CEO of the US Studies Centre, Professor Geoffrey Garrett, addressed the Australian Institute of International Affairs today. He spoke about ‘Obama’s Foreign Policy: One Year On’.

Transcript:

When I come back to Canberra, my home town, I have feelings of many sorts. But when I come to this building, I remember a very bumpy cricket ground near here called York Park where I spent a lot of time when I was a small boy and an old hotel next to it, the Hotel Wellington, where I spent a lot of time when I was a somewhat older boy.

Anyway, it is a real pleasure for me to be here today, particularly considering the distinguished quality of the audience. I feel a little bit reticent about making a lot of prepared remarks, simply because I know there is so much expertise in the room and I do not want to insult you by saying things you already know and a whole bunch of platitudes. I thought it would be more interesting for us to have a conversation on some issues.

So the way I thought I would do that is to use the planned Obama visit to Canberra as a window into the Obama Presidency, to United States foreign policy and to relations with Australia. Let me see if I can do that in relatively short order and then move on to what I hope can be a free flowing conversation among us all on a series of important issues.

Let me start with the one that I think is on the minds of everybody at the moment, which is the ‘will he won’t he?’ question about the visit.

I want to say a couple of things about that. The first one is to give you a very simple rendering of the health care debate in the US and the second is to say something that sounds like a political platitude but which I believe is absolutely true, which is that if at the end of the day President Obama doesn’t come to Australia this time it should not in any sense be taken as a snub.

I would go the other way and say that the lengths to which the Obama Administration has gone to try to preserve the trip, even though it will be a truncated one, tells you how significantly he views this trip, the two parts – to Indonesia and to Australia.

Health care: The arcanery of the American health care debate continues to plumb all-time depths. We now have to find out not only what reconciliation means in American politics but also comprehend the fact they some are proposing passing the bill into law without actually voting on it in the House of Representatives. It is a bizarre world.

Will it pass? My prediction is yes. What is going on is that there are Democrats holding out for a lot of goodies. They want cover and goodies for the 2010 election and they are holding out until 11.59 before the midnight when the vote has to happen. This is common practice in the US on big issues, and this is a really big issue.

What is health care a metaphor for in the US? It is a metaphor for at least two things. The first is that American politics is more bitterly partisan today than in the living memory of most people. Is that good or bad? You could make an argument that it is not a bad thing. It certainly makes decision-making choices quite clear.

But one thing that is probably under-estimated in the simple partisan rendering is that Osama’s problem isn’t with Republicans today. It is with centralist Democrats who are very concerned that supporting the President will cost them their jobs in the mid-term elections. It is a struggle between Nancy Pelosi and Harry Reid, the leaders of the Democratic Party, and the rank-and-file members of the party in Congress who are worried that supporting the President will hurt them.

But at the end of the day, going the other way and being the Democrats who torpedoed the President’s signature domestic policy is something that just won’t happen.

If Obama made a strategic mistake in 2009 it was buying into the idea too much that the Global Financial Crisis was too good a crisis to waste – that is, that the crisis would create a fluid-enough environment that previously unthinkable things could be done in the US.

These unthinkable things would have been health care reform, climate change and financial reform. He hoped to do all of that in 2009 and it transpired he did none of it. What we are looking at, if I can mix some bad metaphors, is that the jumbo jet of health care has taken 12 months to land and it is still not quite there. While that was going on the jumbo jet of climate change legislation flew off to a different airport and the one about financial reform still hasn’t left the departure terminal.

Obama bought into the crisis-creates-fluidity argument a little too much. He is now stuck with a legislative agenda that looks like it is going to play out over four years, rather than one. Is that the worst thing in the world? It can have some serious collateral implications, for example the slowdown in US legislation on climate change certainly was a contributing factor to the less than satisfactory for some people outcome to the Copenhagen climate change summit. And global financial reform was always going to be hostage to the passage of new American legislation.

Let’s now go back to the visit. Obama has said he wants to be America’s first Pacific President. For him, that means more than the fact that he grew up in some combination of Indonesia and Hawaii. If he is going to be America’s first Pacific President, he is going to have to do things in Asia. The visit to Indonesia and Australia is important because it signals different aspects of that Pacific Presidency.

