Regional economic integration towards the ASEAN Economic Community has led to a more than five-fold increase in the size of regional GDP of ASEAN member states since they first set off on this path. This began with the ASEAN Free Trade Area in 1992, and the increase has been from approximately USD 500 Billion in 1995 to USD 2.7 Trillion by 2017 (in current US dollars). If these trends continue, it could allow for reducing regional poverty and potentially contribute to the global 2030 Sustainable Development Goal (SDG) of ‘ending poverty’.
However, since the first year when the SDGs were institutionalized (2016), there have been waves of protectionist sentiment in international trade, which present an important uncertainty that could disrupt the previous pattern of trade-enabled growth and development. This sentiment, mostly through twitter posts on social media, was actualized in January 2017, when the United States officially backed out of a landmark trade agreement, the Trans-Pacific Partnership (TPP). It was followed by the ongoing trade-war between the United States and China.
The theory has been that freer trade in goods, through trade facilitation and reduction of tariff- and non-tariff barriers, allows countries to specialise in commodities which they can produce more efficiently than others. As a result of more efficient distribution of roles on who-produces-what, the size of the economic pie increases, ideally to the benefit of all who take part in baking it. As such, trade-wars and less trade cooperation can potentially reduce GDP growth.
So far, ASEAN has not yet been significantly affected, if one looks at its economic output. For instance, 2017 did not see a decline in ASEAN GDP, even in constant US dollar terms. Based on latest available year-end data from 2016 to 2017, the region’s GDP grew 4.8 per cent, which was faster than its annualized growth rate of 4.3 per cent from 2010 to 2016 (both in constant US dollars; in current US dollars, the increase was even steeper, from 5.4 percent to 6.7 per cent). These reflect to some extent the robustness of ASEAN’s economic community, as a result of prior integration efforts.
Nonetheless, the risk remains, when one speculates on potential behaviours of countries beyond the region. At the 2018 ASEAN Business and Investment Summit in Singapore, Malaysian Prime Minister Mahathir Mohamad warned that US protectionist behaviour could set a precedence, and trigger a ‘domino effect’. Populist sentiment in developed countries may, for instance, lead them to also apply or increase trade barriers on products exported by developing countries, including ASEAN countries.
For ASEAN to continue to be robust against the threat of trade protectionism, it will need to sustain its progress in developing the ASEAN Economic Community, such as by developing its infrastructure; building up its small and medium enterprises; improving digital and transport connectivity; and appropriately leveraging technologies in the Fourth Industrial Revolution that are slowly transforming jobs and businesses.
Apart from trade, financial robustness will be a continuing safeguard moving forward. Trade and financial integration go hand-in-hand, as increased intra-regional trade means net exporting countries can accumulate more capital, such as through cross-border trade financing. However, during trade wars, a sudden decline in demand for products of net exporting countries can lead to financial instability (as less capital goes to the exporting country) coupled with exchange rate volatility. To prevent these, the ASEAN+3 Chiang Mai Initiative Multilateralization provides reserves that ailing countries can tap when they are running low on capital. It needs improvement, though, as a timely and reliable source of capital in times of crisis. For example, 70 per cent of the fund can only be tapped by countries with ongoing programmes with the International Monetary Fund (IMF); yet, not all countries agree with reforms imposed by the IMF as pre-requisites for IMF loans.
Looking forward, there is also room to explore ways for the region to fund their own infrastructure and connectivity efforts. If these initiatives are expected to have vast positive economic impacts, allowing for new cross-border transactions that boost the productivity of their businesses, then there is potential for these to become viable investment opportunities, even for the private sector.