Will the real Glenn Stevens please stand up?

The Reserve Bank: waiting for tapering. AAP

Quick quiz: which southern hemisphere central bank governor from a large island continent said this in June 2012?

“There are big benefits to us as consumers from the high currency…We shouldn’t wish too quickly for a lower exchange rate…The (high) exchange rate is one of the devices that is imparting to us the higher wealth that the mining boom brings…That’s how all of us here are actually taking some of that higher wealth.”

Contrast this with his December 18, 2013 statement:

“The Bank has described the exchange rate as ‘uncomfortably high’, and suggested that balanced growth in the economy would probably require a lower exchange rate.”

Well, which is it, Glenn? Are you spreading the wealth or actively diminishing it?

For a month now, Governor Stevens and other RBA members have been verballing the Oz dollar in an attempt to spook markets into driving it down. A bit like a football coach who thinks he can win a match just with the sound of his own voice.

Now, I’m all in favour of handing out bonkers bonuses to people who wear striped shirts, braces and drive Porsche 911s. But I don’t think a central bank governor should be giving speculators a free kick from point-blank range. Especially by telegraphing through a loudhailer that he’s not cutting interest rates further. And that the RBA may intervene to drive the $AUD exchange rate down further.

So now hedge funds have a nice little insight into the deepest policy recesses of Martin Place and can take Australian dollar positions in the secure knowledge that the Bank cannot move on rates until its next meeting in February 2014.

This week, the US Fed may have saved the Australian dollar’s bacon, announcing it will taper its bond purchases, which have injected $85 billion per month into the US economy under its third quantitative easing programme (QE3).

The strength of the Australian dollar is also due to its safe-haven status, as investors fled to strong currencies and gold in the wake of the GFC.

But how did we get into this position? Why do we have high interest rates by global standards and a strong dollar, coupled with a weak manufacturing export sector?

The crux of the problem is this: the RBA and successive federal governments have - mostly - been running policies in direct contravention of each other.

Put on your floaties

It was 30 years ago today (almost) that Sgt. Keating taught the dollar to float. That was the day Australia gave up its monetary sovereignty to often-fickle international currency speculators.

Before December 1983, the Secretary of the Treasury, the Deputy Secretary from the Department of Prime Minister and Cabinet and the RBA governor met Monday-Friday, before 9.00am (when the markets opened), to set the narrow bands of adjustment within which the Bank would defend the Australian dollar exchange rate, buying or selling currencies, as required.

Relative parity (i.e., roughly 1:1) with the US dollar – the most important currency – was the general objective. This was known as a fixed-exchange rate regime (although that descriptor was not particularly accurate). China did roughly the same thing with the US dollar until 2005, ensuring the yuan RMB did not appreciate excessively against the currency of its biggest export market. So: $US down; yuan down.

This worked just fine. Until Australia’s share of world trade halved between 1973 and 1983. This was due largely to the loss of the UK and Commonwealth markets as Britain entered the EU in 1973.

The 1983 float meant Australian joined the rest of the world – a decade late. Nixon’s US dollar float in 1971 was quickly followed by the pound sterling (1971); the deutschmark (for 5 minutes); and the yen (1972). Once Australia floated, the New Zealand dollar was forced to join the 20th century as well. In 1985.

Why float?

The problem with a fixed exchange rate was that the RBA’s hard-earned was being handed to currency speculators on a silver platter. Every time speculators sold the dollar down, the RBA would buy it back again, at a fractionally higher rate. This put millions into the pockets of speculators. And Porsche’s pockets as well.

Presumably, the RBA governor and the bureaucrats also got sick of the sight of each other every morning at 8.00am. Like being married, really.

Mission: Impossible Trinity

One of the immutable laws of economics is that you cannot have all three of the following:

  1. A fixed exchange rate.
  2. An independent central bank setting monetary policy autonomously.
  3. Capital mobility.

This is known, variously, as the Mundell-Fleming model, the ‘impossible trinity’ or the ‘trilemma’.

Put simply, it means a country can only have two of these things at any one time. Governments are forced to pick two options, resulting in trade-offs and compromises.

In 1983, Australia abandoned fixed exchange rates for a floating dollar. Keating boasted he had the RBA “in his pocket”, which meant that Treasury was still calling a lot of the shots on monetary policy. The Bank was not granted formal independence by the ALP; it was left to LNP Treasurer Peter Costello to give the RBA formal independence. By way of gratitude, the Bank raised interest rates during the 2007 election, damaging Howard and Costello significantly.

