforAustraliaandChinatobeginplantingtheseedsforhavingarepresentativefromanemergingmarketeconomyappointedastheheadoftheIMFattheendofLagarde’sterm.

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ReformstotheIMFcouldalsofocusonitsfinancingfacilitiestoensuretheyaremeetingtheneedsofitsmembers.Thiscouldincludeagreateruseofprecautionaryfinancingtomakethesafetynetfaster,moreflexibleandmoreresponsive.TheIMFtookasignificantstepinthisdirectionindevelopingtheflexiblecreditlineandtheprecautionaryandliquiditylinein2010.Thesefacilitiesareaimedatstronglyperformingeconomieshitbyexternalshocks—theso-called‘innocentbystanders’.TheIMF(2016)hasfoundthatwithoutpromptliquidityprovision,innocentbystanderscanquicklybecomevulnerableduringsystemiccrises.Thisisalsoamotivationforcountriestostockpileforeignexchangereserves.Havingagreaterfocusonprecautionaryfinancingcouldhelpbettermeettheneedsofmembers,reducefragmentationandimprovetheIMF’sresponsetocrises.

composition of the sDR basket of currencies

On13November2015,IMFstaffrecommendedtherenminbi(RMB)beincludedintheSpecialDrawingRights(SDR)basket(IMF2015c).China,ofcourse,continuestohaveakeyroletoplayinthisregard.LiberalisationofChina’scapitalaccountispivotalnotonlytotheRMB’sinclusionintheSDR,butalsoforChinatoplayanincreasingroleintheglobaleconomymoregenerally.Importantly,theRMB’sinclusioncanbeusedbyChinaasacatalysttohelpdrivedifficultfinancialreformsathome.

strengthening collaboration between the imF and RFAs

WhilereformingtheIMFisthebestwaytoaddressthechallengesfacingthesafetynet,thereareotherstepsthatcanbetakentomakethepatchworkofglobalandregionalinitiativesmorecohesive.Regionalandbilateralinitiativescanhaveanimportantrolewithinthesafetynet,buttheymustberigorousandstructuredsoastocomplementtheIMF.AttheCannesSummitin2011,leadersendorsed‘G20PrinciplesforCooperationbetweentheIMFandRegionalFinancingArrangements’(G202011).ThisshouldbeusedasthebasisfordevelopinganoverarchingframeworkforbettercooperationbetweentheIMFandRFAs.

Suchaframeworkcouldbegraduallydevelopedandstrengthenedthroughinformalandformalmethods.Informally,regulardialoguescouldbeheldbetweentheIMFandRFAstoreachabetterunderstandingonhowtocoordinatewitheachother,suchasestablishingproceduresforinformationsharingandjointlyconductingcrisisscenarioexercises.ThissuggestionwasputforwardbySouthKoreain2012andreceivedbroadsupport(G20IndiaSecretariat2014).IthasalsobeencanvassedbytheIMF(2013)asapracticalsteptofine-tunethecurrentflexibleapproachtoIMF–RFAcooperation.

Moreformally,theG20couldtaskaworkinggrouptodevelopdetailedguidelinesonIMF–RFAcooperation.Suchanagreementcouldformalisetheexpectationthatco-financingoperationswouldbesubjecttocertainprinciplesandsafeguards,similartothosestipulatedundertheIMF’slendingframework.Thedetailedguidelinescouldprovideconcreteguidanceonhowtheseprinciplescouldbeachieved.ThisproposalhasalsobeencanvassedbytheIMF(2013)andshouldbeconsideredbytheG20.

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Renewing bilateral funding of the imF

TheexpirationofUS$369billionofIMFbilateralloanfundingover2016and2017requiresanurgentresponseunderChina’sG20presidency.ThisfundingrepresentsathirdoftheIMF’sfundinganditspotentiallossintroducesanunacceptableamountofsystemicriskintotheglobaleconomyatatimewhenmanyeconomiesaregoingthroughdifficulttransitions.Theseloansmustberenewed.

However,AustraliaandChinashouldnotlosesightoftheultimategoal,whichislong-term,adequateandsustainablefundingfortheIMF.Whilethesebilateralloansarecriticalinfillingashort-termgap,theirrenewalshouldformpartofabroaderdiscussionaroundthetimetablesforquotareformsothat,ultimately,thesebilateralloanscanbefoldedintolonger-termformsofIMFfinancing.

strengthening domestic frameworks

Finally,thesafetynetalsoneedstobeconsideredinabroadercontext.Itisnotapanacea.Itis,andshouldremain,alastresort.Thereneedstobeanequalfocusondomesticreformstobuildsoundmacroeconomicframeworkswithincountriestocushionagainsteconomicshocksandensureflexibleresponses.AustraliaandChinashouldensurethatthemacroeconomicfocusoftheG20growthstrategiesisnotlost,andthatthesestrategiesandtheG20peerreviewprocessexpresslyconsiderhowdomesticframeworkscouldbestrengthened,withanalyticalsupportfromtheIMF.

supporting and promoting the global trading system

Theglobaltradingsystemreferstotherules,normsandinstitutionsthatgoverninternationaltrade.Althoughitcanbecharacterisedinmanyways,thesystemconsistsofmultilateral,plurilateralandbilateralcomponents.Bilaterally,itconsistsofhundredsofFTAsorotherformsoftradeagreementthathaveemergedoverthelast20years.Plurilaterally,thesystemconsistsofregionalandcross-regionalagreementssuchastheNorthAmericanFreeTradeArea(NAFTA),TPP,RCEPandTTIP.Multilaterally,thesystemconsistsoftheWTOandthemultilateralagreementsithasproduced.

AustraliaandChinaactivelycooperatemultilaterallythroughtheWTOaswellasbilaterallythroughChAFTA,whichhassetnewdirectionsintradepolicystrategy.Differencesemerge,however,inregardstoplurilateralarrangements.WhileAustraliaandChinacooperatethroughRCEPundertheauspicesofASEAN,AustraliaisamemberoftheTPPwhileChinaisnot.Figure8.8givesasnapshotofhowAustraliaandChinafitwithintheincreasinglycomplexglobaltradingsystem.

Allthreeofthesecomponents—multilateral,plurilateralandbilateral—areimportantandrelevanttotheAustralia–Chinarelationship.AustraliaandChinaarebothtradingnations.Bothcountrieshavebenefitedimmenselyfromtheglobaltradingsystemthroughincreasedconsumption,investmentandhigherproductivitythroughthemoreefficientallocationofresourcesthattradeliberalisationfacilitates.

