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ASEAN looking to stage a sustainable comeback

April 1, 2004

7 Min Read
ASEAN looking to stage a sustainable comeback

The main markets of Singapore, Malaysia, Indonesia, Philippines, and Thailand are again demanding the attention of major global competitors as their economies start to recover from the financial crisis that began in the late 1990s.

The size and importance of this market remain enormous; in 2003, for example, the value of U.S. domestic exports to the Assn. of Southeast Asian Nations (ASEAN) market surpassed the combined value of U.S. exports to India, China, and Hong Kong; and this trade balance holds true even after subtracting the less significant markets of Brunei, Laos, Cambodia, Myanmar, and Vietnam.

And notably, the significance of the ASEAN market, which comprises more than 500 million consumers, should only continue to grow, as its largely export-dependent markets reap the benefits of a rebounding global economy, and AFTA boosts regional trade. Reflecting this outlook, GDP growth for the Asean market is expected to reach 5% in 2004.

The ASEAN context

ASEAN manufacturers will be focusing on several important recent developments. Of primary interest should be the implementation of the Bali Concord II, which was signed by all 10 ASEAN leaders during the ninth ASEAN summit in October of 2003. The agreement provides a blueprint for the gradual creation of an ASEAN economic community (AEC), along the lines of the initial European model.

The Bali Concord establishes specific deadlines for tariff reductions and the elimination of regional travel restrictions. Eleven key economic sectors, including electronics, will also be put on a fast-track for reductions of both tariff and nontariff barriers by 2010, ahead of the originally specified 2020.

A freer marketplace is expected to help ASEAN economies integrate more quickly and help propel regional growth. However, implementation is not guaranteed, especially in some traditionally contested markets like plastics and automobiles. Already the Philippine government has announced its intention not to lower resin import tariffs to the required 5% level, instead lowering tariffs to just 10%. Such actions could obviously undermine the agreement.

Regional trading partners

ASEAN processors will also be intently monitoring the growing and liberalizing economic relations being nurtured with Japan, China, and India. Paralleling their work on the Bali Concord II, ASEAN leaders were simultaneously negotiating free-trade and security agreements with all three of their heavyweight neighbors.

As a result, Chinese and Indian officials signed on to ASEAN''s original 1976 nonaggression pact, known as the Treaty of Amity and Cooperation (TAC), while Japanese leaders signed an agreement that significantly lowers both tariff and nontariff barriers for ASEAN''s exporting community.

Japan remains the leading export market for many of the ASEAN nations, accounting for more than 14% of their total trade in 2001. The agreement that Japan''s Prime Minister Junichiro Koizumi signed in October was complemented by the subsequent Japan-ASEAN summit in December, where the parties signed the Tokyo Declaration for the Dynamic and Enduring Japan-ASEAN Partnership in the New Millennium. The declaration reiterated their mutual economic and security interests and laid the groundwork for future agreements.

China''s Foreign Minister, Li Zhaoxing, confirmed Beijing''s determination to reach its own FTA agreement with ASEAN by 2010, an increasingly significant development considering that in 2003, China-ASEAN trade hit a record high of $78.25 billion, a 42.8% increase from 2002 levels. When assessing the importance of these figures two factors stand out. First, the ASEAN economies increasingly carry a substantial trade surplus with China, which reached $16.4 billion in 2003, after their exports jumped 51.7% to $47.33 billion. Second, while trade with China has experienced phenomenal growth, trade with Japan has simultaneously fallen from its peak of $121 billion in 1995. This trend is continuing to elevate China''s importance to ASEAN manufacturers. The leading ASEAN export markets primarily include machinery products and parts, as well as mineral and agricultural products. Notable imports included machinery, electronic products, chemicals, and textiles.

Looking west

Trade with the U.S. should also begin to recover along with the U.S. economy. Bilateral free-trade agreements with the U.S. will also help boost sales for several ASEAN manufacturers. The existing FTA between the U.S. and Singapore, and the lesser agreement between the U.S. and Vietnam, will continue to encourage investment and trade within these economies, while the planned FTA with Thailand should further accelerate ASEAN trade with the U.S. Already in 2003, total two-way ASEAN-U.S. trade surpassed $122 billion, with the U.S. importing more than $80.5 billion of that, including more than $293 million in NAICS 3261 plastics products.

A few caveats

Despite these generally rosy fundamentals, ASEAN manufactures should take careful note of some potentially ominous international developments:

  • First, U.S. foreign direct investment (FDI) in ASEAN economies has dwindled from the record levels it experienced just a decade ago. The U.S.-ASEAN Business Council estimates that ten years ago, 75% of direct U.S. investment in East Asia went to ASEAN economies—that percentage has now dropped to 10%, with 80% of those former investments now flowing into China.

    However, some analysts observe that as wages begin to rise in China, foreign investors might again find promise in the more cost-efficient labor markets of countries like Vietnam. Already, some Chinese companies have developed manufacturing sites within ASEAN, a process that is sure to expand in conjunction with their growing economic relations.

  • Aside from the fact that ASEAN economies are losing out on needed foreign investment, the increased investment in China poses another, potentially serious problem. Many economists are becoming increasingly concerned that the blistering pace of investment and credit growth (much of which is underperforming or failed) in China could be creating a bubble. The growing number of unemployed rural workers and the excessively high degree of government spending only serve to exacerbate this potential problem. Because ASEAN economies have become so much more dependent upon exports to China, a crisis in China would inevitably hurt ASEAN producers.

  • Another concern involves the sinking value of the U.S. dollar, largely attributed to the overwhelming trade and account deficits the U.S. continually shoulders.

    The Economist Intelligence Unit suggested in January that there is a 30% chance the U.S. currency will fall at least another 4% in the coming months. If the devaluation continues, the export-dependent ASEAN economies will find it increasingly difficult to compete in the weakened U.S. market. And the strategy employed by many leading Asian nations—accumulating massive amounts of U.S dollars in an effort to hold down the relative value of their own currencies—would likewise be threatened.

  • ASEAN manufactures should also be concerned with the increased potential for protectionist legislation in the U.S. While the presumptive Democratic nominee, Senator John Kerry, has long voted to support liberal trade policies, his position on trade appears to have at least publicly shifted during his campaign, ostensibly to gain support in several key manufacturing states.

    The fear is that the Bush administration might likewise attempt to circumvent its own vulnerability on the issue by embracing more protectionist policies such as its abandoned steel tariffs. Because the U.S. has lost millions of manufacturing jobs since 2000, and employment levels have yet to seriously respond to the recovery, the potential for such an election-year development is significant. Furthermore, Asian currency manipulations have fostered a palpable resentment within U.S. industrial and political circles, enhancing Asia''s likelihood of being targeted by the protectionist backlash.

  • Finally, the growing ASEAN labor markets pose a mounting challenge to their governments to ensure that GDP growth remains significantly ahead of labor growth. The labor market is expected to grow by another 20 million workers by 2008, a growth rate of more than 7%. Yet GDP growth for the ASEAN market is predicted to rise at only around 4.5% to 5% during the same period. These ratios will slow per-capita economic development and make it more difficult for the domestic markets to develop, ensuring that ASEAN''s high and potentially risky dependency on exports will continue.

By Agostino von Hassell and Mark Bella of the Repton Group (New York, NY). Contact von Hassell at [email protected].

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