Interestingly, in his Fightback package in 1991–93, LNP leader, Dr. John Hewson, lifted the Bundesbank’s model and sought central bank independence and statutory inflation-rate targeting set at 2% per annum. The RBA still has an inflation target, but it’s not statutory.

The perils of intervention

The RBA board: does the left hand know what the right hand is doing? RBA

Australia undertook a ‘managed float’ in 1983. This means that the RBA retains the option of exchange-rate intervention when the $AUD rate and the economy are in disequilibrium.

Like now, for instance.

By contrast, a ‘dirty float’ is akin to currency manipulation. Central banks, often in collusion with domestic banks as proxies, deliberately distort exchange-rates by, say, aggressively selling down their own currencies to force rapid depreciation.

The biggest intervention was in 1992/93. The most recent was in October-November 2008. On both those occasions, the RBA intervened to save the dollar from a downward spiral. The 2008 intervention amounted to a piddling 0.47% share of average daily turnover.

Did it work? No.

In the first 10 days of October 2008, the dollar crashed from $US0.796 to $US0.655. By 1 December (i.e., after RBA intervention), the rate was $US0.648.

So the RBA spent $AUD3.75 billion in two months. With zero effect.

One more thing: in November-December and February 2009, the Bank cut the cash rate aggressively by 2.75%. Why did the bank shore up the exchange rate while loosening monetary policy? Did the Board not know what the forex desk was doing?

Why was the RBA running two concurrent, inherently contradictory policies?

The RBA claimed it was to inject liquidity into the system. It had also intervened in 2007, again on the grounds of liquidity.

But global credit markets were frozen. So why bother intervening with a paltry few billion? You’re either serious about providing liquidity or you’re not. The US Fed and the ECB were serious: they implemented virtually-unprecedented monetary policies, domestic rescues and wide-ranging financial market stimulus.

Why Governor Glenn can’t intervene

Governor Stevens: the reluctant interventionist. RBA

In his recent book, Dog Days, Ross Garnaut argues that we need to get the exchange rate down to bridge the productivity gap and, to accomplish this, there’s room for interest rate cuts.

Although I disagree with Garnaut – you can’t cheat your way to genuine competitiveness by undertaking manipulative currency depreciations – Stevens and Garnaut also differ on this point.

The RBA is clearly not going to take the ‘nuclear option’: maintaining the Federal funds rate at close to zero per cent for 20 consecutive quarters has been the ‘exhorbitant privilege’ of the US Federal Reserve, with the advantage of controlling the world’s principal reserve currency.

The European Central Bank has also aped this strategy with progressive cuts to the fixed rate, with euro market lending always several percentage points lower than the RBA. The ECB cut even further as recently as November, dropping the rate to an historically-low 0.25%.

The Bank of Japan sure knows how to make a cheap yen: set interest rates to zero. Yes – zero. It started in 1999. And here’s a recent chart so you can see what a straight line looks like.

Collaborative policy

Spend, spend, spend: the stimulus injected $42 billion into the economy. Krug6

One of the few recent examples of – brief – coordination between the Commonwealth and RBA was during the 2008 GFC. Rudd and the RBA combined to inject a massive dose of fiscal and monetary stimulus, respectively, commencing in the last quarter of 2008. Between September 2008 and February 2009, the RBA almost halved the cash rate from 7.00% to 3.25%.

In February 2009, Rudd delivered up to $950 in cash per person in a $42 billion stimulus package.

Compare that with the RBA’s cash rate and the exchange rate in early 2008. In March 2008, the Bank increased interest rates by 25 basis points to 7.25%. By mid April, the Australian dollar was valued at over $US0.94.

But in the wake of the October 2008 rate cut, the dollar fell 4 cents in late October, crashing to $US0.61.

From convergence to divergence

But from October 2009, the Bank began increasing rates and did not cut again until November 2011. At the same time, Commonwealth fiscal outlays in 2009/10 hit 26% of GDP for the first time since 1994.

That was the last time federal fiscal policy and Bank monetary policy coincided. From 2010/11, the ALP cut spending significantly, under increasing pressure from the LNP opposition.

The outcome? A roaring Australian dollar appreciation.

