As the US-China talks “pause” their tariff conflict, and other bilateral trade relations such as US-Japan and US-India continue to grab headlines at the recent G20 Leaders’ Summit in Osaka, we may look back at another Asian nation leaders’ summit of the ten Southeast Asia nations (ASEAN) in Bangkok, Thailand in June as the summit which made an even bigger impact on the future of Asia’s role in global trade.
The ASEAN region, home to 650 million people, with a combined GDP of US$2.8 trillion, and the only region to have preferential trade and economic cooperation frameworks with all of Asia’s largest economies (Japan, China, Korea, India, Australia and New Zealand) is both a political and economic center of gravity in Asia. While the ASEAN leaders discussed a range of political, social and security issues at the summit, as the fifth largest economy in the world and third largest in Asia, several global trade issues were also on their agenda.
It is no surprise that the US-China tariff conflict is a strategic issue for ASEAN’s leaders. China is ASEAN’s biggest trading partner and there is more American foreign direct investment in ASEAN than the total amount of American FDI in China, India, Japan and South Korea combined. Several ASEAN leaders noted that U.S.-China trade tensions represented a challenge to both the economic interests of the region and the global economy. As the perception grows that the current nature of US-China trade relations is a “new normal,” we’ve begun to see the initial impact of this conflict as numerous Asian and international companies adjust their supply chains by shifting production into operations located in ASEAN countries like Thailand and Malaysia.
Vietnam has been reported to be one of the biggest beneficiaries, recording significant growth in exports in Q1 of 2019. For example, Vietnam’s exports to the United States are up by 38 percent relative to Q1 of 2018 (US exports to Vietnam have also risen by 18 percent this year), partly a result of Samsung shifting a percentage of cellphone production for export to their existing factories in Vietnam.
While avoiding US tariffs on products made in China is an important “push” factor in the decision-making of companies to shift manufacturing supply chains towards ASEAN, sustaining that trend is likely to become a function of even more powerful “pull” factors in the form of trade modernization initiatives contained in the formation of the ASEAN Economic Community (AEC) and new preferential trade agreements like the CPTPP, ASEAN-Hong Kong FTA, and EU-Indonesia and EU-Vietnam FTAs. For example, according to Vietnam’s General Department of Customs, exports to fellow CPTPP partner nations Japan and Canada have increased 11 percent and 37 percent respectively in 2019.
The second major trade issue discussed at the ASEAN Leaders’ Summit was the status of the negotiations of Asia’s 16-nation regional preferential free trade agreement, the Regional Comprehensive Economic Partnership (RCEP). From the start, any trade negotiation involving 16 Asian countries is bound to be challenging and potentially commercially significant with China and India involved. Given the political and economic diversity of the nations involved from Japan, China and India, to Cambodia, Laos and Myanmar, one could imagine the task as inherently difficult and because of China and India’s involvement, success will likely be defined differently relative to other international trade agreements.
Fortunately, ASEAN has a history of serving as Asia’s neutral ground to develop Pan-Asian trade and financial responses to crises and varying regional economic cooperation and integration initiatives. The ten ASEAN nations already have five preferential trade agreements with its six partners, and RCEP (based on a framework developed by ASEAN’s trade ministers) was envisioned to synthesize and enhance in commercially meaningful ways those five existing agreements into a single framework. Given that combined, the 16 RCEP nations would represent the world’s largest economic block, consisting of 3.4 billion people, with a GDP of US$49 trillion (equal to 40 percent of global GDP), if successful it would make an impact on the global economy.
After seven years of negotiations and continued trade policy sensitivities in India, Indonesia and China, the 16 nations have only reached consensuses on seven of the proposed 20 chapters in the agreement, which is why many presume the RCEP agreement remains a bridge too far. The June 23rd ASEAN Leaders’ Summit communique reiterated the April 23rd communique by ASEAN’s ten trade ministers and other previous ASEAN communiques: Successfully concluding the RCEP agreement by the end of the year is ASEAN’s top trade policy priority. After the summit, trade officials from Thailand, Indonesia and the ASEAN Secretariat were sent to India for RCEP talks in the hope that the recent elections in each country might make the domestic political trade calculations more conducive to move the RCEP negotiations.
While China and India’s mercantilist tendencies ultimately are likely to significantly influence the degree of modernization and liberalization contained in a successful RCEP agreement, this author sees commercial potential in two middle pathways forward: Similarly to what transpired after the United States withdrew from the TPP, RCEP members unwilling to move forward with the consensus degrees of trade modernization could be allowed to step out, and remaining members led by ASEAN, China, Japan and Australia could create the necessary agreement reconfiguring provisions to conclude the agreement, bringing it into force and enabling members to rejoin the agreement in the future; or all RCEP members could sign an agreement containing only those chapters successfully negotiated and commit to continue the negotiations on remaining chapters in 2020.
In the current environment, even if neither pathway was successful in 2019, signals from several Asian capitals indicate the continued delay in reaching an RCEP agreement would likely serve as a new catalyst to make joining the existing CPTPP framework without China and India a national trade policy priority to avoid being “left behind.”
As American and international companies and investors continue to research their options and look for degrees of predictability in a changing global environment, ASEAN’s leaders have a window of opportunity to make decisions which can enhance their attractiveness as manufacturing locations in the eyes of global and local firms, while significantly influencing the evolution of the Asia’s trade landscape to support processes of inclusive, sustainable and innovation-led growth.
The writer is senior vice president of policy at the US-ASEAN Business Council.