So the fact that Obama is doing everything he can to come to Australia is a plus, even if he ultimately doesn’t make it.

Secondly, if he does come, what are they going to talk about? I think the first thing that I would caution you to watch out for is a strong incentive for leading Australian journalist pundits to make less than flattering parallels between the Australian Prime Minister and the US president – centre left policy wonks over-promising, under-delivering and losing traction with voters.

Now I think there is more than an element of truth in those observations. But it would be a mistake if that focus obscured the positive policy elements that would come out of a visit.

So what are the positive policy elements? Some of the things that would be at the public podium would be fairly predictable. I would expect there would be a lot of coordinated, cooperative statements on Afghanistan, counter-insurgency, counter-terrorism, without any breakdown of what you might call the ‘don’t ask, don’t offer’ equilibrium on Afghanistan. That is the President won’t ask the Prime Minister in public for more troops and the Prime Minister will not be offering any more troops in public.

That potentially could have been destabilised by the Dutch election a few weeks ago, if you believe the collapse of the Dutch Government was a function of Afghanistan policy and that therefore there is a chance that the Dutch will pull out of southern Afghanistan. That would be a natural place where Australia could be asked to do more. But it was instructive that the American leadership said if there is a vacuum in Southern Afghanistan, the US will fill it. That takes off the agenda the possibility that Australia would be asked to play a bigger and potentially leadership role in Afghanistan.

The second area where the President and Prime Minister could trumpet their accomplishments is nuclear non-proliferation and disarmament, where their initiatives have been different but complementary. President Obama has said his goal is a world of zero nuclear weapons. He has re-started the Strategic Arms Reduction Talks with the Russians.

I was speaking to the Hungarian Ambassador about the Obama decision to withdraw the missile shield from Central Europe which caused some real issues there, but as I said to the Ambassador, this was an Obama good faith move with the Russians with a bigger objective in mind – serious arms reductions.

If you flip to Australia, we have the Prime Minister, having invested a lot of time and effort in non-proliferation issues, creating the Commission that Gareth Evans co-chairs with a view to toughening up the Nuclear Non-Proliferation regime in 2010. So that is another obvious one that would be on the agenda for the dual public statements or the President’s address to Parliament, but I would not expect anything particularly new there because most of the big initiatives are already in train.

Third, you would expect, particularly since President Obama would just have been to Indonesia, that there would be some coordinated positive statements on Indonesia and the importance of having strong relations with the largest Muslim majority country in the world that has also undergone a successful, peaceful, transition to democracy and is now emerging as a strong market economy.

That is a positive story in the US as it has been in Australia. But as SBY was saying at the weekend, maybe Australians do not appreciate that as much as they might. It would be fair to say that Americans appreciate it less. It is almost a cliché that Indonesia is the most important country that Americans know least about.

President Obama is perfectly positioned to change that – it fits his personal biography and it also fits his ambition.

Less obvious but important are climate change and trade. On climate change the emissions trading schemes do not look quite as good today as they did three or four months ago. I don’t want to second-guess what is going to happen in the Australian debate but I will make bold predictions about the US – they are consensus predictions, so maybe they are not so bold.

There will not be a US emissions trading scheme passed by Congress in 2010. Whether there will be further into the future, who knows? But the Energy Bill that is being re-written in the US at the moment bears some parallels to the Tony Abbott proposals about targeted incentives for different parts of energy production to reduce emissions rather than an economy-wide emissions trading scheme.

Of course the one difficulty for the Rudd Government with that is that nuclear power is a central element of the Obama strategy. I think what Obama will say when asked by the Australian media about that: ‘Listen, I haven’t got religion on nuclear power, what I know is that the US has a lot of ageing nuclear power plants and it is just a sensible thing for us to update some of our old nuclear power capacity. We are not talking about expanding it; we are not going to be France on nuclear power.’

