Building blocs and doing deals

Asia Pacific Equities September 2017

4 minute read

While the UK and US bluster towards new trading arrangements, the ASEAN region is quietly showing how it’s done, writes Ed Wiltshire.*

It has been argued Western philosophy lost its way around the time Descartes started
doubting himself and ended up placing “I” at the center of his world view. By contrast, philosophies of the East have long emphasized the dissolution of the ego and importance of the universal. Recent political and economic developments suggest those philosophical differences remain – at least in part.

On the one hand, growing suspicion of multinational trading agreements in the United
Kingdom and United States could be seen as a reassertion of individualism.  The UK’s vote to leave the European Union has left politicians grappling with the consequences of withdrawal from deeply ingrained customs union and single market arrangements. One of the first actions of President Trump’s administration, meanwhile, was to withdraw the United States from the Trans-Pacific Partnership (TPP), a free trade arrangement among various Pacific Rim nations (excluding China).  Although the President’s rhetoric on the North American Free Trade Agreement (NAFTA) has toned down since his election, the demand for renegotiation is still underlined by the threat of withdrawal. Going it alone, it seems, is not necessarily conducive to doing deals.

Yet in the Asia Pacific region, formal structures for economic integration are strengthening. The Association of Southeast Asian Nations (ASEAN) recently celebrated its fiftieth anniversary as a promoter of intergovernmental cooperation. The original founding nations of 1967 – Indonesia, Malaysia, the Philippines, Singapore and Thailand – were subsequently joined by Brunei, Cambodia, Laos, Myanmar and Vietnam to create a bloc that now covers about 9% of the world’s population[1]; a larger market than that of the pre-Brexit European Union. Considered as a single entity, ASEAN would rank as the sixth largest economy in the world; a similar size to the UK’s.[2]

Embracing diversity

That such a politically and economically diverse group of countries have created a stable
and increasingly integrated organization that has survived for half a century is impressive. While the founding nations of the European Economic Community had much shared heritage as industrialized democracies recovering from the collective trauma of the Second World War, those of ASEAN had much less common ground. From Thailand, where the military remain the dominant power, through to the parliamentary constitutional monarchy of Malaysia and the relatively long-established democracy of Singapore, political diversity has made ASEAN’s principle of tolerant diplomacy a beneficial necessity.

ASEAN economies are equally diverse. Singapore has developed from a major port into a
successful market economy that includes the world’s third largest financial center and thriving tech sector. Indonesia is much more dependent on commodities such as palm oil and rubber and was, until recently, a member of OPEC. Vietnam, the most economically successful of the newer ASEAN nations, has a mixed economy that works to five-year plans not unlike those of China.

In the face of such differences, the ASEAN Economic Community was formed in 2015. This embodied plans for the nations to integrate into a single market based upon a “four freedoms” principle similar to that of the European Union, with free movement of goods, capital, services and labor. The aspiration to achieve these goals by 2025 was ambitious, so perhaps it is not wholly surprising that the “single market” has now been replaced by the more ambiguous “deeply integrated.” Even so, much progress has been made to remove barriers to trade: 96% of goods traded within the bloc are now tariff free.[3]

Broadening horizons

Perhaps of more immediate consequence than any aspirations towards creating a single market are the attempts of ASEAN to jointly engage with the other markets in the region. A recently announced Free Trade Agreement (FTA) between ASEAN and Hong Kong was the sixth the bloc has negotiated. Given that Hong Kong is a small and very open economy, the benefits to ASEAN from this arrangement will be limited, at least in an economic sense. Politically, it is advantageous as a signal of the bloc’s willingness to work with Beijing.

The most significant by-product of the ASEAN project could yet prove to be the Regional Comprehensive Economic Partnership (RCEP). This is a proposed free trade arrangement involving the countries of ASEAN and those they already have separate FTAs with: China, India, Japan, South Korea, Australia and New Zealand.

With the future of TPP in doubt following the United States’ withdrawal, RCEP, with the additional lure of the populous Chinese and Indian markets, may prove far more attractive for participants on the Western rim of the Pacific.

While the complexity of creating a deal like RCEP should not be underestimated, it seems there is sufficient political will from the major players to reach agreement in 2018.  The allure of the prize is undeniable: privileged access to a market of 3.4 billion people that accounts for nearly 40% of global GDP, larger than the current EU and NAFTA combined.

Friends with benefits

Already, ASEAN has been commercially beneficial for the participating nations; giving them greater collective clout than they could hope to wield individually. The ten members have all significantly increased their export volumes since the start of the century, which combined have climbed from less than $430 billion in 2000 to $1.2 trillion in 2015.[4] Relatively speaking, the newer members have benefited the most, with both Laos and Vietnam seeing the value of their exports increase more than tenfold over that period.

Perhaps more revealing is the changing geographical make-up of the destinations of these exports.  The proportion ending up in other ASEAN nations has increased marginally, from 20.5% to 21.8%. But the big change is in the amount going to the other potential members of RCEP (including Hong Kong), moving from 31.1% to 37.5%, reflecting the success of FTAs already agreed. The overall proportion of exports destined for the Asian and Australasian regions has gone from 58.8% to 67.2%.

ASEAN Export Destinations - 2000

ASEAN Export Destinations - 2015

Source: as of September 13, 2017. Compiled from data from the Center for International Data, the BACI International Trade Database and the United National Statistical Division (COMTRADE); ”Other RCEP” includes Hong Kong. 

The trends are clear and will surely only accelerate as and when RCEP is agreed and ASEAN
looks to the next phase of integration for the ASEAN Economic Community. This also adds perspective to the protectionist rhetoric coming out of the Trump administration. While it would be less than ideal if ASEAN found trading with the US more difficult, this market is already of diminishing relative significance. In 2000, 20.4% of ASEAN exports were destined for the US: by 2015, that number had dropped to 12.5%.  Significantly, over the same period the proportion of ASEAN’s exports headed for China rose from 4.5% to 13.2% as it took over as the single biggest destination country.

At the very least, ASEAN’s success in expanding both intra-regional and external trade offers a compelling argument for a ”strength in numbers” approach, in stark contrast to the course being taken by the UK and US. Time will tell whether individuals doing deals or collectives building trading blocs win more of the economic arguments.

Sources:

[1]  http://asean.org/storage/2012/05/ASEAN_Stats_Leaflet2016_web.pdf

[2] http://www.aseanstats.org/wp-content/uploads/2016/11/AEC-Chartbook-2016-1.pdf

[3] http://en.reingex.com/ASEAN-AFTA-Free-Trade-Area.shtml

[4] All export data has been compiled from that provided by the Center for International Data,
the BACI International Trade Database and the United Nations Statistical Division (COMTRADE) as accessed via the Observatory of Economic Complexity website.

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