ASEAN in 2017: Can the Region Sidestep Trump’s Trade Threats?

ASEAN

Southeast Asia is awaiting the inauguration of Donald Trump with growing trepidation. For the 10 nations and 625 million people that make up the Association of Southeast Asian Nations (ASEAN), a lot is riding on the content and direction of his administration’s trade and foreign policy. As the world’s fourth-largest exporting region, where trade with China is of paramount importance, ASEAN is hopeful that Trump’s actions will bear no resemblance to the rhetoric of his election campaign.

“All of ASEAN is nervous about what Trump’s going to do,” says Mark Beeson, a professor of international politics at the University of Western Australia.

What’s making ASEAN nervous? China and trade, or to be precise, the president-elect’s tweets and pronouncements on those subjects thus far.

On China, Trump said during the campaign that he would impose a 45% tariff on Chinese-made goods in retaliation for its alleged currency manipulation. He has since followed up his anti-China stance with his controversial phone conversation with Taiwan’s President Tsai Ing-wen, and with the cabinet nominations of Peter Navarro, Robert Lighthizer and Wilbur Ross — all well-known China hawks. The titles of Navarro’s books speak for themselves: Death by China and Crouching Tiger: What China’s Militarism Means for the World.

For now, the question that haunts local markets is whether Trump would use the falling yuan as an excuse to start a trade war with China. Christian de Guzman, senior sovereign analyst with Moody’s Investors Service in Singapore, says this would have repercussions throughout the ASEAN region, as would any punitive measures against China.

“All of ASEAN is nervous about what Trump’s going to do.” –Mark Beeson

“Many of the so-called Chinese exports are actually products that are part of this regional supply chain, where intermediate inputs are sourced from different countries in the region and are shipped to China for final assembly,” says Guzman. “If you can imagine an iPhone: It has components from … at least a dozen countries – so if the demand for iPhones from China falls, then I think we will have a ripple effect throughout that supply chain across the region.”

Another issue of concern for ASEAN is the fate of the Trans-Pacific Partnership (TPP). Trump has vowed to withdraw from the international trade agreement on his first day in office. For the signatories of the pact from ASEAN – Brunei, Singapore, Malaysia and Vietnam — this will come as a big blow. Billed as the world’s largest regional trade agreement, involving 12 nations with a total population of 800 million and comprising of 40% of the global economy, the TPP was designed to eliminate tariffs and create a single set of trade and investment rules between member countries.

Seven years in the making, the TPP was held up as the centerpiece of Barack Obama’s “Pivot to Asia” and seen as a signal statement of America’s intention to play a leading role in the economic and security future of the region. But the TPP was not simply a trade deal. With China intentionally excluded, it was widely seen by analysts as part of Washington’s rebalancing move to curb the former’s dominance in the region. Also, the TPP would benefit communist Vietnam, America’s newfound ally, which is contesting China’s maritime claims in the South China Sea.

According to de Guzman, losing the TPP would not only mean less opportunity for ASEAN economies to diversify from China, it also means a lost opportunity for domestic reforms.

Potential Domestic Damage

“The biggest cost will be on the domestic front for the ASEAN nations,” he says. “A lot of the provisions in TPP require structural reforms in these particular countries, some of which are politically unpopular.” Regional leaders, he notes, were using the TPP as a “fulcrum” to lever support for unpopular reforms like liberalizing the agricultural sector in Japan. “In the absence of something larger like the TPP, perhaps those agricultural reforms may never happen.”

ASEAN countries have been further rattled by Trump’s questioning of the post-war regional security frameworks. Japan and South Korea were singled out for free-riding the U.S. regional alliance, with the implication that they should start paying America for providing security for their countries. As Thomas Wright of The Brookings Institution has written, Trump is of the view that “Japan and South Korea must pay for the Pacific fleet and the U.S. nuclear umbrella.”