I also think the President would say: ‘It is important that we are in the business of providing nuclear reactors for places like India and China, because it will help them with their energy needs, it will probably reduce greenhouse gasses and it is good for us because we are exporting big dollar high value items in the form of nuclear reactors.’

So that is on the defensive side. On the positive side I would imagine the two things that both countries would like to push in 2010 and beyond is energy efficiency and investments in alternatives that can be used as a platform for export earners in the future – the way the Chinese are thinking about this. The rendering of China, which seems to me not so unfair at the moment, is that the Chinese Government is making big investments in alternative energy not just because it is concerned about its energy needs and pollution problems, but because it thinks this could be the next stage of the Chinese economic miracle.

There is going to be massive global demand for alternatives, whether it is batteries in electric cars or wind and solar and we should be at the forefront of that. I would expect the US and Australia to want to be in that business as well.

On energy efficiency, and maybe this is an obvious point, but if you look at the political problems with cap and trade both within countries and among countries, it is an ‘I don’t win unless you go along with me’ situation. Being a unilateralist in the cap and trade world looks like a losing proposition.

But in the energy efficiency world being a unilateralist isn’t a losing proposition. If you can reduce your own energy intensity you are better off, so why not do that? Particularly if you think that energy efficiency, the built environment and the like can be an export industry for you, why wouldn’t you do that?

So on climate change, I think we will see a subtle pivot away from putting so many eggs in a cap and trade-emissions trading scheme basket and diversifying that. That has big implications for the global deal. So another not so bold prediction: The main challenge of 2010 is to make sure that the Mexico City event at the end of the year is not a replay of Copenhagen – high expectations not met. Can the frame of the debate change sufficiently to make that international meeting a success absent a big global deal?

Let me move to trade. I have talked a lot about exports, one reason for that is because President Obama has said that exports are going to be a central focus and a critical element of the US economic recovery.

Let’s unpick the numbers a little bit. President Obama has said that he wants to double American exports over the next five years. That sounds like a lot but actually US exports have increased by almost that from 2002 to 2007. Also in 2009 exports were down 20 to 25 per cent so just if you rebounded to pre-crisis levels American exports would be up 33 per cent.

What Obama is trying to do at the moment – and I think this will be an important element of his trip to Australia – is to say to the American people that you can be pro-trade and pro-jobs at the same time: A very difficult ask for American Democratic Presidents. So how is he going to do it?

Let me say some negative things about the other trade deals that are on the table. The Australian Government is still very hopeful that the Doha Round will be completed in 2010 with American leadership. I think that is a forlorn hope. In the current political environment it is implausible to expect a Doha Round deal to be ratified by the US Senate before the 2012 Presidential Election.

Can Doha run that long? The Uruguay Round ran a long time, so maybe it can. But it doesn’t seem to me that Doha is a front runner with Obama. He also probably can’t fight the big bilateral free trade deal issues that are on the table at the moment led by the Korea-US Free Trade Area. I thought six months ago that there was a win-win on the Korea – US Free Trade deal which was that the Obama Administration says it got some concessions from Korea on beef and Korea got some concession from the US on automobiles and there it is.

But the political environment in Washington is too tough for that. The political environment in Korea is tough too, but it is worse in Washington.

Then there are these small Central American free trade deals which Obama still won’t bring to the Congress - and that just shows you how poisoned the trade environment is in the US. The fact that Americans are now talking seriously about labelling China as a currency manipulator, tells you just how tough the employment picture is.

There is 10 per cent unemployment which is not going to go down in 2010, plus a lot of Americans who are involuntarily under-employed – white collar professionals who are working three days a week. Americans are hurting at the moment and pushing bilateral free trade deals in Congress is just too hard in this environment.

So no Doha and no bilaterals. What is left is something I know this building is pretty concerned about at the moment, which is the TPP – the Trans Pacific Partnership. What is TPP for those who have not been following the ins and outs of trade? This is a group of six small free-trading States, plus Australia and the US, who already have a pretty dense network of bilateral free trade agreements among them. I think Australia has FTAs with four of the other seven and the US has with five. So the TPP believes in multilateral, free trade across the Pacific and the TPP is a good way to do it.