To summarise: the RBA got it wrong on at least three occcasions. First, Bernie Fraser’s maintenance of very high interest rates in the late 1980s, helping induce the 1990s recession; second, the RBA’s monetary policy in 2007/08 saw rates continue to rise through early 2008, even though the implications of US sub-prime crisis were clear by mid-2007; and, third, the Bank’s rate increases in 2009–10, even as the Commonwealth stimulus was pulled back, served to push the dollar beyond parity in 2011.

The consequences

Don’t fall asleep. Pay attention at the back there, Stevens. What were the consequences of these divergent two-track policies?

  1. Fiscal spending cuts: this withdraws capital from the economy. Oz dollar up? Check.
  2. RBA increases cash rate and holds. Oz dollar up? Check.
  3. Trade surplus blows out to deficit in 2012 as we board 17-hour Qantas flights to LA. Oz dollar up? Check.

On point (3), remember how the RBA didn’t cut rates again until November 2011? They only cut because the $AUD blew out to $US1.0199 in mid October.

It took the RBA almost two full years before it cut the cash rate to 2.5%. Too slow. Too late.

The $AUD did not drop below $US1.00 until May 2013. Not-entirely-coincidentally, that was the month Ford announced the closure of its local manufacturing operations.

Why currency manipulation won’t fix everything

We should all be concerned that the RBA appears to have no long-term strategy to address the fundamental disequilibria in the Australian economy: the profitable resources sector versus the uncompetitive manufacturing sector; the gap between the demands of property investors versus the issue of housing affordability; the need for savers to derive a reasonable return on their deposits; and the maintenance of a high level of consumption demanded by the retail sector.

Instead, the assumption of all federal governments since 1983 has been that “the exchange rate will fix everything.” It hasn’t. And it won’t. Depreciated exchange rates merely disguise factor productivity underperformance; they do not resolve what are structural issues in the Australian economy.

No guru. No method. No teacher.

Commonwealth governments should also shoulder much of the blame for the unhappy patchwork quilt they have assembled over the last 30 years. The manufacturing centres of Victoria and South Australia risk becoming rust belts as manufacturing is ignored in favour of resource extraction in Western Australia and Queensland.

As the mining boom slows and the Commonwealth derives decreased revenues from hollowed-out manufacturing states – not to mention the pressures on Australia’s food growers – the budget deficit is likely to expand, rather than shrink, unless the Abbott government takes drastic measures to reduce the structural deficit (or it borrows more).

Neither interest rate cuts nor exchange-rate depreciation will do much to alter these unpleasant realities. Both the Commonwealth and the RBA are constricted in terms of their options. Drastic cuts to middle-class welfare (such as reforming negative gearing) are politically unpalatable to any government that seeks re-election. Equally wage cuts, pauses or freezes to increase labour productivity (in the form of a Work Choices 2.0) are politically improbable. Work Choices lost Howard the 2007 election; Abbott will not be crossing that Rubicon anytime soon.

Equally, no RBA board will sanction action in the form of either drastic exchange-rate intervention, or extreme monetary policy measures to force down the dollar. The RBA has never been a policy entrepreneur. And it’s not about to start now.

Let’s conclude with a bit of mischievous scuttlebutt about why RBA officials might have a vested interest in maintaining the investment property market Ponzi scheme (in case you missed it in 2010):

“Interestingly, it appears that Reserve Bank officials are the keenest investors in rental properties…Of the 200 occupations classified by the Australian Tax Office, the employees at the Reserve Bank topped the list with respect to their investment property exposure.”

Ah, bankers. They never die. They just lose interest.

The five worst decisions ever made by the European Union

The European Union. Love it? Loathe it? All of the above?

The Wall Street Journal writes that Euro chic is back in fashion. EU chic — to be precise.

The 12 gold stars that form the EU flag are not exactly selling clothing lines like hotcakes. But a Brussels PR firm plans to introduce T-shirts and a whole range of Euro clothing extolling historical EU figures, like Robert Schuman, the French foreign minister in 1950, who was one of the “fathers” of EU integration.

How über-cool. This really captures the zeitgeist. A certain je ne sais WTF croix. Like, yo. Dudette.

PR firms — well, they’re paid to lie. But history tells a very different (and rather less auspicious) story of European integration.

So I thought we’d focus upon Five Epic EU Fails. Drum roll, Maestro. The envelope, please. The nominations are …

5. Going bananas

So you thought that tale about the EU regulating the shape of bananas was an urban legend? Think again.

