The world is turning its back on globalisation. Or, at least some of the world is. And many parts of Asia aren’t.
As we wrote a few days ago, the U.S. is shifting towards Fortress America. If Donald Trump wins the upcoming US election, the U.S. could dump long-standing trade deals like NAFTA and it would abandon the Trans-Pacific Partnership (TPP). A win by Hillary Clinton is likely to see some – thought not quite as extreme – similar protectionist measures put in place. These trends have been evident in the U.S. for some time.
Then there’s Europe. The UK’s vote to leave the European Union signals a return to isolation. And throughout much of Europe the rise of right-wing nationalist parties, who tend to equate globalisation and open trade with the refugee crisis and terrorism, is pressuring the unity of the EU.
As I mentioned previously, anti-globalisation is likely to be damaging for Asia. But in the meantime, Asia is helping itself by increasing regional, and global, ties that will reduce the negative impact of what’s happening elsewhere in the world. Most importantly, trade agreements such as the ASEAN Economic Community (AEC) are helping to bring the region together.
A time of opportunity in Asia
The AEC was designed to promote economic, political and cultural cooperation between the Association of Southeast Asian Nations (ASEAN). This agreement was founded on four pillars – creating a single market, creating an economically competitive region, ensuring fair economic development, and integrating ASEAN into the global economy. Importantly, it does not include any plans for a common currency – the measure that’s been the downfall of the EU.
So far, the integration process within ASEAN has been gradual. ASEAN was established in 1967 by Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Five more nations joined later – Brunei in 1984, Vietnam in 1995, Laos in 1997, Myanmar in 1997 and Cambodia in 1999. (It’s worth noting that China is not a member.) In 1997, ASEAN leaders decided to promote economic and political cooperation among its member nations. Six years later, those leaders decided to begin setting up the AEC.
In 2007 – 40 years after ASEAN’s birth – that the AEC Blueprint 2015 was created to set up the framework to launch the AEC. On the final day of 2015, the AEC was officially launched.
Spectacular growth in trade
There has been much to celebrate from the AEC Blueprint 2015. Through the establishment of the ASEAN Free Trade Area (AFTA) agreement, almost all trade tariffs between member nations have been removed. There is now much freer movement of goods, services, labour, capital and investment between members.
Between 2007 and 2014, considered the first phase of the AEC’s development, ASEAN’s GDP nearly doubled to $2.57 trillion. The total value of trade in the region increased by nearly $1 trillion, or 56 percent. ASEAN also became one of the world’s fastest growing recipients of foreign direct investment (FDI). The bloc accounted for 11 percent of the world’s total FDI inflows in 2014, up from only 5 percent in 2007.
ASEAN integration has also helped to strengthen the region’s ties with its major trading partners. The U.S.-ASEAN Connect, for example, was announced one month after the launch of the AEC. According to the U.S. government, the U.S.-ASEAN Connect allows the U.S. “to support ASEAN’s continued integration, including the success of the ASEAN Economic Community, and increased U.S.-ASEAN trade and investment.”
Even grander goals for AEC Blueprint 2025
Building on the success of the first phase, the AEC is ambitious. AEC Blueprint 2025 targets big strides in creating a single unified market for both businesses and consumers, by removing more barriers to trade and bringing together the region’s financial sector.
Financial integration is a big piece of the 2025 project. For example, the ASEAN Banking Integration Framework (ABIF) will allow the region’s bigger, well-regulated banks to access to other ASEAN markets. Banks servicing corporates domestically could soon be able to follow their clients offshore as they expand within the region. In turn, this will promote business growth and create investment opportunities.
Also, ASEAN’s insurance market is working toward an integration framework, similar to ABIF. The region’s bond market is similarly coming together, which will boost transparency and liquidity.
Strengthening the regional financial markets is also a high priority. The ASEAN Trading Link (ATL) was established in 2012 to promote the free flow of capital. It provides investors with a single point of entry into three of the largest ASEAN stock exchanges – Thailand, Malaysia, and Singapore. Last year, Singapore indicated that the link would be expanded to bring in other ASEAN exchanges. This will eventually allow portfolio investors to access various Southeast Asian stock markets through a single portal.
Still some obstacles to growth
There are a lot of challenges, of course. At the top of the list is the region’s lack of political cohesion. Unlike within the EU, the political systems within ASEAN nations are vastly different. The communist government in Vietnam, the new democracy in Myanmar and the military regime in Thailand operate in very different ways, for example. This makes cooperation a lot more challenging, and it means that some governments might shy away from some elements of integration.
The gap between the most and least developed ASEAN economies is another big challenge. Singapore boasts the region’s highest annual GDP per person at around $85,000. Cambodia is at the bottom at less than $3,500. And with economic sanctions still in place, Myanmar’s young economy is fragile. The different concerns and objectives of the 10 member mean that it will be difficult to find common ground on a lot of issues.
How can investors benefit from this economic integration?
ASEAN has a combined population of around 625 million people. It has a GDP of $2.43 trillion, which would make it the sixth-largest economy in the world. It is also one of the world’s fastest growing regions.
A joint study by the Asian Development Bank and International Labor Organization estimates that the AEC could boost economic growth in the region by an additional 7.1 percent between 2015 and 2025. And it could also generate 14 million more jobs during that time.