There is surely an element of political pragmatism here. For President Obama, supporting the TPP can signal his bona fides with respect to free trade and the fact that he is interested in regional integration in the Asia-Pacific - without having to bring it to a vote in Congress any time soon, because it is going to take a long time to negotiate out the details of the TPP.

So I would expect that when the President is in Canberra he will want to talk up trade and the Australia-US Free Trade Area as having been a big success. Then Obama and Rudd will say that the US-Australia Free Trade Area is the way to go and that it is a model for what a TPP free trade area should look like – oh and by the way, if we can put all that together we have now got a high quality, multilateral free trading arrangement that Japan and Korea and ultimately China could join.

That is the big vision – a way towards an Asia-Pacific Free Trade Area that doesn’t grow directly out of APEC with all the problems associated with that, including Taiwan’s participation.

This may not be quite the backdoor, but it is a creative way to think about moving towards that goal that the US and Australia have long had, which is an Asia-Pacific Free Trade Area, in an environment where you cannot be confident that the Doha Round, or something else big and global, is going to happen.

So, I would expect much more emphasis on trade during the Obama visit than you might have thought if you were just following the politics – certainly the Australian political debate and maybe the American because it’s not much on the agenda there either.

What about ‘behind closed doors?’ TPP is an easy way to get to that, because it is a consensual position that Australia and the US under Obama and Rudd have suffered from deteriorating relations with the three big Asian players in different ways – China, Japan and India. How do you repair those relations? Well, a lot of it can be pure diplomacy – we can talk about the details of anti-whaling ships in the Antarctic or Indian students in Australia, or Obama having a meeting with the Dali Lama.

But it seems to me that there are bigger structural issues on the table that surely would not be mentioned in the President’s address, or probably in a press conference, but that both countries must be thinking about. The biggest to think about today is whether America’s de facto Asian strategy for the past several decades, which has been a bilateral-alliance-based strategy, fits the Asia-Pacific region of the 21st century in an environment where Asia-only regionalism has been quite dynamic.

What we currently have is a post-Asian-Financial Crisis-inspired Asian regionalism that did not want, in the first instance, to include the US centrally and that the US, under President Bush was not so interested in.

So the challenge going forward is going to going to be how do you modernise the US’s political-military-security relationships with its key allies in Asia, at the same time as the US must become part of a more multilateralised Asia-Pacific region? That is a really tall order. It can’t be done overnight and you certainly don’t stand up on a stage and announce you have got the solution in Canberra in a week’s time.

I would expect this to be a big issue, not only next month but for the next many years.

Another big global question that must be on the minds both of Kevin Rudd and Barack Obama, and that is what is the future of large-end multilateralism? This is a different way of rendering what is going to follow the Bretton Woods system; how outmoded is the post World War II settlement?

When we used to think about that – last year or the year before -- the challenge was: How do you accommodate the rising powers in an encrusted Western system? We had the answer in 2009 – it was called the G20. But what we don’t yet have is a way to make an executive committee of global governance so that a grouping like the G20 can effectively make proposals on a take-it-or-leave-it basis to the world community of nations, so that new deals can be done.

That is a very long-winded political-sciencey sentence. What does it mean? Two things – that the community of nations in the WTO or the UN or any other body would have to accept a de facto move in which a smaller number of agenda setting players to come up with a proposal for the world, that the world would then ratify.

What does that take? The sub-group has to be a representative group. Is the G20 representative? It is not a bad grouping, but there are some parts of the world that feel a bit disenfranchised in the G20. There are some that say Australia should not be there, but it is.

So I don’t know if the G20 is the grouping going forward. If you look at the combination of Doha and Copenhagen, one conclusion is that a committee of the whole does not seem to be an effective way of doing global deals any longer and what we need is to move from the old de facto model, which was the West coming up with the deal and then everyone else would sign on, to now a globally inclusive leadership group - the G20 or something else - coming up with a deal; that the rest of the world sign on to.