De Guzman says this has added to the atmosphere of uncertainty pervading the region: “If the U.S. were to back away from some of these treaty-level commitments with regards to the Philippines, Japan and Korea – these are mutual defense treaties that were signed after World War II – I think the logical outcome is [that it] would ramp up defense spending [in those countries].” Countries without the fiscal means to increase defense spending would have to look for alternatives.

The case of the Philippines illustrates the uncertainty, says de Guzman. “Instead of ramping up defense spending, they are actually changing foreign policy. So there’s an easing of tension with China, which would perhaps preclude some of that ramping up of defense spending.”

All of this, says Mauro Guillen, Wharton Management professor and director of the school’s Lauder Institute, “generates uncertainty on two levels. One is American commitment to free trade, and the other is American commitment to the security of East Asia.”

This year marks the 50th anniversary of ASEAN. Founded in 1967 at the height of the Vietnam War and communist insurgencies in Indonesia and Malaysia, the five-member regional association has since grown into a club of 10: Singapore, the Philippines, Thailand, Malaysia, Brunei, Indonesia, Vietnam, Laos, Cambodia and Myanmar. Today, ASEAN is recognized as one of the most successful organizations in the developing world and the premier regional association in East Asia. It is widely acknowledged that the group has been successful in fostering growth and development in a region once ridden by war, poverty and underdevelopment. Not only has it presided over a sustained period of dynamic economic growth, it has also kept the peace.

The question that haunts local markets is whether Trump would use the falling yuan as an excuse to start a trade war with China.

Ooi Kee Beng, deputy director of the ISEAS-Yusof Ishak Institute in Singapore, has been observing ASEAN’s progress for nearly three decades. “As a security network, [ASEAN] has provided regional peace,” he points out. “As a forum for its many member countries to exert international pressure and exercise influence, it has worked as well.”

Despite its many achievements, skeptics contend that ASEAN has failed to develop into an organization with any power and influence, and that its insistence on non-interference in each nation’s affairs – the so-called “ASEAN way” – has rendered it toothless on issues concerning human rights, political reforms and, more recently, the rise of Chinese power.

“Over the last decade, China has taken an aggressive stance on claims in the South China Sea,” Kee Beng said. “This has put a lot of strain on ASEAN members and they have found it extremely difficult to stay united on this issue. The Philippines’ decision to seek a court decision internationally has been a legal success but a strategic failure, especially since the new president, [Rodrigo] Duterte, has decided to proceed with bilateral discussions with China instead.”

Kee Beng flags the possibility that the Philippines, which assumes the chair of the organization later this year, might side-step any reference to the South China Sea, as Cambodia did in 2012 when it was chair. For now, he adds, the prevailing mood in ASEAN is that “it is best not to seek quick solutions. Much depends on whether China pushes matters or not.”

Mark Beeson, a visiting professor at Centennial College at Hong Kong University, says this is the real ASEAN way — a show of political impotence and the inability to resolve crises in its backyard. “There’s always been this myth that ASEAN is in the driver seat,” he says.

“The fact that ASEAN can’t come up with a unified position [on the South China Sea] and can’t operate in a way that gives them that unified status makes it much more complicated. At the moment they are being picked off one by one — China has effectively bought off Laos and Cambodia — and that’s weakening their bargaining position and the authority of ASEAN as well.”

A big casualty in all of this of this: “ASEAN as an organization, because it’s finally dawning on people that it doesn’t have much influence or power. It’s obvious it’s not going to recover from this,” Beeson says.

ASEAN Marches On

While experts go through the “what-if” scenarios, ASEAN gets on with the business of turning Southeast Asia into a magnet for trade and investment. On this front there can be little doubt of its success. In 2015, ASEAN’s combined GDP was more than US$2.8 trillion, making it the world’s sixth-largest economy. Last year, according to FocusEconomics, despite a weak global market, low commodity prices and a slowdown in China, ASEAN’s economies expanded at an expected 4.6% (the global growth rate was projected at 3.4%, according to the IMF). While countries like Indonesia and Malaysia slipped, others like Vietnam and the Philippines have picked up the slack.