The 1994 regulation (you can read the full enchilada here) stated that bananas could have “slight defects in shape”. This gave rise to the “bendy banana” legend, as the EU Commission regulation referred to “abnormal curvature”.

Moving from crescent-shaped fruit to cucumbers, the 1998 rule (Regulation 1677/1988) on the concombre stated that they must be “well-shaped and practically straight (maximum height of the arc 10mm per 10cm of length)”.

In 2008, the Commission tacitly recognised how stringent food regulations were becoming, as shops were apparently refusing to stock up to 20% of food and vegetables, because they didn’t meet EU regulations. Consequently, the Commission noted that it was wasteful to simply throw the food away. Sanity prevails.

The EU’s food regulations were bananas. robin_24

4. The farmers are revolting

Staying with foodstuffs, the three favourite swear words of the Australian farmer are Common - Agricultural - Policy (CAP). Established in 1962, this complex mechanism of farm production supports and export subsidies was implemented fully in 1967–68. By 1969, the CAP budget blew out 800%.

In fairness, the CAP is about ensuring that strategic food supplies are maintained and raising farm incomes. In practice, it led to massive over-production: wine lakes and butter mountains. It made food more expensive, imports prohibitive and ruined crop production in the Third World, as excess EU produce was dumped on developing countries. It also produced billions of dollars' worth of US Farm Bills as Washington responded with its own subsidies. Meanwhile, the long-suffering, efficient Australian farmer got crushed in the middle of the CAP sandwich. Go figure.

Oh yes, and some wag once worked out that if you sent every single cow in Europe on a first-class around-the-world air trip, it would still cost less than subsidising the cattle under the CAP. Moo to you too.


Exchange-Rate Mechanism II was part of Phase II of the Euro’s introduction. Following the horrendous currency crashes of 1992 and 1993, Italy’s lira collapsed and withdrew from the basket of currencies that formed the embryonic Eurozone. Under “ERM I”, the lira could appreciate or depreciate a maximum of 6% within the currency’s band of adjustment.

ERM II, by contrast, was introduced in 1995 to accommodate weak currencies, so they could (re)join the transition to the euro, scheduled for 1999. ERM II introduced a much wider band of adjustment for currencies: +/- 15%. A 30% band, in effect, was close to a free float. It worked. The lira joined ERM II in 1996. The rest is, er, history. Well, the Italian economy is, anyway.

2. Britain’s entry into the EC (1973)

Britain had missed the boat. Twice. In 1951, the British were invited to join the European Coal and Steel Community. They declined. In 1955-56, at the Messina Conference, London could have opted to sign up for the 1957 Rome Treaty, which established the European Community. Harold Macmillan’s government said “no” once more. But Harold Mac was to regret this, as the UK economy declined to such an extent that he launched Britain’s first bid for membership in 1961.

Without consulting his partners, the French President, Charles de Gaulle, called a press conference in January 1963 and famously said “non.” Britain was “not ready” for EC membership.

Le grand “non”: Charles de Gaulle declines EC membership to Britain. ThomasThomas

In 1967, Britain, this time under Harold Wilson, tried again. De Gaulle exercised a veto once again.

Finally, in 1970-72, with de Gaulle dead and gone, Edward Heath’s (does anyone remember him?) government secured UK membership, but at a price: Macmillan and Wilson had demanded associate membership of the EC, or at least special trade access privileges, for the British Commonwealth.

Not Heath. Desperately, he gave up all claims and left the Commonwealth out in the cold. In Australia, this was known as the “British betrayal”. Britain finally entered the EC on 1 January, 1973. The EU has been regretting this ever since.

Fun fact: Princeton’s Professor Andrew Moravcsik in his book The Choice for Europe (1998) found in his archival research that de Gaulle named-checked Australia among his private reasons for vetoing British EC membership in 1963. Australia’s farm sector, de Gaulle opined, was so deadly efficient it could ruin the nascent Common Agricultural Policy, if Britain were permitted to bring the Commonwealth in.

So it’s all our fault.

I suppose a Brussels PR firm could put Ted Heath’s beaming visage on a hoodie. But I bet it would sell about as well as a Paris 2012 Olympics T-shirt.

And the winner is…

1. Greece’s admission to the Eurozone

Beware of Greeks bearing false national accounts. Athens didn’t make the cut in 1999, when the original Eurozone was established with 11 members.

