Colin James: How to do business with Australia - look to Asia

What to do with Australia? Easy: go out into the world together. Actually, that is not easy at all.

First, what is the world? Fifty years ago it was the North Atlantic rim. That was where the money and power were, and where "we" came from.

Now the "world" for Australasia is the western Pacific. That is where the money is and will be and where the power increasingly is and will be.

At the core is China's economic and strategic weight, which in recent years it has enhanced through active diplomacy and initiatives for trade arrangements in the region. Add the two other north Asian economic powerhouses, Japan (also with huge military potential) and Korea, and the developing, if uneven, economic strength of Southeast Asia, and that makes a region set to challenge the North Atlantic's pre-eminence. And India is just around the corner.

Australia and New Zealand are increasingly wound into this region. That is, we are in the Asian - or, more bluntly, the Chinese - sphere.

In December we are both highly likely to join, as member countries, the planned east Asian community summit (an outgrowth of the Asean-plus-three arrangement - the Association of Southeast Asian Nations plus China, Japan and Korea - with India also added). That summit in formal terms is an Asean initiative but behind it, some say, is China's diplomatic hand.

Given the stall in Apec, which includes the United States and the other American Pacific-rim states, the summit, which excludes those states, is potentially very important.

And that poses a challenge for the US. As Professor Hugh White, a distinguished Australian strategic analyst, puts it, Washington has been distracted from its pre-2001 preoccupation with China by the war on terror and Iraq. Having now turned its attention back to China, Washington finds the Asian balance has shifted.

The Government in Canberra has understood that shift. Prime Minister John Howard has rapidly rebalanced his foreign policy from the single-minded alliance with the US which took him into Iraq and got him a free trade agreement, to much more active engagement in Asia and with China, even agreeing China is a market economy and qualifying his position on Taiwan.

Now that Washington has refocused on China, Howard's balancing act is likely to become more complex.

Canberra wants into Asia. But it also wants China counterweighted - and worries that some Asian countries (for example, Thailand, Malaysia, Laos and Cambodia) are too willing to go along with what China wants. It finds comfort that other countries, notably Japan but also Indonesia and Vietnam, also want a counterweight - not to be "moons around a Chinese planet", as a senior Australian figure puts it.

That requires, Canberra reckons, an active US presence.

Given these preoccupations, it was not surprising that, at Australia's request, a scan of the Asian regional tectonic shift formed the opening backdrop to the Australia-New Zealand Leadership Forum's second meeting in Melbourne at the weekend.

The message to the delegates (of whom I was one) was that no longer can we in Australia and New Zealand see our relationship just in relation to each other. We must see it in a wider context.

Add in Australian Treasurer Peter Costello's blunt statement in February that if harmonising banking regulation proves beyond the two governments, he will turn his attention elsewhere: the Asian spectre again.

His frustration was echoed by many at the forum: that the Australasian "single economic market" (SEM) is mired in detail, on which progress is slow to zero.

Put Costello's warning together with the Asian geopolitical and geo-economic realities and apply it to Australasia's closer economic relationship and the message is clear. Stir in the facts that (a) four-fifths of New Zealand's international economic transactions are not with Australia and (b) Australia's regulatory systems are often more prescriptive and intrusive than New Zealand's and the message is even clearer.

That message is that the criterion for steps towards the SEM must not be just whether they make doing business in Australasia easier - that is common sense - but whether they improve both economies' competitiveness in Asia (and elsewhere). The resulting regulation must not just be in harmony but much better.

The lesson is the inward-looking decision in 1900 when the Australian states federated: free-trade states gave in to Victoria's demand for protection; the country lost competitiveness.

To deepen CER by adopting second - or third-best - regulatory practices for the sake of an SEM for the fifth of this country's transactions that are with Australia is no way to deal with Asia.

CER can no longer be a cosy duo-dance on micro matters. It now must be imaginatively outward-looking into Asia. Self-important Sydney and Melbourne are small beer beside our strategic economic needs in the Chinese sphere.