“ASEAN is continuing to outperform other emerging market regions, for example Latin America or Sub-Saharan Africa — those [regions] continue to face pressures from lower commodity prices as well as capital market volatility,” de Guzman notes.

Looking ahead, analysts polled by FocusEconomics predict GDP growth of 4.5% for ASEAN in 2017, with a two-speed economy emerging between the trade-reliant and the domestically driven economies.

“We can divide ASEAN into two camps, those that are externally exposed and those that are domestically reliant for growth,” de Guzman of Moodys says. “Places like Singapore, Malaysia and Thailand are going to continue to be quite subdued, because of what’s going on externally. And there are places like the Philippines, Indonesia and, to a certain extent, Vietnam that are looking quite robust. In the case of the Philippines and Indonesia, the sources of demand are primarily domestic, so that’s shielded them from what’s going on outside.”

Vietnam is the star performer, de Guzman points out, showing strong growth in exports, foreign direct investment (FDI) and domestic demand.

“Vietnam is a special case. What we’ve seen over the past few years is a government [that has] tried to be business friendly, more welcoming to foreign investment. This has contributed to the economic performance in the last couple of years. In the case of Vietnam, we don’t see that slowing down,” de Guzman adds.

There is “uncertainty on two levels … the American commitment to free trade and … to the security of East Asia.” –Mauro Guillen

Meanwhile, at the western border of mainland Southeast Asia, Myanmar, one of ASEAN’s youngest members, is facing its moment of truth in 2017.

According to independent development consultant Nick J. Freeman, Myanmar needs to catch up with the rest of the region. “After roughly half a century of military rule, civil conflict, unsustainable plunder of resources and macro-economic mismanagement, Myanmar now has a chance — a long-awaited window of opportunity — to pursue a more sustainable and inclusive growth trajectory,” he says. Having won an overwhelming election victory in 2015, Aung San Suu Kyi’s National League for Democracy (NLD) will be under pressure to deliver on expectations or risk political disaffection, he adds.

“Failure to do so runs some risk that the minority ethnic parties, who were the other principal losers at the 2015 polls, along with the military’s party, will gain in popularity,” Freeman notes. It won’t be an easy task, given Myanmar’s list of “developing economy” problems.

“A key constraint is the lack of institutional and human capacity in most agencies of government, which will not be overcome overnight,” Freeman says. Other immediate challenges: “A fragile physical infrastructure is another constraint, notably in terms of roads, rail, ports, logistics, power and other utilities. Also, [the country has] a largely outdated, overly prescriptive and yet poorly implemented and enforced legal and regulatory framework, where compliance has often been limited.”

Rising ethnic tension also threatens to derail Myanmar’s economic progress.

“It is a genuine risk,” Freeman says. “Not so much in terms of FDI projects being directly impacted by ethnic strife, as most investments will be in relatively peaceful areas, with the possible exception of extractives projects, but rather that ongoing ethnic strife has ripple effects that adversely impact on the macro-economic and business-enabling environment, and thereby keeps FDI activity at a modest level.”

On the plus side, Myanmar, whose economy is relatively less exposed to the Chinese downturn than fellow ASEAN members, can look for growth in its garment and extractives sectors.

Its location helps. Myanmar shares long borders with India and Thailand, and has an extensive coastline that allows for more trade flows with its neighbors and beyond. “China’s earlier dominance was largely a function of economic sanctions imposed on Myanmar, which deterred a lot of actors, and China moved into the vacuum…. The lifting of virtually all remaining economic and financial sanctions in September 2016 provides an opportunity for Myanmar to markedly diversify its foreign trade and investment profile.”

As the Year of the Rooster dawns, Myanmar as well as the rest of ASEAN are hoping 2017 won’t turn out to be anything like what some experts are warning against — that it might become an unintended casualty of Trump’s new America.

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