But some creative accounting, most likely recommended by Goldman Sachs, led Greece to understate its fiscal deficit in 1999, the reference year for its eventual admission in 2001. The revisions helpfully left some defence expenditures accounted for inaccurately, while the EU Commission adopted a “don’t-ask-don’t-tell” policy by failing to question either the methodology or the data set provided by the government.

It gets worse, of course. In 2004, the new government at least revealed the earlier anomaly. The EU Commission admonished Greece. Not for the cover-up, but for being too honest. Fortunately, financial markets, who were busily watching Iraq and the Brent crude index hit stratospheric heights, looked askance.

But wait — there’s more. In 2009, the Greek government announced a revision to the 2008 fiscal deficit figure, raising it from 5% to 5.6%.

Then they decided the budget deficit in 2009 would not be 3.7% after all. No. Or Oxi, if you prefer. It would be 12.5%.


The China Choice: why America needs to share power

Hugh White’s new book says a concert with Asia mean peace in our time. But should the US retreat in the face of China? AAP

“I’d love to have the German army in Australia,” Hugh White said wistfully.

The date was July 2004. The place was the bar on the fourth floor at the Department of International Relations, London School of Economics and Political Science, Houghton Street.

I was intrigued. “Why, Hugh?” I asked.

“250,000 troops,” White mused. “We could do a lot with a quarter of a million troops.”

“Not with 250,000 German ones,” I countered. “This is not your grand-daddy’s German army. Only 5,000 are combat-ready and the rest are polishing the wheels on tanks. It’s not like you can just drop them in a Vietnamese jungle. They’d die.”

“I’d love to write a book,” White beamed. “I really want to write a book.”

Well, he has. And he did.

At the risk of revealing a private conversation (but I doubt it; there were about 24 people present), the exchange above gives us at least some insight into the mind that produced The China Choice: Why America Should Share Power.

The China Choice’s thesis is straightforward: rather than engage in competition and conflict with China, Washington should share power with Beijing by forming a “Concert of Asia”, comprising the major powers of the Asia-Pacific.

White’s book expands upon the thesis he propounded in 2010. In an earlier article in The Conversation, I canvassed the debates White raised in his original Quarterly Essay.

Beijing: partner or competitor?

During the 2000 US presidential election, Al Gore and Bill Clinton campaigned on the theme of China as a “strategic partner” of the US. By contrast, George W. Bush argued that China could never be a partner of Washington; it would always be a “strategic competitor”.

As Bush’s future National Security Advisor and Secretary of State Condoleezza Rice asserted in Foreign Affairs in 2000:

“China is not a ‘status quo’ power but one that would like to alter Asia’s balance of power in its own favour. That alone makes it a strategic competitor, not the ‘strategic partner’ the Clinton administration once called it.”

Despite this inauspicious start, US-China relations under Bush were stable, following a terse exchange over the Hainan Island affair. The central point of friction between the Beijing and Washington during the Bush administration remained Taiwan.

Since 2003, the PRC leadership under Hu Jintao has vacillated between closer integration and hard-line opposition to any semblance of independence from Taipei. Further complicating the situation are occasional faux pas, such as Major-General Zhu Chenghu’s threat to strike “hundreds of American cities” with nuclear weapons, in the event of Sino-US conflict over Taiwan.

The debate around the relationship US and China’s - partner or rival? - is likely to tested again, this time by Taiwan AAP

The US foreign policy debate on China-as-partner-or-rival was given a provocative twist in 2005 in Robert Kaplan’s ‘How We Would Fight China’. Kaplan, who writes an approving blurb for White’s book, is rather more hawkish than his antipodean colleague, although it is clear that White was influenced deeply by Kaplan’s ideas.

Taiwan is merely one of the strategic issues in Asia with which policy makers need grapple. As one leading US realist, John Mearsheimer, argued, China will attempt to push the US out of Asia. But it will fail, Mearsheimer asserts. How does White envisage the outcome in an Asia-Pacific where a declining US persisted in its military aggrandisement in the region? What if the future Chinese leadership becomes more hawkish and attempts to transform the South China Sea into a Chinese lake?