Exportsrepresentabout21percentofAustralianGDPandabout23percentofChina’sGDP.ComparethistotheUnitedStates,whereexportsrepresentjust13percentofGDP,anditisclearthatAustraliaandChinahavestronginterestsintheefficiencyandeffectivenessofthe

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globaltradingsystem.AustraliaandChinahaveaparticularinterestinensuringtheglobaltradingsystemsupportsregionalandglobalvaluechainsbyfacilitatingtradeandinvestmentflowsacrossborders.Thishasbeenaidedbyimprovementsinphysicalinfrastructureandlogisticsservices,rapiddevelopmentsofinformationandcommunicationtechnology,andfallsintradebarriersandtradecosts,allofwhichhavehelpedexpandtradeandforeigninvestment.ThefactthattheWTOhasbeenlockedinadecade-longpreoccupationwith20thcenturytradeissues(suchastariffsandagriculture)intheDohaRoundhasmerelyexacerbatedthisregionalisationeffect(Baldwin2013).

AustraliaandChinagainthemostfromtradeliberalisationwhenitismultilateral,ratherthanbilateralorplurilateral.Inshort,theGDPand,moreimportantly,consumptiongrowthenjoyedbyAustraliaandChinawillbebiggerwhenliberalisationeffortsareundertakenwithinlarger,andpreferablyworldwide,groups(McKibbin1998).Thelargerthegroup,thegreaterthepotentialformoreefficientallocationofresourceswithintheseeconomiesis.Inlargergroupingsthestimulationofdemandforexportsandcapitalastradebarriersarealsolowered.Alargergroupingalsohelpspreventtradebeingdivertedawayfromnon-participatingcountries.

TherearethreepriorityareasforcollaborationbetweenAustraliaandChina.First,giventhebenefitsofmultilateraltradeliberalisationtobothcountries,AustraliaandChinashouldrefocustheG20’seffortsonboostingthemultilateraltradingframeworkbypromotinganincrementalprocessthroughwhichtheG20canworktowardsWTOreformoverthecomingyears.Second,AustraliaandChinashouldfocustheireffortsintheG20,WTOandRCEPontakingpracticalstepstotrytoreducefragmentationintheglobaltradingsystem.Third,giventheimportanceofinvestmenttotheeffectivenessoftheglobalandregionalvaluechainsAustraliaandChinaparticipatein,bothcountriesshouldsupporttheG20onanincrementalprocessthatsupportsamultilateralframeworkforinvestment.

Figure 8.8: Australia and China within the global trading system

NS PACIFICTNERSHIP

TPPTM

World Trade Organization162 members

TPP

United States

Peru

Canada

Mexico

Chile

TRANPART

T

RCEP

India

China

Korea

Philippines

Indonesia

ThailandMyanmar Malaysia

Vietnam

Brunei

Singapore

New Zealand

Australia

Japan

Laos

Cambodia

ASEAN

Source:Authors’schema.

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Promoting multilateral liberalisation and WtO reform through the g20

TheresponsibilityforglobaltradegovernancehasrestedwiththeWTOsinceitscreationin1995.Itsmembershiphasgrownto162asofMay2016.TheWTO’scentralfunctionistoprovideaforumforinternationaltradenegotiations,whichresultsinWTOagreements.TheWTO’sotherfunctionsincludeadministeringWTOagreements,monitoringnationaltradepolicies,andprovidingtechnicalassistanceandtrainingfordevelopingcountries(Baldwin2013).

TheWTOisthepreferredvehicleforpursuingtradeliberalisationandmanagingtheglobaltradingsystemforboththeAustralianandChinesegovernments.Itistheonlyorganisationthatcantakeacomprehensiveviewoftheincreasingcomplexitiesoftheevolvingeconomicengagementsbetweencountries.ButWTOnegotiationshavenowbeenstalledfortwodecades,largelyoveradivideonmajorissuessuchasagriculturesubsidies,industrialtariffsandnon-tariffbarriers.

Asaresult,theWTOhasnotkeptupwiththeevolutionoftheglobaltradingsystem,particularlythedevelopmentofglobalandregionalvaluechainsandtheintertwiningoftrade,investment,intellectualpropertyandservices.WhiletheWTOremainedfocusedontariffsandagriculture,morecomplexglobalandregionalproductionnetworkswereforming.WithoutWTOreformthatallowsentrenchmentofthestrongerregulatoryandinstitutionalarrangementsnecessaryformorecomplexinternationalcommercialties(intrade,servicesandinvestment),theglobaleconomyrisksthesteadydeclineintherelevanceofoneofitsmostvaluableinternationalinstitutionsandtheconsequentlossofextraordinaryopportunitiestoimprovegloballivingstandardsandcreationofapermanentlyfragmentedglobaleconomicsystem.

ThedifficultyinreformingtheWTOisnotincomingupwithalternativerulesorinstitutionalframeworksbutinachievingpoliticalagreementthatreformisrequiredandonwhatformitshouldtake.Thefocusneedstobeondevelopinganincremental,inclusiveandrobustprocessthroughwhichsuchissuescanbediscussed.TheG20presentsthemosteffectiveforumgivenitsglobalgovernancefocus.

TheG20’sfocusontradehasbeenmovinginthewrongdirectioninrecentyears,givinggreateremphasistoFTAsandregionalagreements.UnderAustralia’sG20presidency,asunderTurkey’s,thefocuswasondomesticstructuralreformsinnationalgrowthstrategiestoreducethecostofdoingbusiness,streamlinecustomsprocedures,reduceregulatoryburdensandstrengthentrade-enablingservices.Whiletheseareimportantareasoffocus,theG20’skeyareaofcomparativeadvantageisintendingtothemultilateralsystemandshapinghowbilateral,plurilateralandmultilateralcomponentsfittogether.Increasingly,communiquésdepicttheG20asaforumforinformationsharingontradeissuesratherasthedrivingforceforinstigatingnecessaryglobalgovernancereform.

TheG20needstorefocusonthemultilateraltradingsystemanddevelopaprocessformovingforwardonWTOreform.PangestuandNellor(2014)providepracticalsuggestionsonhowaG20processcouldbedeveloped,buildingonthecreationofadesignatedG20workinggroup.TheysuggestthatleadersannouncetheappointmentofanEminentPersonsGroup(EPG)comprisedofhighlyregardedpeopleininternationalgovernance,tradeandotherareas,taskedtomakerecommendationsontheglobaltraderegimeandspecificallyontheprinciplestobeobservedbyG20membersastheyconsidergovernancereforminregardstotrade.ThecompositionoftheEPGshouldreflecttheneedtomovetradediscussionsbeyondthenegotiationparadigmtoreflectthebroadereconomic‘wins’ofastronger,moremodernregime.

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ReformingtheWTOandentrenchingitsauthorityisofcentralimportancetoAustraliaandChina.Regionalagreementsarefragmentingtherelationshipandbothcountriesbenefitthemostfromtradeliberalisationthatisundertakenacrossthelargestnumberofcountriespossible.WTOreformisalsothelinchpinforaddressingfragmentationintheglobalsystem,whichbenefitsneitherAustralianorChinagiventheincreasedcostoftradeandinvestmentitentails.

