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How will S China Sea dispute affect businesses in Asean?

15 Aug How will S China Sea dispute affect businesses in Asean?

Controversies over the South China Sea have dominated headlines, especially after last month’s decision by the Permanent Court of Arbitration, brought by the Philippines and denounced by China. But many businesses may look on more quizzically. What is the impact on the bottom line? Will prospects for Asean (Association of South-east Asian Nations) countries diminish if tensions with China escalate?

Yes, political differences can spill over to economic engagement and bilateral development assistance can dry up when relations sour. Yes, an outright naval confrontation or incident at sea — especially between China and the United States or Japan — could be destabilising. But negative outcomes are not inevitable.

Differences can be managed with win-win areas to keep the dispute in context. Both sides — and indeed all those interested in a prosperous and more interdependent Asia — have much to gain.


Beijing has laid out a grand future vision of a “One Belt, One Road” — involving the construction of land, sea and air routes — across the region and beyond. China’s newly created Asian Infrastructure Investment Bank is expected to fund major parts of that vision and increase infrastructural connectivity, both within the region and to major partners beyond.

But while China is a key player, it is not inevitable that Beijing will dominate the region. Existing multilateral agencies such as the World Bank and Asian Development Bank can step up. So can other donors and partners, such as Japan. The US too can play a greater role through high-quality trade agreements like the Trans-Pacific Partnership (TPP), now pending ratification, and with support for the innovation-led sector.

Asean is not solely dependent on China but is well balanced between Beijing and other partners. Consider the trade and investment figures.

China is the region’s top trading partner with total bilateral trade at 15.2 per cent of total Asean trade, but this is followed by Japan, the European Union and the US, with each at about 10 per cent. Investment data shows the EU leading with 16.4 per cent of the total inflows, followed by Japan at 14.5 per cent, the US at 10.2 per cent and China at just 6.8 per cent.

While the global economy is facing strong headwinds and China is slowing, Asean continues to outperform. It is not only Asean who needs China. As an immediate neighbour, China stands to benefit economically and strategically from cooperation with the grouping. Asean is not doomed to be anyone’s puppet and can instead be a worthy partner to key players.


This will, however, require Asean to be competitive and more closely integrated. The group’s economic ministers met in Laos on Aug 3 and provided impetus for the Asean Economic Community, inaugurated at the end of last year. A framework will monitor and evaluate progress on integration, for regular review from now and towards 2025.

Yet while this can help, some doubt whether the group can really push ahead. Protectionist sentiments and narrow nationalism seem to be on the rise and Asean is not a supra-national organisation that can command governments to obey. What remains more important is what is happening at the national level. Here, while less apparent, signs are emerging that key Asean economies show more ambition for reform than at any time in recent years.

Take Indonesia, for example. President Joko “Jokowi” Widodo has rolled out 12 economic reform packages aimed at stimulating economic growth and attracting fresh investments into Indonesia. This was followed by an announcement of a “big bang” plan earlier this year to reduce restrictions on foreign investment in 49 sectors. This is the country’s largest opening to international investment in a decade.

While nationalist voices are loud, the Jokowi administration is signalling ambition to go beyond the export of natural resources, and move up the global value chain. Reforms will be essential and must include efforts to increase government efficiencies and address corruption as well as balancing the budget.

Indonesia is not alone in such efforts, moreover. Economic reforms are being planned across Asean, from Thailand, which has the second-largest GDP in the grouping, to Myanmar, the frontier economy.

They are seeking the right kinds of investment that bring good-paying jobs for more workers and more opportunities to local small and medium businesses. In today’s political climate, governments strive for inclusive growth, whether they are populist — like the Rodrigo Duterte presidency in the Philippines — or controlled, like Vietnam and Thailand. Such reforms can spur the majority within the region to be more competitive and better integrated.

In this regard, it is not so much Asean at the regional level that is setting the pace to deepen economic integration. Rather, the efforts are coming from the national level, through these parallel reform initiatives.

Much remains to be done. Reform will not be easy and building infrastructure across the region will require long-term effort. But these are necessary and indeed essential. National governments will otherwise struggle to grow their economies and jobs for their people.

Asean can only remain central by pairing its political centrality with economic dynamism and moving ahead with integration.

This is the way to better manage bumps and controversies, even sensitive concerns such as the South China Sea, and move ahead on an agenda for integration and reform that all — governments, businesses and ultimately Asean citizens — may partake and benefit.

Simon Tay is chairman of the Singapore Institute of International Affairs (SIIA), which is organising the 9th Asean & Asia Forum on Aug 22. This commentary was published in TODAY on 15 Aug 2016. A version of the article also appeared in The Nation and The Straits Times.