On both of these points, Asia-Pacific geopolitics and what is the future of multilateralism, I would not expect any politician to be talking about either of those subjects in public anytime soon, certainly not the Prime Minister and the President, but I would expect they would be charging people, including people in this room, to think really hard about this stuff because going forward these are going to be the very big issues.

I think I will stop right there and I am ready for questions

Questions:

Could you comment of Afghanistan and the timetable for withdrawal? Do you have any sense as to whether we can look forward to a long-term involvement there?

Are you referring to Australia or the world? Far be it from me to comment on what the Australian Government intends, but on the US side, the fact is that Obama tried to square an impossible circle on Afghanistan, which was to say ‘I am committed to Afghanistan, but I also want to get out of Afghanistan’.

So the effectiveness of that policy remains to be seen. The simple criticism of the Obama strategy has two elements. First, the surge isn’t going to do much, and the second one is that the Taliban will wait you out because you have said you want to get out by the middle of 2011.

The way the US has handled Iraq might give you some window into how it could play out in Afghanistan, which is that the US has talked about withdrawing all combat troops, they don’t talk about withdrawing all American military presence. The number that is always bandied about is that there will be about 50,000 American combat troops in Iraq for as long as the Iraqis are willing to have them long after ‘American combat troops have been withdrawn’.

I don’t know what that means for Australia, but if you look at the raw numbers on Afghanistan, Obama wanted it to be his war – it is his war because the effective US troop numbers will have gone from 25,000 to 35,000 to about 100,000 under Obama’s watch.

It will be interesting to see what happens to the other coalition partners. The thing that always strikes me about the Afghanistan debate in Australia is that it’s not very intense compared with, for example Canada, where Afghanistan is the burning issue and has been for several years. There could be two answers why that is – Australian believe that part of the deal with having such a strong alliance with the US is that you fight alongside the Americans as Australia has in every international conflict since World War II.

The other point is Australia has been fortunate not to have had so many fatalities in Afghanistan so the public resonance of the issue is not high.

Going back to the US, I am surprised that Afghanistan has not become a really large negative issue for Obama this far, because Americans are sick and tired of having 100,000 troops abroad. The cost in all senses is really weighing on the country. Why isn’t that at the top of the agenda in the US today? The other issues are so burning – the economy, health care – the domestic issues are so strong that I don’t think the foreign policy ones have the resonance they once did.

Could you talk about the baggage the US carries in its relationship with Indonesia – the human rights lobby in the US Congress? Will the relationship change?

I will make a sideways observation that may, or may not be helpful, because the parallels may not be direct.

If you look back at the US-China relationship, it is not the muzzling of the human rights agenda, but the way that the US has managed to accommodate a critical view of China on human rights whilst having the overwhelming objective of engagement with China.

That is a 20-year reality now. In China, George Bush senior is a god-like figure and I think the reason is that he resisted the post-Tiananmen Square temptation in the US to punish China. What George Bush said, what Clinton said, what George Bush junior said and what Barack Obama is saying is that human rights is really important but engagement with China is more important and then they say that in the end engagement is going to improve human rights.

If that is the right model, you would expect it to be the right model in Indonesia and therefore you would expect the big ticks against a successful peaceful transition to democracy, marketising the economy and openness to be all pre-conditions for that.

I don’t think that US-Indonesia relations have been held back because of human rights concerns. They have been held back because they have not been close enough to the front burner for the US.

It is also fair to say that American foreign policy has put Asia on the back-burner now for a very long time. It is a large back-burner but it’s not the front. President Obama wants to move Asia closer to the front burner, but that means managing down the classic front burner issues, and the problem there is that they keep flaring up.

It is not helping anybody to have another US-Israel spat going on where there doesn’t seem to be an easy way out and both sides look as if they are going to be tarnished as a result.

So it is not easy to bring Asia to the front burner but I think that Obama has a bigger commitment to doing that then George Bush Junior, with the important qualifier that two things that Bush gets less credit for than he should – his relations with China and India. However, they were an old-style model – two bilateral relationships in an environment in which the Asian countries are thinking much more regionally.

That’s a long way from Indonesia and human rights – I am sorry for the digression.

