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Commentary: Positioning ASEAN for a trade war

16 Apr Commentary: Positioning ASEAN for a trade war

By Hank Lim and Shangari Kiruppalini
For The Business Times

THE tit-for-tat trade spat between the world’s two largest economic powerhouses has sent shockwaves through the global economy, roiling financial markets. Staying true to his campaign promise, US President Donald Trump has upped his protectionist rhetoric and has successfully set the stage for a possible trade war with China.

Beijing’s and Washington’s war of words has escalated rapidly over the last week with Mr Trump announcing that he would order an additional US$100 billion in tariffs on Chinese goods. In response, China has warned of its intention to impose tariffs on crucial US exports such as soybeans, aircraft and automobiles.

Adopting such a narrow approach on trade might not only have dire consequences for both the Chinese and American economies, but also has negative spill over effects on its trading partners.

Asean, for example, is deeply embedded in the China-US value chain. According to a report by RHB Bank, 16.9 per cent of goods shipped from the Philippines are part of China’s supply chain to the US, while Malaysia and Indonesia are close behind at 11.4 per cent and 10.9 per cent respectively.

Strong message

The looming trade dispute is a growing concern for export-oriented economies in Asean, and the grouping has sent a strong message to the two economic superpowers. During the recently concluded Asean finance ministers meeting, Asean leaders reaffirmed their commitment to international trade.

Asean is currently negotiating the Regional Comprehensive Economic Partnership (RCEP) which seeks to integrate its six dialogue partners. The RCEP will help create the world’s largest regional trading bloc, accounting for nearly 45 per cent of the world’s population with a combined gross domestic product of US$21.3 trillion.

Looking outside Asia, Asean has also resumed free trade agreement (FTA) negotiations with the European Union.

The potential US-China trade war emphasises the need for Asean to accelerate effective economic integration under the Asean Economic Community. The trade dispute highlights the urgency for Asean to leverage on the growth of its dialogue partners and conclude the RCEP negotiations this year.

FTAs can help Asean diversify the risks of the global market. However, they alone are not enough to hedge against this new tide of protectionism. There is a need to diversify Asean’s growth engines and adopt a more forward-looking and pro-active approach, aimed at reducing the risk of relying on one or two major trading partners.

New markets

Capitalising on the digital economy provides new market-based solutions by connecting Asean to previously remote and untapped markets. This empowers Asean businesses to gain direct access to a larger pool of customers and can help reduce its dependency on external major economies.

Asean is already on the cusp of a digital revolution. According to a Google-Temasek study, Asean is the fastest-growing Internet market in the world. Asean’s digital economy is expected to exceed US$200 billion by 2025 with 3.8 million users coming online every month. Asean’s young and middle class is driving this growth with their rising purchasing power.

It is clear that Asean has strong fundamentals to become one of the top five digital economies and now, more than ever, the momentum for digital integration must not be lost. Failure to do so may leave Asean more vulnerable to the tantrums of larger economic powerhouses.

Although Asean is doing what it can to minimise the economic implications of a possible trade war, the greater concern is the broader geo-political trends underpinning this trade dispute. If not well-managed, a trade war could divide the global economy into different geo-political camps.

Asean alone is not able to solve this issue, but it is well-placed to create a trusted neutral platform to engage both the US and China. If there is a willingness to negotiate, through quiet and creative diplomacy, Asean can support the US and China in reaching a mutually beneficial outcome.

Dr Hank Lim is a senior research fellow and Shangari Kiruppalini is senior policy research analyst (ASEAN) at the Singapore Institute of International Affairs. This article was first published in The Business Times on 16 April 2018.