Integraltothiswillbegivingthebusinesscommunity(representedthroughtheBusiness20,or‘B20’)agreatervoicewithintheG20.TheB20hasafundamentalroletoplayinadvisingG20leaders,ministersandofficialsonthepracticalstepstheG20cantaketoimprovetheeaseoftradinganddoingbusinessacrossborders,particularlybyproducingamorecohesiveinternationaltradearchitecture.TheG20needstoensureitprovidesplatformsfortheB20tomakeitsrecommendationstoleaders,includingsignificantengagementbyleaders,ministersandofficialswiththeB20anditsrecommendations.ResponsibilityalsofallstotheB20toensureitsrecommendationsarespecific,targetedandfirmlyrootedinarobustevidence-base.TheB20canplayacontinuedroleintheimplementationofthoserecommendationsandshouldnotconcernitselfonlywiththerecommendationsthemselves.

A more cohesive and integrated global trading system

ThereareotherpracticalstepsAustraliaandChinacouldsupporttohelpaddressfragmentationintheglobaltradingsystem.Calledthe‘noodlebowleffect’inthecontextofAsia,tradefragmentationrisksreducingtradeandinvestmentflowsbyincreasingthecostandcomplexityofdoingbusinessacrossborders(Urata2013).Thesecostsincludedifferentandcompetingtariffschedules,exclusionlists,rulesandstandards.Sincethecoexistenceofbilateral,plurilateralandmultilateralagreementsisunlikelytochangeanytimesoon,thefocusshouldbeonachievinggreatercoherencebetweenthesediverseagreements.

Preferentialtradeagreementshavepositiveandnegativeeffects.Thepositiveeffectscomefromtheexposureofuncompetitive,shelteredhomeproducerstocompetitionfromlower-costpartnercountrysuppliers.Thenegativeeffectsarethattheseagreementsdiverttradeawayfrommoreefficientandcompetitivethirdcountrysupplierstowardspartnersupplierswhoonlybecomecompetitivebecauseofthepreferentialtreatmenttheyreceiveundertheagreement(Armstrong2015;seeChapter7).Havingalargenumberofintertwinedpreferentialtradeagreementsnotonlyriskstradediversionbutalsoexacerbatesthesenegativeeffectsbyincreasingcomplexityandcompliancecosts.The‘noodlebowl’canmakeAsianfirms—particularlysmall-andmedium-sizedenterprises,whichdisproportionatelyuseFTApreferences—facecostlybusinessproceduresandcumbersomerequirements(Baldwin2013).Ensuringcoherencebetweentheseagreementshelpseliminatethesenegativeeffects.

ThegoalfortheTPPandRCEPmustbetoensuretheyactasastepping-stonetowardsmultilateralisation.TheTPPwassignedinFebruary2016,althoughitstillawaitsapprovalintheUSCongressandinotherjurisdictions.ThereisariskthattheserulesandstandardshavebeennegotiatedbilaterallysuchthattheTPPmayhavesomeofthecharacteristicsofaseriesofbilateralarrangementsratherthanagenuinelycommonsetofregionalrules.Thisisfarfromidealintermsofeconomicefficiencysinceitwillprotectsupplierswithinthearrangementagainstlowercostsuppliersoutsideit,suchasChina,IndonesiaorEuropeforinstance,divertingtraderatherthancreatingit(Drysdale2015).

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ThefocusofAustraliaandChinashouldnowbeonworkingwithpartnersinRCEPtoensureitisnotonlycomplementarywiththeTPPbutgoesfurtheronkeyissuessoastoraisethestandardforregionalagreements.ThisrequiresastrongpoliticalcommitmentfromleaderstobetterintegratethefiveASEANPlusOneFTAswithChina,Japan,SouthKorea,IndiaandAustralia–NewZealand.Fromapracticalpointofview,theASEANPlusSixcountriesshouldadoptagradualapproach,whichhasbeenshowntobeeffectiveintheestablishmentoftheASEANFreeTradeArea(AFTA),intariffelimination,aswellasaco-equalapproachinthedefinitionofrulesoforigin(Urata2013).

Thereareotherpracticalthingsthatcanbedonetohelpensurecoherencebetweentheseagreements.Theseincludeencouragingrationalisationandflexibilityofrulesoforigin,upgradingoriginadministration,improvingbusinessparticipationinFTAconsultationsandstrengtheningsupportsystemsforSMEs(Baldwin2013).TherearealsoimportantwaysinwhichtheWTOprocesscanbeusedtoassistwiththeseregionalintegrationeffortstohelpensuretheyactasstepping-stonesformultilateralisation.Forexample,theWTOandASEANcouldcollaborateonjudicialandmonitoringfunctionstoensuregreatercoherencebetweenglobalandregionalrules(Oshikawa2013).

Finally,implementationoftheTradeFacilitationAgreement(TFA)offersopportunitiesforreducingthecostoftrade.The2015OECDTradeFacilitationIndicatorsfindthattheimplementationoftheTFAcouldreduceworldwidetradecostsbybetween12.5and17.5percent.CountriesthatimplementtheTFAinfullwillreducetheirtradecostsbybetween1.4and3.9percentagepointsmorethanthosethatdoonlytheminimumthattheTFArequires(OECD2015).

AustraliaandChinashouldusetheirinfluenceintheG20tomodifytheG20growthstrategyprocesstorequireeachcountrytoincludespecificreformstoimplementtheTFA.Tradeisalreadyacomponentofthegrowthstrategies;however,todateithasbeenoneoftheweakestareas.TheTFAprovidessomethingtangibleforcountriestoaspireto.TheOECD’sTradeFacilitationIndicatorsshouldbeusedtomeasureandreportonthelevelofambitionbeingdisplayedbyindividualcountries.

multilateral cooperation on investment and infrastructure

Whiletradebarriershavetypicallyfallenoverpastdecades,barrierstoforeigndirectinvestmentremainhigh.ThenDirectorGeneraloftheWTO,PascalLamy,callsthisagapininternationalcooperation:

Weseetheabsenceofmultilateralrulesoninvestmentasagapincooperation.Currentbilateralarrangementsarenotasatisfactorysubstituteforacomprehensiveinternationalinvestmentagreement(Lamy2013).

BarrierstoforeigninvestmentareasignificantissueforAustraliaandChina.Foreigninvestmentflowsarefundamentaltothespreadofglobalproductionnetworks,fromwhichAustraliaandChinaaresignificantbeneficiaries.

Asacapital-importingcountrythatreliesonforeignsavingstofinanceinvestmentinfundamentalsectorsofitseconomysuchasmining,resourcesandagriculture,Australiahasastronginterestinensuringthesechannelsremainopen.ForChina,likemanydevelopingcountriesinAsia,muchofitssuccessinparticipatinginglobalvaluechainshascomefrom

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beingabletoattractthenecessaryinvestmenttobuildproductionbases.Since2008,EastAsia,andChinainparticular,attractedthelargestshareofglobalforeigndirectinvestmentbecauseofitshighgrowthrateandlargemarkets(ZhangandWang2014).