We won’t need to wait long to find out. In the last six weeks, China and the Philippines have come close to confrontation over the Scarborough Shoal in the South China Sea (SCS); the July ASEAN summit in Phnom Penh saw Southeast Asian states in furious disagreement over rival maritime claims in the SCS, even as Beijing sent a thinly-veiled warning to Manila to back off. The Philippines wants the dispute arbitrated by the International Tribunal on the Law of the Sea (ITLOS).

In response, a Chinese Foreign Ministry spokesperson said, “Isn’t it a weird thing in international affairs to submit a sovereign country’s territory to international arbitration? What a chaos the world will be in if this happens?"

Yes, quite weird. The rule of law, and an independent judiciary in the form of the International Tribunal for the Law of the Sea (ITLOS), under the auspices of the UN taking an impartial decision within the ambit of a multilateral treaty is very weird indeed. If you’re Beijing. If you believe in “sharing power” with Beijing.

If you’re Hugh White.

China has ratified the Third UN Convention on the Law of the Sea (UNCLOS III). The US hasn’t (to save you looking it up). However, like the NPT, UNCLOS III is merely another convention that Beijing signs without the slightest intention of adherence. In 2001, China also joined the World Trade Organisation and duly ratified its attendant Trade in Intellectual Property Services (TRIPS) agreement. Yet, anyone who has ever visited China knows of the sheer scale of knock-offs, replicas, fakes and blatant product piracy. Beijing makes sporadic, insincere attempts at enforcing IP rights; but these efforts fool no one.

Readers will find none of this in The China Choice. Nevertheless, White feels comfortable enough to advocate “concert diplomacy” with Beijing. Nor will you find any mention of cyber-espionage. In April this year, the US’s former counter-terrorism chief, Richard Clarke, warned, in a grossly under-reported story: “Every major company in the United States has already been penetrated by China.” For Clark, this represents not only a commercial threat to the US economy, but also a military threat.

Labor pains

In his review of The China Choice, Paul Keating wrote, somewhat oddly, “I have long held the view that the future of Asian stability cannot be cast by a non-Asian power.”

Paul Keating: believes non-Asian countries cannot cas the future of Asia. AAP

Why is Asia different from Europe or the Middle East? The answer: it isn’t. None of these regions possesses a regional state with the capability to ensure either security or stability. In any case, Beijing has demonstrated absolutely no interest in “Asian security”. Beijing describes itself as a “participant” in the ASEAN Regional Forum (ARF) process, not a ‘member’, thus avoiding any binding regional security commitments.

Consequently, anyone who argues that the world’s biggest non-democracy is interested in “Asian security”, as that country steadily continues to militarize the South China Sea, has an exceptionally perverse view of “Asian security”.

The ALP has never been entirely comfortable with the US alliance. Curtin called upon the Americans in desperation only after it was clear that Churchill had abandoned Australia and the Japanese invasion threat was real; Evatt opposed Washington’s plans to revive the Japanese economy after 1947; Cairns led Labor’s anti-Vietnam war crusade; Whitlam labelled Nixon’s bombing of Cambodia “criminal”, and called for the disbanding of SEATO – the US’s first attempt to contain China. In 1985, the ALP Left compelled Hawke to perform a volte-face on the MX missile tests.

Keating, while in office, kept his powder dry, although he and Hawke attempted to establish APEC without US participation (the Japanese refused to countenance this). But Keating emptied both barrels into Obama following the US president’s visit in November 2011, arguing that Obama should not have been permitted to deliver an anti-China speech in Federal Parliament. Simon Crean, Mark Latham and Kim Beazley lambasted the US publicly on the Iraq invasion (albeit from the safe distance of opposition) and pledged Australian withdrawal.

Kevin Rudd, like Keating, attempted to dilute US power in the Asia-Pacific, proposing a concert of powers, comprising China, the US, Japan, Indonesia and India, among others, under the rubric of an “Asia-Pacific Community”. However, no leaders in Asia or North America treated Rudd’s initiative with any seriousness. Nevertheless, Rudd’s views have found some resonance in White’s book, as White himself proposes a “concert of great powers”.

Two generations of Australian politicians and policy makers have proven perfectly content to accommodate China, as its wealth pours into Treasury’s coffers. Consequently, White’s book is likely to become the bible of the Beijing Lobby; its apostles traverse the political spectrum of China apologists and appeasers, including, but not limited to, Paul Keating, Bob Hawke, Malcolm Turnbull, Kevin Rudd, Ross Garnaut and Gareth Evans.