On the bilateral question (inaudible) can you comment on Haiti? (inaudible)

Haiti is really close to the US. Its hands are all over Haiti. My sense is that was not viewed as a diplomatic snub in Australia. It was unfortunate. The US Deputy Secretary of Defence was here 10 days later, and part of the reason was to say ‘this is really serious for us, I am sorry that Haiti happened and here is the way we want to move forward.

If Hilary Clinton doesn’t come, you don’t miss the cute Obama kids hugging the koala moments. If President Obama doesn’t come, the temptation and media speculation would be about snubs – snubs to the country, snubs to the Prime Minister. I just think it would be wrong-headed to view it that way.

I would view it the other way – that Obama is doing everything he can to get here because he is really serious about this.

Could you highlight the differences between the Asia-Pacific Community and the Trans Pacific Partnership?

I would expect that the words ‘Asia Pacific Community’ would not be very common in a joint Obama event, for the simple reason that the Asia Pacific Community does not have a lot of traction in Asia, not because the US is less into it.

I have spent a bit of time in Washington since the Asia Pacific Community second track summit was held in Sydney in December and have been struck how open American officials are to the idea in principle.

There is this pragmatic problem in public that it doesn’t have ringing endorsement from a bunch of Asian countries. The approximate answer as to why the US would be open to a whole bunch of regional groupings – the Asia Pacific Community, but as I was suggesting almost certainly the Trans Pacific Partnership, is because Japan has been a bit of a shock to the US.

The Japanese election and what the new Government intends to do; the difficulties over the Okinawa military bases; having the Japanese Prime Minister float the idea that Japan might look to its geographic west rather than to the West for its future. Some people in Washington thought that with so many eggs in the bilateral Japan basket they should think a little more broadly about Asia.

At the end of the day, my hard Realpolitik read of this is that Japan will understand that even if it wants to be closer to China and the rest of Asia, that will make its security relationship with the US even more important.

So if there is a Japan problem for the US it won’t be that Japan shuns the US, it will be that the Japanese economy is in such a tough position, that figuring out a way to get through those problems over the next decade will be a big challenge.

The reason I use the very broad language about bilateral alliances versus regional multilateralism is that I don’t think the forum is clear yet, and the Asia Pacific Community is not one that the US can invest a lot of energy in. The thing that makes the TPP a little more palatable in the short term is that it is a smaller grouping of committed free-traders and the bigger countries could opt in later, while the idea of the Asia Pacific Community is that everyone is there at the beginning.

You don’t want to overdraw these comparisons, but there are some reasons for thinking the TPP looks more like the European Coal and Steel Community in 1951 and 50 years later you end up with the European Union with 27 members. In other words, an agreement that looks quite modest but potentially could be the piece of sand a bigger pearl grows from.

In respect of the transatlantic relationship, you are talking about the switch to the Pacific. How do you think this will impact the transatlantic relationship with Europe where most of its traditional allies are located? Where will Europe figure?

I have lots of thoughts flowing through my mind – Old Europe, New Europe, security relationships, Iraq. We may now have dodged an important bullet in transatlantic relations which is Europe putting too much heat on the US to become more European in terms of financial regulation and other things.

That was something that was never going to fly in the US and I don’t know whether it was because the European countries had their own problems they had to deal with, that that agenda wasn’t pushed harder than it was.

It is one the public record, and other people have said this to me, that Australia played a very important mediating role in the Washington and Pittsburgh G20s in being a halfway house between the European view and the American view.

Staying in economics, the US has on the table, as of Monday, a new Financial Services Bill which Chris Dodd the Connecticut Senator, the head of the relevant committee in the Senate, has put forward and if it goes through it would be partly European. The Fed would control hedge funds, private equity and all the other things that were outside the regulatory environment. Banks like Goldman Sachs would not be able to trade on their own account.

It would end up looking like the kind of thing the Europeans would want, but it would grow out of the US. It seems to me that this would be the right path to a global financial architecture – let the American legislation go first and then go globally. It could have gone the other way. The Europeans really thought there was a lot political and moral capital in banging on the US.

