The Asian Century? Or the ASEAN Century?

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China will soon be the no. 1 economy, and ASEAN is its biggest trading partner. Close economic ties with Asia’s top economy brings benefits and concentration risks in equal measure, but geopolitical tensions will derail growth

This article is republished with permission from Perspectives@SMU, the online business journal of Singapore Management University. You may access the original article here.

In 2020, ASEAN overtook the United States to become China’s largest trading partner. The next year saw a 28 percent jump in trade volume to US$878 billion, with Vietnam, Malaysia and Thailand accounting for the lion’s share. Chinese exports to the region increased 26 percent year-on-year to US$483 billion, but imports rose even faster, up nearly 31 percent to US$394 billion.

“China is importing a lot of stuff, and the Chinese will be consuming a lot of our goods. That’s good because when trade between ASEAN and China increases, the neighbourhood will be more peaceful,” notes Don Lam, Chief Executive Officer and Co-Founder of VinaCapital, and Chair of SMU’s International Advisory Council (IAC) in Vietnam.

Lam made those comments at a panel discussion titled “The ‘Asian Century’” during the recent SMU Asia Summit 2022, which featured members of the IAC. Serge Pun, Executive Chairman of Yoma Strategic and Council Chair of IAC Myanmar, believes the garment industry presents a prime opportunity for ASEAN and China to build closer ties while creating even more economic benefit.

Pun cites a dearth of young Chinese workers to replace ageing seamstresses at garment factories, where many are approaching the blue-collar female retirement age of 50. Chinese factory owners would prefer to relocate to Vietnam but rising labour costs there have closed that option. Four countries are left to choose from: Myanmar, Cambodia, Laos, and Bangladesh.

“Cambodia and Laos have too small a population, while you have to incentivise somebody to live in Bangladesh. So that leaves Myanmar, but Myanmar needs more proactive policies to attract these factories,” Pun muses.

“How do we get a situation where all the requirements are met? Three factors are needed. One, the right policy – that’s how China became so successful. Two, adequate supply of labour. Three, logistics. If we can get all three in one place, we’re bound to succeed. But no single place like that exists.

“But is there a place where we can put all three requirements together? I’m thinking, if there is a place in Thailand where we can convince the government to set the necessary policies, and Myanmar can provide the labour, that might become the new manufacturing base for the garment industry.”

Arif Rachmat, Executive Director of PT Triputra Investido Arya, SMU Trustee, and a member if IAC Indonesia, attests to the benefit of Chinese manufacturing moving into ASEAN. Indonesia is one of the top three destinations for Chinese FDI, with Singapore and Malaysia being the other two.

Unlike the countries Pun mentioned as garment factory destinations, Indonesia’s GDP per capita is already higher than that of Vietnam’s, and Southeast Asia’s largest economy is focusing on developing higher value-added industries.

“I think Indonesia has progressed very quickly led by nickel production. Nickel is a key component in the production of EV batteries,” he observes. “Indonesia now has the largest global market share of nickel – 37 percent. Beyond nickel, solar and hydrogen energy are also abundant. I wouldn’t be surprised if some part of Singapore in the future will be electrified by solar energy from Batam.

“You may also know Indonesia is home to the world’s largest peatlands and mangroves. We plan to launch our own carbon exchange hub during the G20 summit in Bali in November this year.”

The ASEAN Century?

Chartsiri Sophonpanich, Chair of IAC Thailand and President of Bangkok Bank PCL, suggests the current era could be dubbed ‘The ASEAN century’ given the region’s average growth rate of some five percent.

“We are seeing more integration in the region,” Sophonpanich says. “We can see the increasing connectivity throughout the region, and China has been leveraging on that to build its supply chains in Southeast Asia, capitalising on the younger population in the region and the higher growth rates.”

Victor Fung, Chair of IAC China and Group Chairman of the Fung Group, echoes Sophonpanich on the integration effect of Chinese FDI even though it might have been driven by self-interest.

“If your goods are made in one country and shipped to another, such as made in China and shipped to the U.S., you’re subject to tariffs and, shall we say, political risk,” Fung explains. “If you look at the different stages of production, it’s the last stage under the WTO rules that defines the country of origin; it’s where the substantive transformation takes place.

“In the supply chain world, there is a massive search for the ‘right’ country of origin. That induces a huge integration effect. For the past decade – and intensifying recently – China has been trying to work with other countries and especially its near neighbours in Southeast Asia, to co-ordinate the final stage of production. That brings the region together.”

Initiatives like the ASEAN Economic Community (AEC) and Regional Comprehensive Economic Partnership (RCEP) showcase the region’s potential as a cohesive collective economic entity, but ASEAN’s disunity over South China Sea issues highlights the risks posed by geopolitical tensions. Don Lam believes the 10-nation grouping could explore deepening cultural ties within Southeast Asia.

“We’ve had a peaceful community in the last 50 years,” he says. “Right now I see economic integration, a little bit of political integration, but to be long-lasting there must be some form of common cultural identity within ASEAN. Should there be an ASEAN soccer league to pull everyone together? You have peace and prosperity when people feel that they are one.”

IAC China’s Fung thinks fixing the multilateral trading system might be the answer.

“The WTO has done an admirable job for us since the second world war, but over the past decade, everyone can see it is in serious need of repair. Given the current state of geopolitics I cannot imagine this to be a top-down, Bretton Woods type of realignment.

“Whether we like it or not, I think we will see a revitalised multilateral trading system and WTO building out from regional blocs. I’ve had an aversion to the word ‘bloc’ for a long time but believe it will happen that way. The global system, if you will, will be driven by the Asian bloc.”

Arif Rachmat, Chartsiri Sophonpanich, and Victor Fung were panelists in the discussion ‘The Asian Century’ at the SMU Asia Summit 2022 on 11 August 2022 that was moderated by SMU President Professor Lily Kong. Don Lam and Serge Pun were amongst the distinguished guests in attendance.