Deploying to the Red Sea a test of US fealty

Jan 9, 2024
Aerial view on the harbour of the Red Sea with trade ships iStock/gorsh13

It is worth considering when exactly deploying our military assets in Australia’s interests becomes a test of fealty to the United States, and an act of ‘‘mateship’’.

The Australian government is being pounded by the federal opposition, pro-US think tanks and some media for not sending a single ship to help out the international naval coalition in the Red Sea facing down the rising Houthi attacks on commercial shipping with the connivance, perhaps even the encouragement, of Iran.

Occasionally, the attack on the government is framed around higher energy prices from increased transport costs because of the extra transit time if shipping needs to divert around the Cape of Good Hope. This targets populist concerns that the costs would feed into higher prices, fan inflationary pressures and – the clincher – delay long-hoped-for interest rate cuts.

It surely won’t be long before the opposition starts linking the government’s pusillanimity to stubbornly high interest rates. A bigger issue, however, is at stake.

In 1968, US economic historian Douglass North published a paper on the costs of piracy and the rise of the North Atlantic economies, and thus the creation of the modern world.

He argued that, during the 18th century, state action to eradicate piracy across the Atlantic did more to promote sustained economic growth than technological change. The argument was based on analysis of transaction costs.

Piracy increased the cost of shipping, sometimes to prohibitively high levels. To the extent that such costs could be reduced, economic growth would follow. Transaction cost analysis was an audacious challenge to economic orthodoxy at the time he published his paper.

With this, the New Institutional Economics theory was launched for which, decades later, North was awarded the Nobel prize in economics. In the ideologically manacled world of economics during the Cold War, North and the NIE school identified the positive interplay between the state and the private sector in promoting economic growth which is now largely taken for granted.

The state, it turns out after all, had a valuable contribution to make towards prosperity beyond security, macroeconomic management and ensuring competition in markets.

The case, then, for contributing to the collective effort against piracy or terrorist disruption to Red Sea shipping would be much more powerful if argued along the lines of transaction costs and associated systemic risks, rather than management of the US alliance relationship or easing inflationary pressures.

The long-term health of the international economy depends largely on continuing efforts to reduce transaction costs to support economic growth.

As Eric Jones showed many years ago in a seminal book, Growth Recurring, economic growth is the normal situation. It is only where high transaction costs occur through such things as piracy or rapacious government that the inherent tendency of economies to grow is snuffed out.

So, the government’s judgment whether to support the international coalition against attacks in the Red Sea should be a no-brainer. It is actually akin to an aspect of microeconomic reform, about which the government seems particularly shy: reform is intended to reduce transaction costs, usually from past bad interventions by government.

John Lee in these pages recently, in an eloquently argued piece, put forward the case that Australia should surrender even more of its sovereignty to the US as insurance that the US – by implication, inherently unreliable – will turn up in our time of exigency. On this view, the Albanese government should have immediately agreed to contribute to the coalition forces, no matter what.

This is how the argument has been framed by the opposition and hawks alike, but it would be for the wrong reason.

Sensibly, the government most likely could see that this would not go down well within sections of the Labor Party and the electorate without a clear articulation of what interests are in play.

The shadow of the flawed and failed invasion of Iraq hangs over all of this.

Alliance maintenance is a factor but should not be the sole determining one. Public discussion has become muddled on these critical security issues by invoking the US alliance and phoney ‘‘mateship’’ on all occasions and by not articulating a clear position on Australia’s interests. We should have been in, but not for the alliance.

The excuse of not joining for the lack of ships is hardly credible. A cursory stroll around Sydney’s Garden Island dockyard makes a mockery of that assertion. The argument that the Royal Australian Navy is fully occupied doing good work keeping vital shipping lanes in the South China Sea and Taiwan Strait open is specious.

As has been argued over again, and never answered, China is not about to disrupt shipping lanes that supply it with inputs it needs to keep its economic engines humming and its people fed. And as Australian Financial Review international editor James Curran pointed out, the China threat is asserted but never established.

China’s recent bruising encounters with the Philippines in the South China Sea do not threaten Australia’s economic interests. It is not a justification for tying up our naval assets. And even if it were, it is most unlikely to change anything. A resolution to tensions between China and the Philippines will only occur bilaterally between them. In view of the huge power imbalance, when it comes we most probably won’t like it, but that is the real world. It will be enough for the Philippines to find some advantage in it.

Whatever the constraints on contributing assets to the international efforts in the Red Sea, this episode is a handy reminder that even for the Australian Defence Force resources are limited, and that therefore policy has opportunity costs.

Decisions to join the US in freedom-of-navigation exercises in East Asia, where the threat is mainly to US primacy rather than Australia’s interests, have now come at the cost of this country not being able to contribute assets where they are needed to defend our real interests. The opposition and hawkish think tanks hopefully may come to understand that security is about making rational choices. Some training in economics might help them.


First published in the Financial Review on 4 January, 2024.

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