But putting aside this coterie, one is left wondering at whom White’s book is directed. The Australian defence and foreign policy establishments? The Pentagon? The US State Department? Surely not the Beijing lobby of former Australian prime ministers, foreign ministers and sundry acolytes? The slow boat to China they boarded sailed long ago.

Beijing describes itself as a participant in the ASEAN Regional Forum, not a member, avoiding binding regional security commitments. AAP

The Concert dances… but it isn’t going anywhere*

Asia does not need great-power concerts which, White admits, are difficult to construct and potentially unstable once they are in effect. And, ominously, White further admits that a sphere of influence would need to be conceded to China: “Obviously not over the entire East Asian region… China might be conceded a sphere of influence – in Indochina, for example.” (p. 150). This may be news to Hanoi.

Spheres of influence are what landed Churchill, Roosevelt and Truman in such hot water. The notorious “percentages agreement”, negotiated by an inebriated Churchill over several hours with Stalin, allowed Moscow a free hand in virtually all of Eastern Europe; it forced Truman to adopt a policy of unlimited containment from 1948, embroiling Washington in wars, not only in Korea, but also, ultimately, in Vietnam. It left millions of Poles, Hungarians, Germans, Romanians, Bulgarians and Czechoslovaks under the yoke of Soviet imperialism for 40 years. And it left all of Europe confronting the threat of nuclear annihilation until 1989.

Instead of spheres of influence, what Asia needs is pluri-lateral commitments from the region’s major powers to limit their conventional and nuclear forces. This does not mean conceding China a “sphere of influence” where it can simply throw its weight around in Asia to the detriment of its neighbours; it means sound, negotiated limits upon the weaponization of the Asia-Pacific.

According to White’s strategic conspectus, this particular concert would comprise a “party of four” (p. 144): the US, China, India and Japan. The latter two countries are included – reluctantly. Meanwhile, Indonesia has potential concert status, but not until mid-century. White decides Russia is out. This might be news to Moscow; after all, where would Beijing and New Delhi – the world’s biggest arms importers – get their weapons from then?

It may well be that White has been seduced by the Pax Britannica – the high-tide mark of great-power concert diplomacy under the auspices of the Concert of Europe that shaped the 1815–1914 period (which the author cites approvingly on pp. 133–7). However, the circumstances were decidedly different. Britain was the balancing power that often determined whether or not a conflict took place; and, if it did, it played a decisive role (the Crimean conflict; the Opium Wars).

But White’s rose-coloured and fleeting appraisal of the Concert ignores the fact that British diplomats made a catastrophic error by allowing Bismarck’s emergent Prussia to fight three decisive wars (1864–70), giving the embryonic German empire mastery over continental Europe. By the 1890s, Bismarck was gone, and Britain was mired in a deadly, unlimited arms race with Germany; in 1914, the guns of August compelled Britain to fight beside France and Russia to counter the German threat once and for all.

Why is Asia different from Europe or the Middle East? The answer: it isn’t. AAP

Trust – but verify

White cites Bill Clinton’s declaration of a “strategic partnership” with Beijing approvingly; yet, he fails to note that it was Clinton who revitalised the US-Japan strategic partnership, so clearly directed at containing China, under the rubric of the Nye Plan. Clinton also signed National Missile Defence (NMD) – and its sibling, Theatre Missile Defence – into existence. Clinton left Bush to activate NMD, opening technologies such as Aegis to the Japanese and Australian navies. Subsequently, both Bush and Obama left open the possibility of supplying Taiwan with Aegis air-sea warfare capabilities as a means of dissuading Beijing from increasing its force projection across the Taiwan Strait.

Yet, ‘strategic ambiguity’ over Taiwan – a concept that invites uncertainty as to the US’s reactions and acts as a deterrent to both Beijing and Taipei – is dismissed summarily by White. Instead, White proposes a power-sharing arrangement:

“Washington has long claimed and exercised a unique military posture in Asia … This would have to change under a Concert of Asia. Treating China as an equal would mean accepting that America would not seek to impose limits on China’s military capability that it would not accept on its own.” (p. 151).

Why should Washington accept this? Why should the US retreat from its preponderant position in the face of growing Chinese military power? Instead, why not work to demilitarise Asia via sensible, verifiable disarmament measures, placing ceilings upon weapons stockpiles and deployments?