Globally,subduedinvestmentremainsastubbornlegacyoftheglobalfinancialcrisis.G20leadersnotedin2014that‘tacklingglobalinvestmentshortfallsiscrucialtoliftinggrowth,jobcreationandproductivity’(G202014).Figure8.9showstotalinvestment(publicandprivate)asapercentageofGDPforadvancedandemergingmarketeconomies.Foradvancedeconomiesinparticular,investmenthasstruggledtoreboundfromitsfallfollowingtheglobalfinancialcrisis.Whileinvestmenthasbeengrowingrapidlyovertimeforemergingmarketeconomies,ithasplateauedsince2009andisnowgrowingatalowerrate.Emergingmarketeconomieshavealsofacedsignificantinvestmentchallengesinrecentyearsasglobalcapitalflowsrespondtomonetarypolicychangesinadvancedeconomies.Improvingdomesticinvestmentclimatesisacriticalelementinaddressingthis.

Addressingtheseglobalinvestmentchallengeshasthreecomponents.Thefirstisdomestic.Improvingdomesticinvestmentandfinancingclimatesisessentialtoensuringthecompetitive,stableandpredictablereturnsnecessaryforattractingprivatesectorinvestment.AustraliaandChinashouldsupporttheG20inthespecialfocusithasgiveninrecentyearsonreformstoimprovedomesticinvestmentenvironments.Theseincludeincreasedpublicinvestmentininfrastructure,regulatoryandinstitutionalreformstoleveragepublic–privatepartnerships,introducingtaxincentivestoraiseinvestmentandenhancingaccesstofinanceforSMEs.

Thesecondcomponentinaddressingtheglobalinvestmentchallengeismultilateral.Therehasbeenanunrelentingmovementtowardstheadoptionofadefactoinvestmentagreementatthegloballevelthroughavarietyofmultilateral,regionalandbilateralinitiatives(Dhar2013).TheseincludeinvestmentmeasuresunderGATT,theWTOAgreementonTrade-RelatedInvestmentMeasures(TRIMs),theOECD’sDeclarationandDecisionsonInternationalInvestmentandMultilateralEnterprises,UNCTAD’sInvestmentPolicyFrameworkforSustainableDevelopment,theG20’sGlobalInfrastructureHub,andregionalinitiativessuchastheEuropeansinglemarket,NAFTA,theASEANInvestmentAreaandtheinvestmentcomponentofRCEP.Theseinitiativeshavedevelopedgoodpracticeguidelinesforforeigninvestment,butthisisinsufficient.Acaseemergesforaneventualmultilateralagreementoninvestmentcoveringtransparencyoninvestmentrulesandinvestorfacilitation,ideallyhousedintheWTO(Baldwin2013).

TheG20standsasthemosteffectiveforumforcontinuingthispush.Ithasalsotakenimportantstepsinregardstotheneedforcollective,multilateralactiononinvestmentthroughitsglobalinfrastructureinitiativeandworkonSMEfinancing.ThenextstepisfortheG20toconsolidatetheworkdonetodateandbeginaholisticdiscussionarounddevelopingamultilateralforeigninvestmentframework.Importantly,theG20’sworkalsoneedstoaddressincreasingfragmentationbetweenregionalagreementsandtheinvestmentmechanismstheyembody,specificallyoninvestor–protection.Theinvestor–protectionmechanismsembodiedinanumberofregionalagreements,particularlytheTPP,aswellasthedifferencesbetweentheseagreements,acttosignificantlyfragmenttheexistingsystem.Consolidatingtheexistingworkonamultilateralforeigninvestmentframeworkneedstohaveaspecificfocusonachievingharmonyacrossthesemechanisms.

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Figure 8.9: investment as a percentage of gDP

10

15

20

25

30

35

1990

19

92

1994

19

96

1998

20

00

2002

20

04

2006

20

08

2010

20

12

2014

Advanced economies Emerging market and developing economies

Source:IMFWEO2015,Investment(publicandprivate)asapercentageofGDP.

DespitealltheshortcomingsofthedeadlockedDohaRoundWTOnegotiations,thebestframeworkforsuchaninitiativeisstilltheWTO.NotonlydoesitalreadycontaingeneralprinciplesonMFNstatus,nationaltreatment,generalexceptionsandtherighttoregulate,amongotherkeyelements,butitalsohasthemosteffectivesystemunderinternationallawtosettledisputesbetweenstates.Theshapeofsuchanagreementandwhatflexibilitieswouldbeavailableforspecificcountriesaremattersthathavetobediscussedandsettledduringthenegotiations(Jara2013).

ZhangandWang(2014)haveshownthataforeigninvestmentframeworkcouldbeobtainedbyconsolidatingtheworkdonebytheG20,UNCTADandtheOECD.Butitshouldgofurther,toahigher-levelarrangementthatrealisesanintegratedframeworkbeyondTRIMs.Itisimportantthatasingleagreementatthemultilaterallevelbetheultimategoal.Basiccomponentsshouldincludetransparencyoninvestmentpolicies,rulesandregulations,withaclearidentificationofagenciesresponsibleforissuingrelevantlicenses,permitsandapprovals.Foreigninvestorsshouldalsoberequiredtocommittotransparencyintheirlabourandenvironmentalstandards,andpublicscrutinyoftheirconformance.

Thethirdcomponentforaddressingtheglobalinvestmentchallengerelatesspecificallytoinfrastructureinvestment.AccordingtotheOECD,totalglobalinfrastructureinvestmentrequirementsby2030fortransport,electricitygeneration,transmissionanddistribution,waterandtelecommunicationswillcometoUS$71trillion,orabout3.5percentoftheannualglobalGDPfrom2007to2030(OECD2012).Howeveritiswidelyrecognisedthatpublicinvestment,includingthatfromthemultilateralandnationaldevelopmentbanks,willbeinsufficienttomeettheglobalshortfallininfrastructureinvestment.Greaterprivatesectorinvestmentininfrastructurewillbefundamental.Althoughinvestmentopportunitiesareplentifulacrossdevelopedanddevelopingcountriesalike,investorsarenotfullyseizingthem—oftenduetogapsinthedomesticinvestmentenvironment(OECD2012).

InfrastructureinvestmentisasignificantdomesticpriorityforthegovernmentsofbothAustraliaandChina.Thereareanumberofbenefitstobothcountriesfromsupportingacontinued,andgreater,internationalfocusonthisissue,bothasparticipantsintheglobaleconomyandforcountry-specificreasons.

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ThecommoninterestsbetweenAustraliaandChinaoninfrastructureinvestmentshouldbecapitalisedonwithininternationalforumsandinstitutions.ThefocusofthecollaborationeffortsbetweenAustraliaandChinashouldbeonmaintainingastrongfocusthroughChina’sG20presidencyoninfrastructureinvestment.Asdiscussedearlier,thisisacross-cuttingthemethatiscapableofassistingonmultiplefronts—includinggrowth,macroeconomicpolicycoordination,development,trade,energyandclimatechange.Infrastructureinvestment,particularlythroughtheG20’stwo-in-fivegrowthagenda,hasthecapacitytobridgethegapintheinternationalcommunityontheneedformacroeconomicpolicycooperation.Itprovidesamuch-neededframeworkforsurpluseconomiestoincreasepublicinvestmentandcontributetoglobalaggregatedemandwhiledeficiteconomiesundertakecommensuratestructuralreformtoboostthesupplysideoftheireconomies.

