The recent visit to Australia by South Korea’s President Moon Jae-in has been welcomed as the dawn of a new era of cooperation between our nations, no less than 60 years after the commencement of formal diplomatic relations.

As established middle powers in a region beset by hegemonic rivalry, Australia and Korea have much to gain from closer collaboration on major strategic challenges. December’s dialogue focused on two of the most high-profile of these: bolstering our nations’ military capabilities and defence interoperability and enhancing resource and energy security in an increasingly unpredictable geo-strategic climate. Yet, while these ‘hot button’ issues are important, there is another, equally pressing challenge that demands our cooperative action – and that could deliver rich rewards for all involved. This is the challenge of turbocharging the rapid and sustainable economic development of our regional partners, from India to Indonesia and Papua New Guinea.

For Australia and Korea, cooperating to address this challenge is not just a moral imperative, but a strategic one as well. The rapid development of our neighbours would enable Australia and Korea to further diversify our regional economic relationships and reduce our trade and investment dependence on China. And by cooperating to become more proactive and productive development partners, Australia and Korea could boost our neighbours’ trust in our commitment to shared economic prosperity as the necessary foundation of regional stability and security.

However, instead of cooperating more closely, over the past five years we have witnessed a large and growing gulf emerge between Australia’s and South Korea’s foreign economic policy approaches. Moreover, when it comes to the goal of promoting our neighbours’ rapid economic development, both countries’ approaches are far from perfect, insofar as they both involve risks and missed opportunities.

So, if Australia and Korea wish to cooperate more closely to promote rapid regional development - and to reap the associated strategic rewards – we must start by opening a dialogue about our countries’ current foreign economic policy approaches, and the limitations of those approaches from a development perspective. Only then we can then begin to develop a new agenda for Australia-Korea economic cooperation – one with true transformative potential.

Australia’s and Korea’s divergent approaches to foreign economic policy

Since 2017, Australia’s approach to foreign economic policy has been to position itself as a fierce defender of the US-led 'rules-based international order’ (RBIO) and the related idea of a ‘Free and Open Indo-Pacific' (FOIP). Defending the RBIO now forms a core pillar of Australia’s foreign policy strategy. And as China’s sabre rattling has intensified since that time, so too has Australia’s defense of the established rules of the international economic game.

Prior to the COVID-19 crisis, Australian diplomats were strongly urging other countries – including South Korea – to step up and do more to defend the existing RBIO. In the economic arena, this approach meant defending the economic rules enshrined not just in the WTO, but also in the newer so-called ‘gold standard’ trade and investment agreements, like the Comprehensive and Progressive Transpacific Partnership (CPTPP), originally the centrepiece of the Obama administration’s ‘Pivot to Asia’.

In the wake of COVID-19 and China’s fierce reaction to Australia’s call for an international investigation into the origins of the virus - including trade sanctions - Australia has only strengthened its calls for a defense of the US-led RBIO. Following the surprise announcement of the new AUKUS Security Pact between the US, UK and Australia in September 2021, Australia issued a joint statement with the US pledging to ‘strengthen the rules based international order’ – including the existing trading order – not least to protect against China’s growing unilateralism.

Korea, by comparison, has chosen a very different foreign economic policy approach. To avoid ‘picking sides’ between the US and China, it has embraced the idea of ‘strategic ambiguity’. Following China’s punitive reaction to Korea’s decision to host the THAAD missile defense system in 2016, the Korean government has been especially wary of upsetting its powerful neighbour. In practical terms, this has meant avoiding strident public declarations of support for the US-led RBIO or a ‘Free and Open Indo Pacific’, while stressing where possible the compatibility between Korea’s approach to regional engagement and those of both the US (FOIP) and China (the Belt and Road Initiative). It has also meant declining to join trade and investment deals like the CPTPP that might be seen as ‘anti-China’ (or else waiting for China’s lead; in late 2021, Korea indicated its intention to join the CPTPP, but only after China had indicated the same).

In contrast to Australia’s loud and proud of support for a ‘free and open Indo-Pacific, Korea has tended to argue in more general terms for an ‘inclusive’ regional economic order while seeking to deepen its bilateral relationships with India and ASEAN nations under its New Southern Policy Plus initiative. Effectively, Korea has chosen to play it safe – insofar as it has sought to avoid articulating a substantive vision for an alternative regional and/or international economic architecture – lest it inadvertently offend China or the US.   

Limitations of Australian and Korean approaches from a regional development perspective

Despite their growing differences since 2017, our countries’ foreign economic policy approaches do share one important characteristic: they both have their limitations from a regional development perspective, and entail significant risks and missed opportunities that deserve serious consideration.

The major flaw in Australia’s approach is that many aspects of the RBIO it is defending actually make it harder – not easier – for our neighbours to develop their economies. As we explain in more detail below, many existing trade rules severely limit the policy space that governments need to transform their economies and lay the foundations for sustainable growth. Australia's foreign economic approach thus risks undermining its strategic objective of strengthening regional allies and becoming their development partner of choice, especially in light of China’s growing influence.

At the same time, Korea’s approach represents a somewhat missed opportunity. As one of the world’s most successful late developers, Korea actually understands what it takes to rapidly transform an economy and lift millions of people out of poverty, thereby enhancing social security and political stability. However, as we have already indicated, many of the policies that Korea relied on to develop its economy are now made more complex or outlawed completely by international and regional trade and investment rules that work against the goal of development.

