As Southeast Asia cautiously emerges from lockdown, the policy focus is shifting from triage to kick-starting their economies.
In its June forecast, the IMF estimated that Southeast Asia’s five biggest economies will shrink by 2 per cent in 2020, which is better than the global average of - 5 per cent,1 but it will still be a severe shock for a region that has experienced growth every year since the 1960s.2
Rebuilding Southeast Asia’s growth engine will be a challenge. The region’s Big Three trade sectors - commodities, electronics and textiles - all face economic uncertainty as demand stalls. And investment, which has historically been an important economic growth driver, is set to fall dramatically across Southeast Asia, stunting the region’s manufacturing growth.3
The temptation at times of global economic uncertainty is to pull up the drawbridge and try to isolate the economy. Even before Covid, there is evidence that Southeast Asia was retreating from internationalism as the global economy wobbled. In April 2019, the EU-ASEAN Business Council estimated that the 10 members of the Association of South East Asian Nations had imposed some 6,000 separate non-tariff barriers to trade across the region.4
But giving in to the temptation of more protectionism would be a mistake. Barriers built in an attempt to isolate an economy from uncertainty have a tendency to become barriers to growth. Recovery from Covid is a challenge, but it is also an opportunity for a policy reset: a new chance to create a transparent, coordinated low-tariff trade environment which facilitates short-term recovery and sets the stage for long-term prosperity.
The key lies in Free Trade Agreements, specifically the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
RCEP accounts for 30% of the world’s population and 29% of global GDP.5 CPTPP is a comprehensive, high-standard regional free-trade pact which brings together 11 economies from both sides of the Pacific, representing a little under 14% of the global economy.6
At a time of increased protectionism and economic headwinds, these agreements promise to open the door to a new era of trade and investment integration and certainty between nations, maintain a rules-based order, and create a level playing field for large and small countries.
RCEP – which includes the ten ASEAN nations, China, Japan, South Korea, Australia and New Zealand - is reportedly down to the ‘last mile’ details after almost a decade of negotiations. Obviously, a finalised RCEP agreement will be a welcome and timely economic boost for businesses seeking to offset the impact of the coronavirus outbreak. HSBC encourages ASEAN members to conclude these negotiations ahead of the RCEP summit later this year.7 RCEP members also have explicitly stated that they will “leave the door open” for India to re-join.8
FTAs can also create a hedge for Southeast Asian markets who may otherwise be exposed and vulnerable to trade barriers from traditional trade partners.
Thailand, Indonesia and the Philippines have been weighing up the cost and rewards of joining Singapore, Malaysia, Vietnam and Brunei in the CPTPP. But with global economic prospects not as bright as they were nine months ago, these markets may need to choose pragmatism over perfection when assessing the viability of CPTPP. The risks of missing out may prove costly.
Regional FTAs like RCEP and CPTPP are also driving important domestic regulatory reforms, including in areas like labour laws (links to labour productivity)9, investment liberalization, cybersecurity, cross-border data rules and intellectual property protection. These reforms create less visible but material commercial incentives for trade and investment from member partners. This is only going to accelerate as we see supply chain dynamics change.
For example, HSBC’s July 2020 Navigator research found that companies are seeking greater control, transparency and confidence in their supply chain production. Suppliers that can offer assurances that come under an FTA framework could find themselves with a competitive edge.
This scenario could very well be applied to Southeast Asia’s electronics manufacturing eco-system. Currently Malaysia, Philippines, Vietnam, and Thailand all vie for the lower-value electronics assembly. As producers begin to revisit their supply chain locations, in this COVID-19 environment, future locations could be selected based on which countries provide the most attractive ‘pull’ factors.
Of course, completing an FTA does not happen overnight - largely because these agreements are complex and have knock-on implications for domestic economies.
Achieving success will require these Southeast Asian governments to deliver strong and compelling messages to their constituents about the benefits that these agreements will bring. They will also need to complement trade policy with domestic programmes aimed at re-skilling or re-deploying workers who may be adversely affected by increased foreign competition.
While it may seem counter-intuitive, the current challenging economic outlook could actually be the perfect time for Southeast Asian countries to make strong and far-reaching economic and trade policy action such as finalizing the RCEP or joining the CPTPP. In more precarious times, such as we have now, the choice is made clearer: either we recognize, accept and embrace change and put ourselves in a position to seize opportunities, or we face being left behind.
A contribution piece by Stuart Tait, Head of Commercial Banking, Asia Pacific, HSBC. A version of this piece was first published in The Business Times on 11th August.
3 HSBC Global Research: “ASEAN Perspectives: Rethinking Growth” page 6, 30 July
4 PRESS STATEMENT: EU-ASEAN BUSINESS COUNCIL LAUNCHES NEW ASEAN TRADE FACILITATION PAPER: CALLS FOR FASTER ACTION ON AEC OBJECTIVES
9 “HSBC ASEAN perspectives: Rethinking Growth”, HSBCM 30 July