ChinashouldbuildontheeffortsofAustraliaandTurkey,utilisingtheG20growthstrategyandmutualassessmentprocessestodeliverambitiouscommitmentsfromG20membersand,fromTurkey’spresidency,usingtheestimated1percentagepointincreaseintheaggregateG20investment-to-GDPratioasameansfortargetingG20efforts.ThereiscontinuedscopeforgreaterpublicinvestmentfrommanykeyG20countriesaswellasincreasedeffortsacrossthemembershipinimprovingdomesticinvestmentenvironmentsandidentifyinginnovativewaysofcrowdinginprivatefinance.

AustraliaandChinashouldusetheirinfluenceintheG20toachievebettercooperationandsynergiesbetweentheAIIBandNewDevelopmentBankwithexistingmultilateraldevelopmentbanks.ChinahasalreadyoutlinedthisasapriorityintheconceptnoteforitsG20presidency.Thereshouldsimilarlybeanincreasedfocusoncoordinatingfundingbetweenthesedifferentinstitutions,centredonaconcretelistofbankableprojectsthatcouldbedevelopedthroughG20support.TheG20shouldcontinuetosupportanddrivetheeffortswithindevelopmentbankstooptimisetheirresourceswithaneyeonhowbesttoleverageprivate-sectorfinance.

supporting global energy governance reform and action on climate change

Theexistingarchitectureforglobalenergygovernancehasbeendescribedas‘amess,withmanyactors,manypriorities,littlecoherenceandlimitedeffectiveness’(Florini2012).Therearecountlessmultilateral,regionalandbilateralinitiativesrelatingtoenergy.Figure8.10givesasnapshotofjustafewofthemandshowshowAustraliaandChinafitinwiththisbroadframework.

Theneedforglobalenergygovernancereformiswellrecognised,particularlybytheG20,whichhashadaspecialfocusonthisissueinrecentyears.Theglobalenergysectorhasundergone,andcontinuestoundergo,significanttransitions.WorldenergyconsumptionandtradeusedtobedominatedbythedevelopednationsoftheOECD,butnowmajordevelopingnationslikeChina,IndiaandBrazilareamongstthelargestplayers(Hirst2012).Countries,likeChina,whichjustafewyearsagoweremajorenergyexporters,havebecomeenergyimporters.Chinaisnowtheworld’slargestenergyconsumerandtheworld’slargestoilimportingcountry.TheUnitedStates,whichusedtobethelargestoilimporter,hassimilarlymadespectaculartechnicalprogressinoilandgasproductionandisnowheadingtowardsself-sufficiency.

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Globalenergygovernancehasnotkeptupwiththesetransitions(Hirst2015).Itisnowwidelyrecognisedamongpolicymakersandcommentatorsalikethattheglobalenergygovernancearchitectureneedstobereformed.Atpresent,thereisnogenuinelyglobalenergyorganisationthatcanbringthemajorenergyconsumercountriesaroundtotabletoaddressthecoreenergychallengesofsecurity,equity,developmentandtheenvironment(Hirst2015).

Figure 8.10: Australia and China within the global energy governance architecture

China

Australia

IEA

CEM

G20

IEF

OPEC

United StatesBahrainAzerbaijan

Afghanistan

India

Libya

Algeria

Angola

UAE

Kuwait

Turkey

Russia

ArgentinaUganda

Zambia

Yemen Singapore

SomaliaSenegalSyria

OmanMali

Malta

Malaysia

Kenya

Gabon

Jordan

Guinea

Eritrea

Djibouti

Ethiopia

Egypt

Comoros

Chad

Bulgaria

BruneiDarussalam

Colombia

Burkina Faso

Kazakhstan

Lebanon

MauritaniaPhilippines

Panama

Sudan Pakistan

Sri Lanka Mozambique

Nigeria

MoroccoVietnam

Tunisia

Tanzania

Nigeria

Qatar

Venezuela

Saudi ArabiaEcuador

Iran

Iraq

United Kingdom

Indonesia

Ireland

South Africa

Hungary Austria

GreeceBelgium

Czech Rep

Slovak Rep. Luxembourg

KoreaSpain

JapanGermany

Canada FranceItaly

DenmarkSwedenNorway

Finland

Brazil

PortugalPoland

SwitzerlandNew Zealand

Netherlands

EU

UAE

Mexico

Bangladesh

Acronyms:OrganisationofPetroleumExportingCountries(OPEC),InternationalEnergyForum(IEF),InternationalEnergyAgency(IEA),Groupof20(G20),CleanEnergyMinisterial(CEM).Source:Authors’schema

Thefactthatmajoremergingmarketanddevelopingeconomiesareunderrepresentedintheglobalenergygovernancearchitectureisaseriousproblemforseveralreasons.First,itlimitsthescopeforglobalcooperationonenergypolicy,whichiscriticalinaddressingbroaderchallengesarounddevelopment,infrastructure,theenvironmentandclimatechange.

Second,amajorobjectiveofinternationaldiplomacymoregenerallyisinmanagingtheinclusionofthesenewpowersinglobalgovernancesothattheymakepeacefulcontributionstoworldleadership.Thisisespeciallytrueinthefieldofenergy,whichhashistoricallybeenasourceofconflict.

Third,theInternationalEnergyAgency’s(IEA)limitedmembershipunderminesglobalenergysecuritybyweakeningtheIEA’semergencyoilplans.TheseplansrelyonIEAmembersholdingstrategicoilreservesequivalentto90daysofimports.Themorecountriesthatareabsentfromthesearrangementstheweakerthesereservesare.Hirst(2015)hassimilarly

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shownthattheexistinggovernancestructurepreservesthedividebetweendevelopedanddevelopingcountries.TheIEA’srestrictedmembershipresultsinitbeinginsufficientlyengagedontheenergychallengesfacingdevelopingnations,particularlydevelopmentandaccesstoaffordableenergy.Thisleavesabiggapattheheartofitsprocess.

Finally,theexistingfragmentedgovernancearchitecturehasresultedinaseriouslackofcooperationonspecificareasofenergytechnologyandpolicy.Technologycollaborationhasrightlybeenidentifiedasacrucialdimensionofclimatechangemitigationand,asdescribedabove,thishasledtothecreationofanumberofnewcollaborationsinthemostimportantareas.Unfortunately,mainlyduetothelimitedmembershipoftheIEA(andnotwithstandingthefactthattheIEA’stechnologynetworkshavebeenopenedtonon-membersoftheIEA),thesecollaborationshavegenerallynotbeenbuiltontheIEA’snetworksbuthave,tosomeextent,duplicatedthem(Hirst2012).Thereisanobviousneedforbettercoordinationofthesebodiesthroughbroadergovernancereform.

the benefits of governance reform to Australia and china

TheenergysectorplaysavitalroleinboththeAustralianandChineseeconomies.Giventhesignificantextenttowhichthissectorisshapedbyglobalforces,AustraliaandChinahaveastrongcommoninterestinensuringtheyareactivelyparticipatinginglobalenergypolicymakingandinshapingtherules,normsandinstitutionsthatwillgovernthissectorintothefuture.