With transatlantic relations you have to talk a lot about specific countries and regions. What happens in the United Kingdom is going to be very important and the fact that Chancellor Angela Merkel in Germany is being more assertive about European positions is also important. She had a very good relationship with Bush, but I don’t know about her and Obama.

So there is a lot going on in Europe, but it seems to me that at the moment the important questions in Europe are the internal ones about small members of the Euro Zone, not transatlantic stuff.

Can you tell us something about the Australia-US Free Trade Agreement and how it has gone?

My colleague at Sydney University, Rod Tiffin, wrote an oped in the Sydney Morning Herald a few weeks ago, saying that the Australia-US Free Trade Area ‘five years out was an unequivocal dud’. I think he had a wrong-headed analysis about this. I am not a cheer-leader for the Australia-US Free Trade Area, but what he did was say that Australian trade was growing more with China than it has with the US since the FTA was signed and we have a trade surplus with China and a trade deficit with the US. He rested his case on that.

It seems to me that this is a bit simplistic. I was speaking with the US Ambassador in Australia a couple of days ago and he said he had statistics that said that US-Australia trade was up 57 per cent from the signing of the deal until today. I find that hard to believe because I have looked at the official US statistics which said it was up about 50 per cent until 2008 and then in 2009 it went down because global trade went down.

The imbalance in the Australia-US trade relationship has not gone away and as a political matter, bilateral trade deficits tend to be viewed, particularly by people on the left, as not working. No economist thinks that’s true, but the next thing economists say is that the flip side of a current account deficit is a capital account surplus and Australia gets lots and lots of foreign investment from the US.

Would Australians rather have Chevron investing in north-west Australia or a Chinese company and the answer seems to be that they would be much happier with Chevron. Was the Gorgon deal possible because of the Free Trade Area? I don’t think so but all the economics says that trade and investment are complements not substitutes.

So I would expect that the US-Australia Freed Trade Area has been somewhat of a plus. The issue that economists are always concerned about is do bilateral free trade deals divert trade from other relationships? That when I go back to the TPP idea. What we have there is a bunch of bilateral trade deals, a complex lattice. If you can wrap that into a multilateral deal, that is one answer to the old question which has been there for 20 years now: Are bilateral free trade deals building blocks or stumbling blocks to multilateralism?

If this TPP works it will be a pretty good study to say that bilateral deals are building blocks, but that is several years out. Also five years is probably far too soon to try to do a serious analysis on a free trade area, and in any event analysis of the US Australia Free Trade Area is going to be complicated because in terms of stuff you can measure it wasn’t nearly as much about tariff reductions at the border, it was about behind-the-border liberalisation.

So it is going to be really tough to do an analysis of this, but it is important and I bet Obama and Rudd will say that the free trade area has been a real success and there will be some statistics to back that up.

What discussions are Obama and Rudd going to have in private sessions relating to New Zealand and Fiji?

I have no idea. The New Zealand situation is obviously a very interesting one. New Zealand made a big policy decision 20 years ago or so. The good news for New Zealand on the trade side is that it is a core member of the Trans Pacific Partnership, so that’s a way back into the mainstream. How the New Zealanders will debate that I just don’t know.

As for Fiji, I just do not know enough about it.

Can you comment on US-Australia common interests in the way they relate to the breaking up of the developing world (inaudible) how the US and Australia may view this.

Are you thinking about Africa? I was proposing this model in which the G20 becomes the executive committee for a global governance system. The big legitimacy challenge for the G20 is that there’s only South Africa in it and Africans don’t think South Africans speak for the continent.

It’s an interesting challenge. Let’s say you could get India, China, the US and Europe to sign on to a climate change deal, would the under-represented Africans then rebel against that deal? Maybe it would be a challenge, but it would a much smaller challenge than the first part. That’s why I would expect that something akin to a G20 process is going to be increasingly important because it is a more pragmatic way of dealing with the problems. You have got most of the players at the table and the numbers are manageable.

Then to invest that institution, or some institution like it, with some form of legitimacy – that is the next challenge.