For example, a number of WTO agreements, such as the Trade Related Investment Measures (TRIMS) Agreement, the Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, and the Government Procurement Agreement (GPA), outlaw many of the industrial development policies successfully employed by South Korea in its rapid industrialization phase, including policies to induce technology transfer and the use of local content. Many of the WTO’s development-unfriendly rules are reinforced and even extended in regional and bilateral trade deals.

Korea is thus in the perfect position to help design and promote a more development-friendly trade and investment regime - one that would provide more space and scope for the industrial and innovation policies needed to advance its allies’ rapid development. To be sure, Korea is already sharing its development experience and expertise bilaterally with its developing country neighbours, especially through its ODA policies and more recently its New Southern Policy.

However, when it comes to reforming the existing international trade and investment architecture that can constrain local development initiatives, Korea remains wary of adopting a more ambitious and high-profile leadership role. Korea’s ODA-focused approach to advancing regional development is also limited because it is not just developing countries that could learn so much from Korea’s experience of successful techno-industrial transformation, but developed countries as well – not least Australia.  

Charting a way forward: a new agenda for Australia-Korea cooperation for development

Here, then, is a perfect opportunity for Australia and Korea to re-think their existing foreign economic policy approaches and to collaborate to address a major strategic challenge: that of both envisaging and helping to build a truly development-friendly trade and investment regime in the region.

The first practical step would be for our governments to acknowledge and seek to understand more deeply the complex ways in which existing trade and investment rules can frustrate the pursuit of rapid and sustainable economic development.

As noted above, it is already well documented, that many existing trade and investment agreements limit the policy space for developing country governments, making it harder for them to ensure that freer trade and investment delivers positive development outcomes, such as the establishment and/or upgrading of local industries and the creation of well-paying jobs on the ground.

However, less well understood are the ways in which existing trade and investment rules may be exacerbating some of the most pressing economic, social and environmental challenges of our time.

Take four of the most significant – and deeply interrelated – challenges facing our developing country neighbours (not to mention our own economies): financialisation, de-industrialisation, health insecurity and climate change. Financialization occurs when the financial sector abandons the ‘real’ or ‘productive’ economy in favour of short-term speculative investments and was a key cause of the 2008 global financial crisis. By starving manufacturing investment or favouring dividends payment against re-investment and worker bonuses, financialisation is also a key driver of de-industrialization (i.e. the hollowing out of manufacturing capacity and capability), low investment and growth, and rising inequality in both developed and developing countries.

Taken together, financialisation and de-industrialisation pose major economic, social, political and geostrategic challenges. Not only do they undermine economic development by thwarting the creation of higher-wage, higher skilled jobs, diminishing export earnings and throttling investment for innovation. They also intensify inequality, fracture social cohesion, make democratisation less likely or more fragile in developing nations, and fuel populist sentiment across the board. In our own region, two of the countries worst affected by premature de-industrialization are also the most populous and strategically significant – India and Indonesia – which should be a major concern for Australia and Korea.

Moreover, as we’ve seen during the COVID-19 pandemic, countries with higher levels of inequality and weaker local manufacturing capability have been far less able to meet major health challenges. And the economic, social and political instabilities and inequities associated with financialisation, de-industrialisation and global health crises will only be exacerbated by the growing number of environmental catastrophes wrought by climate change.

From a trade and investment policy perspective, it is thus vitally important to understand the ways in which trade and investment rules can exacerbate the problems of financialisation, deindustrialization, health insecurity and climate change. For example, agreements that require rapid capital account liberalization and financial sector privatization and deregulation can increase speculative activities and starve the productive sector of funds, amplifying financialisation and de-industrialisation. Agreements that promote the privatization of health services and limit the accessibility of IP protected medicines (including vaccines) can worsen health insecurity. And agreements that enable unrestrained trade in fossil fuels can worsen climate change.

Yet rarely do we hear Australian and Korean leaders or diplomats discuss the pressing problems of financialisation and de-industrialisation facing our regional neighbours – or how existing trade and investment rules might be exacerbating these challenges and complicating national responses to these and other pressing problems, such as climate change and pandemic management.   

We therefore see an urgent need for policymakers to better understand the complex relationships between trade and investment rules on the one hand, and the pressing problems of financialisation, deindustrialization, health insecurity and climate change on the other. We also see an urgent need for policymakers to better understand the potential for new kinds of innovative trade and investment rules to help address these challenges.

So where to from here?

If there can be anything positive to come out of the devastating pandemic currently ravaging the globe, it is likely to be that crisis can open minds to change.

So rather than continuing to defend a broken system – or shying away from systemic reform – Australia and Korea must seize the opportunity and open the door to serious and sustained cooperation on this major common challenge. The first step would be to open a meaningful dialogue between our countries about the limitations of the current trade and investment regime, and about what a truly development-friendly alternative might look like.

Embracing this change – and collaborating to realise it – is in both our interests.  

Elizabeth Thurbon is a Scientia Associate Professor in International Political Economy at the School of Social Sciences, UNSW Sydney and an Australia-Korea Foundation Fellow at Asia Society Australia. Her research specialism is the political–economy of techno-industrial development and change, with a focus on the strategic role of the state in addressing major transformative challenges, including the clean energy shift.

Keun Lee is Distinguished Professor of Seoul National University (Economics), and is also the Vice-chairman of the National Economic Advisory Council for the President of Korea (Chairman). He is a regular writer to Project Syndicate, a Fellow of the CIFAR (Canada) program on Innovation, Equity and Prosperity. He is the winner of the 2014 Schumpeter Prize.

The Australia and Korea: Middle Power Parallels project is supported by the Commonwealth through the Australia-Korea Foundation, which is part of the Department of Foreign Affairs and Trade. This project is undertaken in partnership with Asia Society Korea.