Vietnam’s decision to make “Cohesive and Responsive” its focus when it takes the chair of the Association of South East Asian Nations for 2020 comes at a crucial time for the trade bloc.
ASEAN has enjoyed strong economic growth over the past few decades owing to the many reforms its member countries have initiated. GDP growth in ASEAN nations, for example, averaged 5.5% a year between 2010 and 2018.
However, with many of the lower-hanging fruits of reform and economic development already been picked, growth across South East Asia is at risk of beginning to slow. In fact, the IMF expects GDP to drop below 5% this year1.
If ASEAN is to retain the region’s economic fortunes, it needs to take Vietnam’s “Cohesive and Responsive” theme to heart, and respond to any slowdown by creating a more cohesive economic bloc.
There are three key opportunities to arrest this: through further cutting trade barriers, developing sustainable infrastructure, and creating a seamless digital region.
Most tariff barriers have been dismantled across South East Asia, but non-tariff barriers have proliferated in their place as members have sought to maintain protections for key constituencies by other means.
The EU-ASEAN Business Council estimates that there are now some 6,000 separate non-tariff barriers to trade across the region2.
If trade barriers push South East Asia towards more domestically focused conditions, the region will be at risk of attracting the investment and industry it needs to fuel its next phase of growth particularly that linked to the increasing supply shifts to the region.
A significant offset to these barriers will be the ASEAN-led Regional Comprehensive Economic Partnership (RCEP), making up 30% of the world’s population and 29% of the world’s GDP, which is expected to be signed in early 2020.
Other areas to watch in 2020 include moves to increase the minimum threshold for goods that would require a Certificate of Origin (reducing the amount of administration), automating customs clearance across all ASEAN member states, and encouraging the last ASEAN nations, including the Philippines3, to join the ASEAN Single Window.
The second vital element in positioning South East Asia for its next phase of growth is ramping up investment in sustainable infrastructure: the roads, rail, ports, telecommunications networks and power generation that will both bring the region closer together and expand the opportunities for industry.
The Asian Development Bank (ADB) says that South East Asia needs to invest USD210 billion – 5% of projected GDP -- a year over the next decade in infrastructure just to maintain current levels of growth4.
Linked to this, this challenge is compounded by the environmental threat facing the region.
The ADB estimates that if left unaddressed, climate change could reduce the region’s GDP by 11% by the end of the century5. In the current environment, unsustainable infrastructure development is likely to create more problems than it solves.
These are a formidable difficulties, but success is within grasp. Japan, US and China – through the Belt and Road Initiative – are competing to invest in South East Asian infrastructure.
But that’s not all. ASEAN member states must also take steps to promote greater private sector participation in sustainable infrastructure financing.
This funding will be predicated on creating a coherent regulatory environment that encourages transparent public/private partnerships that can mobilise the flood of excess capital washing around the global economy in search of yield to create a sustainable, long-term basis for future regional growth.
In addition to broader private investment, the funding needs will require an uplift in sustainable and green financing across South East Asia.
The ASEAN Capital Markets Forum (ACMF) is working to harmonise standards and regulations around green finance, providing a complete suite6 of standards in line with international ones in order to accelerate development across Southeast Asia. The development of green finance across South East Asia, more broadly, is certainly something to watch in 2020.
The final challenge is to create a cohesive, borderless digital ecosystem that spans the region. Digital technology has the potential to play a key role in driving the development of new industries and new growth in South East Asia, but unless the region can agree on a common set of standards for data handling and digital commerce that encourage businesses to share data, that potential is likely to remain unrealised.
Like non-tariff barriers, the different digital regulatory regimes across South East Asia limit the ability of both local firms and multinationals to reap the full benefits of economies of scale, weakening its attraction as an investment destination.
The Master Plan on ASEAN Connectivity 2025 is the central node to enhance data management, facilitate harmonisation of data regulations among ASEAN Member States and promote intra-ASEAN flows of data.
However, this is largely a self- run programme for member countries, so maintaining discipline will be essential for its momentum in 2020. The impetus for doing so will only become more pronounced as 5G begins to be rolled out across South East Asia in 2020.
South East Asia has achieved a lot over the past 20 years but there are multiple opportunities to build the connectivity. Barriers in trade, infrastructure and digital borders will challenge the region‘s ability to attract the international investment necessary to play a larger role in the emerging global supply chains and to meet the region’s rising domestic consumer needs. However, if ASEAN can make the reforms necessary to create a borderless and sustainable bloc, growth across one of the world’s most exciting and dynamic regions will remain on track
A contribution piece by Tony Cripps, CEO, HSBC Singapore. A version of this piece was first published in The Business Times on 3rd January 2020.
1 ASEAN Economic Integration Brief No 5, June 2019.
2 PRESS STATEMENT: EU-ASEAN BUSINESS COUNCIL LAUNCHES NEW ASEAN TRADE FACILITATION PAPER: CALLS FOR FASTER ACTION ON AEC OBJECTIVES
6 ASEAN Green Bond Standards (2017), ASEAN Social Bond Standards (2018), ASEAN Sustainability Bond Standards (2018)