SINGAPORE (May 15): Growing geopolitical tensions and disrupted trade has put Southeast Asian economies in a rather difficult geo-economic position. Long having prospered by maintaining ties with both Washington and Beijing and capitalising on its strategic location on the India-China trade route, countries like Singapore have claimed the role of an “honest broker” between the great powers to stabilise potential great power rivalry. However, a more polarised US-China relationship may render this position less tenable.
“We need to avoid creating rival economic blocs or a bifurcated global economy, forcing countries to choose sides,” declared Prime Minister Lee Hsien Loong at the UN General Assembly last year. “To have to choose between them...is going to be a very difficult choice...Even some of the allies of the United States...such as Australia, have said that they would very much prefer not to have to choose sides,” he added at a forum in Mexico City.
“Most of the Asean countries have repeatedly said that they do not want to be put in this position of having to choose between the US and China,” says NUS don Khong. However, as seen by the disputes flaring over the Trans-Pacific Partnership (TPP), the Asian Infrastructure Investment Bank (AIIB), China’s Belt and Road Initiative (BRI) and Huawei’s 5G, sitting on the fence has become increasingly difficult, he adds.
Khong predicts that the region will likely give China the benefit of the doubt regarding its lack of transparency in the early days of the crisis. In fact, he believes they would admire the swift and decisive action that Beijing took to contain the pandemic in contrast to the uncoordinated response of the Trump administration, with the US now struggling with the highest number of Covid-19 cases worldwide.
The region will likely lean towards whoever is able to manage a quicker economic recovery. The IMF predicts that China will have a head start though Khong warns that the power of the US economy is not to be underestimated. “Between the two superpowers, the one who is more resolute economically will play an important role in their future economic standing among the people who are looking to see who will be giving them their lunch in East Asia,” he says.
However, much uncertainty remains about whether the positive effects Chinese recovery would indeed spill over into South-east Asia. García-Herreo says that China would have to import Southeast Asian goods to allow Chinese funds to flow into regional markets rather than adopting protectionist policies to ensure that growth is concentrated within its domestic economy. Bert Hofman, director of the East Asian Institute, observes that China has been reluctant to release fiscal stimulus at a similar scale to the Global Financial Crisis, which spurred South-east Asia’s economic recovery in 2008.
Adapting to a less open trading environment
In spite of these apocalyptic predictions, UOB economist Suan Teck Kin believes that businesses are unlikely to be as enthusiastic as governments to “decouple” economically. As companies gear up for post-Covid-19 era, they will face multiple trade-offs. For example, they must decide if complying with the security and geopolitical interests of their respective governments is worth a loss in profits from abandoning one of the world’s two largest markets, says Suan, who is the bank’s head of global economics and market research.
American companies, Suan notes, have by and large not heeded Trump’s call to quit China. If anything, they are continuing to invest in earnest. Exxon Mobil has begun to build a US$10 billion petrochemical complex in Huizhou while Walmart has invested US$425 million in Wuhan, the initial virus epicentre. Firms, Suan says, have baulked at the costs and hassle of rerouting supply chains and will require state subsidies to reshore their operations.
“Many of our members have been negatively impacted by — and are not necessarily supportive of — the use of tariffs as a tool in the current US-China trade negotiations,” says Tim Stratford, the chairman of AmCham China. “We believe that any true resolution of the current dispute requires addressing the structural issues discussed across these many pages that have long hindered importation of US goods and services and operations of US businesses in China.”
Suan believes that firms will try to adapt to the less open trading environment. They run the risk of losing access to significant markets like the US or China. Yet, there are alternative markets that can be developed, from where firms can try and make back the profits in spite of trade restrictions. China’s growing technology, he claims, will allow it to eventually manufacture components it has previously sourced from the US at home while further strengthening its economic ties with Southeast Asia.
“The US and China can afford to be in isolation given the size of their economies, but South-east Asia cannot. If the US and China do not cooperate, countries will have to find other ways to prosper economically. Maybe this could even work to the region’s advantage as companies shift production to Southeast Asia,” says Suan, “Ultimately, the biggest losers will be the countries that do not open themselves up to trade.”
“Covid-19 will only supercharge the ongoing momentum of Chinese private manufacturers investing in South-east Asia,” agree Bee Chun Boo, Martin David and Ben Simpfendorfer in an article for the World Economic Forum. “As a growing number of Chinese manufacturers, alongside their mainly North Asian partners, seek to build capacity across South-east Asia and hedge against the rising risks of supply chain disruption, Chinese infrastructure investments in South-east Asia will benefit from these flows.”
Small states and individual firms are not, therefore, merely “rule-takers” at the mercy of great powers. Global leadership depends as much on recognition and acceptance by smaller states and non-state actors as the laws of realpolitik, with continued efforts by small Asia-Pacific countries to cultivate Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) highlighting attempts to push back against a protectionist global economic order. As custodians of the levers of the economy, firms and the logic of profit retain at least some leverage against the protectionist inclinations of governments.
“The ultimate outcome in terms of this Strategic competition between US and China will not be resolved by Covid-19...we just have to get used to this,” warns García-Herreo. “I think ultimately there may be no winner. Frankly in my opinion, this is going to harm the two, as people are going to realise that they have put their own interests before the solution to a global problem. Therefore, both are going to come out weaker out of this.”