TheslowdowninglobalcommoditypricesandthedeteriorationinAustralia’stermsoftradeinrecentyearshaveillustratedtheextenttowhichglobalforcesshapetheAustralianeconomythroughitsenergysector.Australiaistheamongtheworld’slargestexportersofLNG,coalanduranium,andAustralia’simportancetoglobalenergymarketswillcontinuetogrow(DepartmentofIndustry2014).

Chinaistheworld’slargestenergyconsumerandhasbeenthekeydriveroftheincreaseinenergyconsumptiongloballyoverthelast10years(EIA2015).In2009,itwentfrombeinganetexportertoanetimporterofcoalforthefirsttimein20years.Itisnowthelargestproducerandconsumerofcoalintheworldandaccountsforalmosthalfoftheworld’scoalconsumption.Chinaissimilarlytheworld’ssecond-largestconsumerandimporterofoilandthefourth-largestconsumerofnaturalgas.

MultipleAustralianprimeministershavenotedthedeficienciesintheexistinggovernancearchitectureandtheneedforreform.PrimeMinisterTurnbullinNovember2015said‘thereformoftheInternationalEnergyAgencyisveryimportant…theIEA’smembershipshouldreflecttherealityoftheenergyproducersandconsumersof2015,notthe1970s’(Turnbull2015).Similarly,forChina,inaspeechinAbuDhabiin2012,thenpremierWenJiabaohighlightedthedeficienciesintheexistingarchitectureandproposedmultilateralcooperationonenergy‘withintheframeworkoftheG20’ChinahassincebeenastrongsupporterandadvocatefortheG20’sworkonreformingglobalenergygovernance(Hirst2012).

Importantly,theUnitedStatesandotherkeycountriesarealsostrongsupportersoftheG20’seffortstoreformtheglobalenergyarchitecture.WhenSecretaryofState,HillaryClintonadvocatedforChineseandIndianmembershipoftheIEA(Hirst2012),andHenryKissinger,thefoundingfatheroftheIEA,hascalledfortheevolutionoftheinstitution,notingthatit‘standsatacriticaljuncture’(Kissinger2009).IntheirNewDelhisummit

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communiqué,theBRICSnationshavesaidthat‘strengtheningrepresentationofemerginganddevelopingcountriesintheinstitutionsofglobalgovernancewillenhancetheireffectiveness’(BRICS2012).

EnsuringsecurityandtheroleofstrategicoilstockpilesaresimilarlyimportantissuesforbothAustraliaandChina,fordifferentreasons.Chinahasbeenbuildingitsoilstocksforsometimenow(Hirst2012).Australia,ontheotherhand,doesnotstockpileoilreserves.Asaresult,AustraliahasbeeninbreachoftheIEATreatyforsometime.ThisgivesAustraliaastrongincentivetoworkwiththeIEAandemergingeconomies,particularlyChina,inhelpingshapetherulesandnormsthatwilloperateintothefuture.

supporting the g20’s progress in reforming global energy governance

WhiletheG20hasmadesignificantprogressontheissueofglobalenergygovernancereform,thereisstillmuchworktobedone.ItisintheinterestsofAustraliaandChinatosupportthisincrementalprocessandtheChineseG20presidencyprovidesauniqueopportunitytodoso.

Althoughtherewassomediscussionofenergytopicsin2012and2013,itwasnotuntil2014,undertheAustralianpresidency,thatenergybecameamajorpartoftheG20’sremit.Hirst(2015)outlinesthreehighlysignificantdevelopmentsfromthe2014G20summit:first,leadersagreedtoworktogethertoachievenine‘G20principlesonenergycollaboration’,includinghavingenergygovernancereflecteconomicreality;second,leadershadG20energyministersmeetin2015andreportonthewayforward;andthird,leadersconsolidatedtheroleoftheG20energysustainabilityworkinggroupasaregularforumforG20seniorofficials.

Itisimportantnowtobuildonthispositivemomentum.ThisshouldfollowthepragmaticapproachthathasbeenadoptedbytheG20,whichfocusesonbuildingandadaptingexistingorganisationsandensuringthattheyworktogethereffectively.HirstsuggeststhatapracticalwaytodothiswouldbetohavetheG20’sEnergySustainabilityWorkingGroupcommissionfromthemaininternationalorganisationstheiranalysesoftherolestheycanplayindeliveringtheprinciplesagreedbytheG20,includinghowtheycancooperatewithotherorganisations,theactionsthattheyareplanningandanygapsthattheysee.

G20energyministerscouldreporttoleadersonprogress,offertheirsuggestionsonhowtoimprovecooperationbetweentheorganisationsandfillgapsinthedeliveryoftheprinciples.TheIEAhasavitalroletoplay,especiallyinhowitrespondstotheG20’scallsto‘makeinternationalenergyinstitutionsmorerepresentativeandinclusive’.TheIEAcouldconsiderfurtherstepstowardscloserrelationswiththeotherpartnercountriesintheAssociationinitiative.

climate change and energy transformation

ChinaandAustraliabothhaveavitalinterestinstrongglobalactiontolimitfutureclimatechange.Bothcountriesareparticularlyexposedtotheexpectedfutureimpactsfromclimatechange,whichwouldbringsignificanteconomicandsocialrisks.TheUNParisAgreementonclimatechangeprovidesasolidbasisfornationallydeterminedyetinternationallyagreed,andtosomeextentcoordinated,actiononclimatechange.

TheParisAgreementsetsoutastronglong-termglobalambitionoflimitingglobalwarmingtolessthantwodegrees,thatwasagreedtobyallcountries.Itputsinplaceasystemofnationallybasedpledgesforemissionstargetsandactions,andamechanismforregularreviewandratchetingupofnationalpledges.BothChinaandAustraliahavebeensupporters

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oftheagreement,andintheirrespectivecapacitiescontributedtothesuccessfulconclusionsofthenegotiationprocess.Bothcountriescanpositionthemselvestomaximisegainsfromsuccessfulglobalactiononclimatechange.

Aspartofthis,thereareopportunitiesforAustraliaandChinatojointlydevelopnewstrategiesforgrowthinbothcountriesbasedonthelow-carbontechnologiesofthefuture.SuchstrategiescouldentailAustraliasupplyingresourcesandenergy,aswellasspecialisedknowledgeservices,andChinautilisingAustralia’sinputstosupportitsindustriesandthenprovidecapitalforinvestmentsinAustralia.Thispatternissimilartowhatisalreadystartingtooccur.However,thenewwavesofeconomicintegrationandgrowthwouldrelyondifferentresourcesandnewtechnologies.

