Asean should not drop the ball

Recently I sat down with Dwight Hutchins, chair of the American Chamber of Commerce in Singapore, to discuss AmCham’s 2017 Asean Business Outlook Survey. The document, published in collaboration with the US Chamber of Commerce and reporting on the poll of companies from a nation that is the largest investor in Southeast Asia, makes for interesting reading.

More than half of the US firms reported that Asean markets had become more important in the past two years in terms of their worldwide revenue. That’s chiefly because of the brisk pace of economic growth here, added to a rising middle class and an expanding consumer class, and regional integration. Nearly 9 out of 10 firms anticipated that their level of trade and investment in Asean would rise in the next five years. Topping the list of Asean states where US firms were the most optimistic because of an improving business climate were the Philippines, Vietnam and Myanmar. The last two, along with Indonesia, were priority markets for expansion.

Interestingly, for US firms that are in Cambodia and Laos, regional integration was the strongest reason for the growing importance of Asean markets.

Not just the Americans but also the Japanese, who are nearly as big an exporter of capital, are turning back to Southeast Asia. In 2015, for a third straight year, the amount of foreign direct investment from Japan to the Asean states exceeded such investment in China and Hong Kong, according to the Japan External Trade Organization.

The Japan Bank for International Cooperation (JBIC) says about 56 percent of Japanese firms are looking to expand in Asean in the next three years. And the share of Japanese firms looking to invest in China had fallen below 50 percent from 73 percent in 2011.

Analysts note that the pace is accelerating. In March, for instance, DBS Group Research said Japanese investment flows to the Asean Six (Singapore, Thailand, Malaysia, Indonesia, the Philippines and Vietnam) had averaged US$20 billion per year for the past five years, with the exception of 2012, when flooding in Thailand caused a drop in flows to it. In contrast, the 2006-2010 period had seen flows of just $7-10 billion.

The AmCham survey and the JBIC report merit the attention of both Asean’s business people and government leaders, coming as they do at a time of opportunity and challenge for Southeast Asia. In China, US firms are finding the business environment steadily more difficult, and profits are dipping yearly. In an extreme case, Uber has just thrown in the towel, surrendering to a combination of stiff competition from a domestic player and regulations that work against its model. The story is repeated in many industries. Little wonder that a tenth of US firms in China are looking to diversify to Asean. But if political risk and China’s slowing economy are opening significant opportunities for Asean firms to capitalize on, fresh challenges are also rising nearby.

Last week in India, the government successfully steered through tax legislation that promises to turn the vast land into a single market for production and distribution—an unquestioned boon to investors and, of course, Indians themselves. But an India becoming attractive to investors can be a formidable challenge for Asean economies because its economy, unlike China’s which is steadily and deliberately moving up the value chain, will compete with them at every section of the scale.

From the low-skilled garment industry jobs that have moved to Cambodia and Myanmar to those that require higher skills, including arms manufacture, all can be done in India, sometimes at lower cost. And it is not about wages only. Productivity in India has been rising by nearly 4 percent a year. It also has the stout strategic backing of the US and Japanese governments.

Asean would never wish to see a neighboring nation, whether China or India, beggared. But if ever there was a time that it should, as a bloc, coordinate its steps in every way, it is now. There’s so much going for it: The Asian Development Bank says Asean’s intraregional trade intensity index was 3.54 in 2014, higher than the European Union’s 2.04 and East Asia’s 1.54. It would be foolish to not keep a good thing going.

Yet, the integration that is so key to Asean’s future may well be at risk. The consensus-based bloc that charmed the world and convinced most outside powers to grant it the “centrality” it sought, is in danger of dropping the ball as internal fissures surface.

A decade ago, the issue that nearly collapsed an Asean summit was Myanmar’s firm refusal to let a United Nations special envoy brief its summit on the progress he was making as a mediator between the junta and the democratic opposition. Today, that seems like a mere hiccup. Myanmar now has an elected government and is increasingly rising on the radar of global investors. But since 2012, the dissonance has become more serious and a lot of it has stemmed from the actions of Cambodia, Asean’s youngest member, and its anxiety to please China. Four years ago as host nation of the Asean summit, its refusal to allow references to the South China Sea in the conference document led to the unprecedented situation where a summit ended without a joint statement. Last month in Vientiane, although it is not a party to the dispute, it again successfully fended off direct references to China. What’s more, the meeting was held in the aftermath of a decisive ruling against China from the arbitration court in The Hague.

The $600-million grant that Cambodia received a week before the Vientiane meeting may be useful for it today, but the political payoffs may not be worth the price, long-term. Indeed, some senior Asean diplomats even took to social media to suggest Cambodia should be asked to leave Asean. There was a time when Asean’s fault lines were regarded broadly as those between the mainland and maritime states of the region. As the big powers jockey for influence, and open their wallets to press their influence, more fissures must be expected. Already, expectations are being moderated: See how the language on the Asean Economic Community has changed. Not too long ago, the pitch was about developing a single market and production base. Now, the formulations are less ambitious, such as striving for a “highly integrated economy.”

Hanging together holds the promise of a shared future of prosperity. As the AmCham survey shows, quite a bit of the interest overseas firms have in being here stems from Asean’s efforts to integrate, not stand separately.

Ravi Velloor is associate editor (global affairs) at The Straits Times, Singapore.