26 June 2020

ASEAN coordination essential for economic recovery

Retaining and continuing its spirit of integration and collective reform is Southeast Asia's best chance of a faster recovery.

Priya Kini

Head of Global Banking, HSBC Singapore

If there was ever a time for ASEAN to prove its mettle as a regional trade and investment reformer, it is now.

Responding to the COVID-19 immediate human health crisis has required countries to forge their own path: closing borders, retaining emergency supplies, and seek infrastructure stability. But as Southeast Asia begins to re-open, member countries cannot approach economic recovery in isolation.

The reason is simple: Southeast Asia is always stronger when it acts as a collective as a region rather than the sum of its parts.

The region's deeply interwoven supply chains - spanning electronics, automobiles, textiles and garments – have developed because of ASEAN's ability to remove trade and investment tariffs between the association's 10 member states. The result has put many of its more than 650 million[1] citizens on a path to prosperity.

This is something that policymakers need to remember as they chart a new path towards economic recovery.

The signs are promising, with the specially-convened ASEAN leaders' meeting in April seeing a renewed commitment to trade, investment and supply chain openness[2].

Now, as member countries focus again on their domestic challenges, the devil will be in the detail of this collective response plan, including the much-touted Pandemic Recovery Fund.[3]

Whilst the collective focus will be, rightfully, on the immediate economic CPR, thought should also be given to the longer-term sustainability of the region.

With that in mind, HSBC advocates a multi-stakeholder approach that focuses on three reform planks: trade and investment flows; digital connectivity; and re-building better for longer.

Re-opening of trade and investment through multilateralism

The pandemic – and before that trade tensions, protectionism and economic de-coupling - has reinforced the need for companies to reassess the diversity and resilience of their supply chains.

These supply chain shifts present an opportunity and a threat for Southeast Asia – depending on the region's appetite and pace towards driving trade reform.

Most of Southeast Asia's tariff barriers have been dismantled but non-tariff barriers have proliferated in their place. In fact, the EU-ASEAN Business Council estimates that there are now some 6,000 separate non-tariff barriers to trade across the region. [4]  

If Southeast Asia is to hold itself up as the gold standard for would-be corporations to operate within, these 'invisible' trade barriers need to be tackled. Examples include increasing the minimum threshold for goods that require a Certificate of Origin (reducing red-tape for businesses already under pressure); automating customs clearance processes, and for remaining nations to join the ASEAN Single Window.

Formally signing and ratifying the already-agreed Regional Comprehensive Economic Partnership (RCEP) is another lever to kick-start the region's growth and strengthen the relevance of its supply chains to international companies seeking diversity.

The economies covered by RCEP account for 30% of the world's population and 29% of its world's GDP (including all of ASEAN states) – so RCEP has the potential to be one of the most powerful free trade agreements, and will be a considerable counterbalance to  the tide of protectionism that is sweeping the world.

Building stronger digital connectivity

Like so many things, COVID has accelerated online commerce from 'nice to have' to business critical, with many sectors likely to shift permanently.

This presents its own set of opportunities and challenges.

The headroom for growth is enormous. A recent report by Bain & Company[5] concluded that the ASEAN digital economy accounts for 7% of its total GDP. In China it's 16%. In the United States, 35%. Harnessing the digital economy to power and accelerate intra-regional trade and growth could, the report concluded, lead to an uplift in GDP of US$1 trillion by 2025, with particular benefits for SMEs.

But unless the region can agree a common set of standards for cross-border data management and digital commerce, that potential is likely to remain unrealized, and threats to go unchecked.

For growth to happen, already-agreed frameworks like the 'ASEAN Digital Integration Framework Action Plan' and the 'ASEAN Framework on Digital Data Governance' need to be fully implemented in order to integrate the currently disconnected rules and regulations of nations.

These are, of course, knotty, politically-sensitive issues for member countries, but with the right blend of political leadership and a renewed spirt of public-private partnership, the digital future for the region is bright.

Building better for longer

As the governments work through the ASEAN Pandemic Recovery fund's design, it seems a perfect opportunity to ensure it is consistent with globally agreed climate and sustainable goals and commitments.

There are many worthy investment avenues including programmes to support the future skills development of its workers, embedding sustainable practices into supply chains, helping the construction sector move towards building green buildings and infrastructure; and accelerating the transition of the fossil fuel industry.

To do this ASEAN member countries should seek to focus on closing the gaps that are likely to hold back long-term growth, for instance looking instead at boosting the construction sector via incentives for green buildings and green infrastructure; and accelerating the transition of the fossil fuel industry.

But for this to actually happen across Southeast Asia, there are a few practicalities that need to be addressed in tandem.

For example, member states need to agree on common definitions for what are considered green or sustainable activities and investment practices.

Having consistent standards on what is considered 'green' would help direct private capital towards long-term, environmentally sustainable activities. ASEAN should forgo the desire for perfection in place of pragmatism. A way this can be more readily achieved is to try to localise green standards that have already been implemented in other jurisdictions, like Europe, rather than build its own[6].

In fact, the EU - in its recovery budget plan announced at the end of May – said that 'green' will be a guiding focus and that its EU taxonomy will play a role.[7]

Southeast Asia's past economic success story rests in no small part on its member states' willingness to embrace multilateralism, rules-based systems and open and connected economies – as a way of growing the economic pie for all concerned.

As we come out of the immediate COVID crisis, the region – like the rest of world – is potentially facing its biggest challenge in a generation, probably longer. Now more than ever, its policy makers need to re-capture the reform spirit that initially sparked its growth spurt. And it needs to do it with speed, pragmatism and a shared vision. Its people are counting on them. 

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