Chinaisstrengtheningitsclimatechangepolicyportfoliowiththeaimofachievinga60to65percentreductionintheemissionsintensityofitseconomy(theratioofcarbondioxideemissionstoGDP)in2030comparedto2005,withapeakincarbondioxideemissionsby2030orearlier.The2020targetisa40to45percentreductioninemissionsintensityrelativeto2005(GovernmentofChina2015).

Chinaisontracktoachieveits2020target,andcanachieveoroutperformthe2030targetifthecurrentpolicyeffortisintensified.Thetargetsrequireanaverageannualreductioninemissionsintensityofaround4percent.Chinahasachievedthisonaverageoverthelast10years,largelybywayofreducingtheenergyintensityofitseconomy(Figure8.11).Thiswasmadepossiblethroughimprovementsinenergyefficiencyandstructuralchange.China’sslowingeconomicgrowthisnowtendingtomakeitmorechallengingtoachievethe4percentannualdecarbonisationrate.However,ifthatratecontinuestobeachievedthenaslowingeconomymeansthatthepeakinemissionswillbeachievedearlier.

Figure 8.11: China’s annual growth in gDP, CO2 emissions, energy and emissions and energy intensity, 2005–2014

-8

-6

-4

-2

0

2

4

6

8

10

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14

16

GDP CO2 emissions Energy use Energy intensity of GDP (Energy/GDP)

Emissions intensity of GDP (CO2/GDP)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

%

Source:BP2015(fortotalprimaryenergyuseandCO2);IMF2015a(forGDP).

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Infuture,limitingandthenreducingemissionswillrequiremuchgreaterstructuralchangeinChina’seconomytowardshighervalue-addedactivities;continuedimprovementsinthetechnicalefficiencyofpowergeneration,industry,transportandhousing;andasustainedshiftawayfromcoalasthemainstayofenergysupplytowardsrenewableenergy,nuclearpowerandgas,withremainingcoalusepotentiallyequippedwithcarboncaptureandstoragetechnology(DeepDecarbonizationPathwaysProject2015;Tengetal2014).Thesechangesarealreadyunderwayanditisexpectedthattheycanbesustainedatrelativelyhighannualratesfordecadestocome(JotzoandTeng2014).

Australia’snationalemissionstargetisareductionof26to28percentinemissionslevelsat2030relativeto2005(DepartmentoftheEnvironment2015).Achievingthiswillrequireaturnaroundinemissionstrends.Itistechnologicallypossibletoachievethisandmoreambitioustargets,includingnetzeroemissionsbymid-century(Denisetal2014).Thekeyisasustainedshiftfromcoaltowardsrenewableorotherzero-carbonenergysources,acceleratedimprovementofenergyefficiencyandsequesteringcarbonemissionsontheland,includingthroughforestplantations.

ArecentstudyofAustralia’soptionsforfuturesustainabilityandeconomicgrowth(Hatfield-Doddsetal2015)foundthatAustraliais‘freetochoose’atrajectorythatwillresultinbetterlong-termenvironmentaloutcomesandsustainedeconomicgrowth:thetechnicalopportunitiesarethere,butthenewtechnologiesandactivitieswillbecomewidelyusedonlyifthereisdeliberateandbroad-basedpolicyintervention.

Benefiting from low-carbon growth

Chinahasrecognisedtheopportunitiesfromlow-carbongrowthandhasbeguntograsptheminanumberofareas,ashavesomeWesterncountries.Archetypalexamplesarerenewableenergysystems,whichduringthelastdecadehaveseenmassiveimprovementsintechnologyandcosts,andtheemergingwaveofelectricvehicles.ForChinatoachievethetransitiontoaninnovation-driveneconomywithanenvironmentallysustainabledevelopmenttrajectory,Chinawillneedtoinvestsignificantlyinresearchanddevelopmentandknowledgeindustries(JinandZhang2016).

InAustralia,policydevelopmentandbusinessinvestmentonthewholehasbeenmoredefensivetodate,witharelativelystrongemphasisontraditionalresourceextractingindustries.ToquoteMartinParkinson(2015):

Thiscapacityfortechnologicalleap-frogging,combinedwiththeneedtoaddressglobalandgeographicallyspecificenvironmentalproblems(i.e.climatechangeandairandwaterpollution),liesbehindChina’smassiveinvestmentsinlow-emissionstechnologies.TheUSisalsoinvestingmassivelyinthesetechnologies.Australiaisnot.

ReducingcarbondioxideemissionsgoeshandinhandwithotherChinesepolicyobjectives,includingimprovingairquality,improvingenergysecuritybyshiftingawayfromfossilfuelsandtheemergenceofnewmanufacturingindustriesintheproductionofwindturbinesandsolarpanels,forexample(TengandJotzo2014).

ItislikelythatChinaisalreadypastthepointofpeakconsumptionofcoal,astheproductionofcommoditiessuchassteelandcementisdeclining,theefficiencyofcoalusekeepsimprovingandalternativeenergysourcesaregrowing.China’scoalimportshavefallenandathree-

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yearbanonapprovalsofnewcoalmineshasrecentlybeenputinplace.Therateofemissionsgrowthhassloweddramaticallyinthepasttwoyears,andsomeobserversbelievethat‘peakCO2’couldoccursoonerthanisimpliedinChina’semissionstargets(GreenandStern2015).

ForAustralia,themostsignificanteffectsarerelatedtoexportsofenergyandenergy-intensiveproducts.Alow-carbontransitioninChinaandgloballyposesnear-termdifficultiesforsomeindustries,butalsolonger-termopportunities—potentiallyofverylargemagnitudes—forothers.

Internationalmovestowardslower-carbonenergysystemsmeanlessfavourableconditionsfortheexport-orientedfossilfuelindustry,inparticularforproducersofthermalcoal(asdistinctfromcokingcoalusedforsteelproduction).Globalcoaldemandgrowthhasbeentailingoff,andsteamcoalpriceshavefallen(byaround60percentoverthelastfiveyears)(WorldBank2016).

CoaldemandcontinuestoriseinmanydevelopingcountriesincludingIndia,butthisgrowthcannotlastiftheworldistoachievemeaningfuloutcomesonclimatechange.Eveniftechnologytousecoalwithcarboncaptureandstoragebecametechnologicallymature,thelonger-termoutlookforglobalcoaldemandisweakening.

DemandinChinaandgloballyfornaturalgas,bycontrast,isincreasingandisprojectedtoincreaseforsometimegivenincreasingclimateaction.Gasismuchlowerincarbondioxideemissionsthancoal,andisasuitablebridgefromcoaltoazero-emissionsenergysystem.ItalsoburnsmuchmorecleanlythancoalandisthereforeattractivetoChinaandmanyothercountriesinthebidtoreduceairpollution.Australia’sgasindustryisbenefitingfromstrongglobaldemand.Demandforuranium,whichAustraliaalsoexports,issettoincreaseaswell.

Inthelongertermhowever,Australia’sopportunitiesasanenergyproducerlieinentirelynewindustries.Australiahasverylargetechnicalandeconomicpotentialtobecomean‘energysuperpower’inacarbon-constrainedworld(Garnaut2015).