This was at the crux of the Reagan-Gorbachev disarmament initiatives. In December 1987, the US and USSR signed the Intermediate Nuclear Forces (INF) Treaty, which eliminated 9% of the world’s nuclear missiles (not warheads, mind) and removed short and medium-range missiles from the East and West European theatres.

The Soviets gave up more than twice as many missiles as the US. Similarly, the Conventional Forces Europe (CFE) Treaty (1990) saw Moscow surrender voluntarily the better than 2:1 advantage that the Warsaw Pact held over NATO in troops and armour.

In both cases, admittedly, the US “negotiated from strength”, as Reagan put it; throughout 1981–86, Washington spent $US2 trillion on rearmament and became the world’s largest debtor; by 1991, the USSR had collapsed. Nevertheless, in the interim, Reagan and Gorbachev concluded major arms reductions treaties that still define Russo-American strategic relations; these treaties were concluded bilaterally without the need for ‘concert diplomacy’. Instead, the watchwords of the new détente in Soviet-US relations were “trust – but verify.”

White says little about arms reductions; the chapter devoted to the military balance merely extemporises upon the implausibility of success of the Pentagon’s Air-Sea Battle concept and the emerging strategic stalemate between Sino-US maritime forces.

Bilateral and plurilateral arms reduction initiatives are more likely to come to fruition when the US directs its diplomatic efforts towards verifiable disarmament, as Moscow and Washington’s efforts since 1987 demonstrate. Verifiable disarmament has already proven effective in the case of India, which was brought within the ambit of a nuclear materials code of conduct by the US-India Civil Nuclear Agreement (2006), after decades of failed efforts to persuade New Delhi to adhere to the 1968 Nuclear Non-Proliferation Treaty (NPT).

By contrast, NPT signatory China has assisted Pakistan (and, possibly, Iran) by proliferating nuclear technologies; protected Tehran from sanctions; shielded and supplied nuclear North Korea; vetoed Security Council efforts to sanction Assad’s regime in Syria; and kept supplying Mugabe’s Zimbabwe with weapons until 2008.

Given that China’s major strategic successes have been assisting the nuclear weaponisation of both Pakistan and North Korea, one assumes that a veteran of security policy like White would not be so placid, nor so benign, about the prospect of granting Beijing anything resembling a regional sphere of influence on the basis of its track record.

China’s major strategic successes have been assisting the nuclear weaponisation of both Pakistan and North Korea. AAP

The fact that Iran has Shahab missiles, courtesy of China, means Tehran also has the capability to launch strikes against any country in the Middle East. Moreover, as defence analyst Mark Schneider notes, “Even a thousand weapons may underestimate the scope of the Chinese nuclear force 10 or 20 years from now.” As Schneider also asserts, Beijing is reportedly working upon multiple independently-targeted re-entry vehicles (MIRVs, which permit 10-12 nuclear warheads on a single missile). Yet, this same China is the country with which White proposes the US “share power”?

This is akin to rewarding bad behaviour. Within the type of concert system that White proposes, a China that had already been granted a sphere of influence would have little incentive to move towards disarmament, as its extant security policies have already delivered Beijing advantages at no cost. Instead, China could deploy the threat of further weaponisation as a means of obtaining increased strategic advantages to the detriment of both the US and its allies in the Asia-Pacific region. Frankly, this is the type of thinking that leads to dangerous, unpredictable arms races.

Although both the Soviets and the Americans committed grave diplomatic and military blunders throughout the Cold War, they nevertheless reached the same, correct conclusion: it was imperative to retreat from arms races with no ceilings. This became the defining logic of the Strategic Arms Limitation Treaties in 1972 and 1979, through the INF and CFE Treaties, to the Strategic Arms Limitations Treaties (I-III) and New START (2010).

The China Choice lacks the intellectual perspicacity and, indeed, the literary panache that renders books like Robert Kagan’s Of Paradise and Power such compulsive reading. White is right to argue that Australia cannot have its cake and hope that the current US-China status quo will persist indefinitely; but the vigilant do not invite vampires inside their houses either.

White believes a Concert of Asia may mean peace in our time. The more sober Mark Schneider thinks not: “No other country has increased its military spending by double digits for twenty years with the intent of a ‘peaceful rise’”.

*The Comte de Ligne said this of the Congress of Vienna in 1814, the forerunner of the Concert of Europe, in case you’re wondering.