Australia as a zero-carbon energy supplier to china

Achievingtheglobalgoaltokeeptemperaturerisestowellbelowtwodegreeswouldrequireacompletede-carbonisationoftheworld’senergysystem(IPCC2014).ThepaceanddepthofthistransitionlargelydetermineshowclosetheworldcangettothegoalsetoutintheParisAgreement.

InscenariosrunbytheDeepDecarbonisationPathwaysProject(DDPP2015),adetailednationallygroundedtechnicalstudy,underatwo-degreecompatibletrajectory,electricitybecomesnearlycarbon-freeby2050,withaveragecarbonintensityacross16majorcountriesreducedbyafactorof15belowits2010value.TheChineseDDPPstudyshowsascenariowithdramaticallyreducedemissionsbyshiftingelectricityproductiontoamixofrenewablesourcesandnuclearpowerandbyequippingthemajorityofremainingfossilfuelpowerplantswithcarboncaptureandstorageby2050.

Australiaisinafavourablepositionasalargescaleproducerofrenewableenergy,onaccountofitspracticallyunlimitedaccesstoarangeofdifferentrenewableenergysourcesincludinghighinsolationrates,largeamountsofavailableland,extensivetechnicalexpertiseandbusinessframeworksinenergyindustries,andacomparativelystableregulatoryandinvestmentenvironment.Australiaisthuswellplacedtosupplyalargeshareofitsdomesticenergyusefromrenewableenergysources.

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Agloballow-carboneconomycouldbringnewandlarge-scalecomparativeadvantageforAustralia.First,Australiacouldbeaproducerofenergy-intensivecommoditiesusingzero-emissionselectricity(Denisetal2014).Thiscouldinclude,forexample,aluminium,whichrequireslargeamountsofelectricitytoproduce.GiventhatthemajorityofAustralia’sheavyindustryinstallationsarerelativelyold,thiswouldmeanbuildingupanewstockofindustrialinfrastructure.

Second,Australiacouldbeanexporterofrenewableenergy,producingfuelssuchashydrogenormethanolinAustraliausingrenewableenergyandexportingthesetothedenselypopulatedareasofEastAsia(Drew2015).Producingandshippingsyntheticrenewablefuelswoulddrawonabroadlysimilarengineeringbaseandindustrialstructuresasexistingindustriessuchasnaturalgasproductionandprocessing.

ThepotentialforAustraliaasalargeproducerofzero-carbonenergyisobvious;however,theprospectsforbuildingexportindustriesbasedonthatpotentialrequiremuchfurtherinvestigation.Researchisneededinto:thetechnologicalbasisforproducingexportablerenewableenergyandenergy-intensiveproductsusingrenewableenergy;whetherandtowhatextentAustraliahasacomparativeeconomicadvantageandcostadvantagethatwouldwarrantproductionforexport;towhatextentsuchenergyandenergy-intensiveproductscouldfitinwithChina’sfutureenergyandindustrialsystem;andwhatpolicyandregulatoryframeworkswouldbeneededtofacilitatethedevelopmentofthesetechnologiesandindustries.

Thepotentialbenefitsofarenewables-basedenergyexportindustryforAustraliainadecarbonisedworldeconomyareverylarge,asarethepotentialbenefitstoChinaofhavingasecuresourceofsuchlow-carbonenergyandenergyintensiveproductstosupplementdomesticproduction.

A new agenda for cooperation

AustraliaandChinacanbenefitbybroadeningandextendingthebilateraldialogueandcollaborationonclimatechangemeasuresandthetransitionofenergysystems.

Afirstplankistointensifygovernment-to-governmentcooperationonclimatechangeissues.TheParisAgreementhaspreparedthegroundforanewphaseofinternationalcollaborationsonclimatechange.AustraliaandChina’sobjectivesonclimatechangearecompatibleandcomplementary.Thetwocountriescanbuildonavarietyofforumsfordialogueattheofficialandpoliticallevel,includingtheministerial-levelconsultationsonclimatechangethathavetakenplaceonseveraloccasionsandtheAustralia–ChinaClimateChangeForumsheldattheANUandtheUNSWinrecentyears.

Second,thetwocountriesshouldstrivetofacilitatebusinessandinvestmentrelationshipsintheareasofclimatechangeandlow-carbonenergy.Thismayinvolvereducingremainingregulatoryhurdlestoinvestmentinnewenergytechnologies,especiallyforChineseinvestmentinAustralia.Thetwocountriescanalsostrivetoenhanceknowledgeexchangeatthebusinesslevel.Thereisalsoacriticalopportunitytobetterinvolvethefinancialsectorcooperativelyacrossbothcountriesthrough‘greenfinance’.AspartofabroaderfocusofintegratingfinancialservicesandfinancialflowsbetweenAustraliaandChina(discussedindetailinChapter5)bothcountriesshouldexplorehowcooperationonfinancialproductsandfinancialservicescanbetailoredtoimproveaccesstofinanceforgreenprojects,suchasinvestmentinrenewableenergyandlow-carbontechnologies.

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Third,experiencehasshownthatactivesupportbygovernmentsforresearchinenergytechnologydevelopmentcanbringsubstantialbenefitsinacceleratingtechnologicalchange.Chinahasprovidedsubstantialsupportinmanydifferentformstothedeploymentofrenewableaswellasnuclearenergy,andadvancedenergy-savingtechnologies.InAustralia,therearenewgovernmentinstitutionsthathaveprovedsuccessfulinsupportingthedevelopmentanddeploymentofcleanenergy,especiallytheAustralianRenewableEnergyAgency(ARENA)andtheCleanEnergyFinanceCorporation(CEFC).ThesemodelsmaybeattractiveforChinaalso.Themodelofco-financingcommercialinvestmentsincuttingedgecleanenergyviaagovernment-financedbodyliketheCEFCmayprovesuccessfulinstimulatinginvestmentinnewenergyoptionsintheAsianregion.OptionstolinkthistooperationsoftheAIIBmaybeworthinvestigating.

Finally,collaborationshouldbefosteredbetweenresearchorganisationsanduniversitiesinAustraliaandChina,intheformofjointinitiativesonscientificresearchandengineeringaswellaseconomicandregulatoryframeworks.PromisingmodelsexistsuchastheAustralia–ChinaResearchProgramonClimatePolicy,whichhasbroughttogetherresearchersfromseveralleadingAustralianandChineseuniversitiestoworkonspecificjointresearchprojects.Theprogramhasoperatedatrelativelysmallscale,convenedattheANUandwithparticularsupportatTsinghuaUniversityinChina.Itcouldbereadilyexpandedtocoverabroaderrangeofissuesandawiderrangeofresearchinstitutions,andscaleduptoanationalinitiativeinbothcountries.

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This text is taken from Partnership for Change: Australia–China Joint Economic Report, by East Asian Bureau of Economic Research and China

Center for International Economic Exchanges, published 2016 by ANU Press, The Australian National University, Canberra, Australia.

collaboration in the global systempress-files.anu.edu.au/downloads/press/n2068/pdf/ch08.pdf ·...

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