ASEAN turns 50 this year, but cracks in the economic partnership continue to grow. Chinese cheque book policies stoke fires of disagreement and, with the TPP lying in ruins, the partnership is in danger of falling apart.
By Oliver Ward
For the last fifty years, ASEAN has been a stabilising force in Southeast Asia. The economic and political partnership brought prosperity to fragmented and chaotic nations, looking to establish themselves in the new, post-colonial era.
ASEAN has been a driving force for economic growth in recent years. Since 2007 four of the five largest economies in ASEAN have improved their WEF Global Competitiveness ranking, with the Philippines rocketing a staggering 17 places. But recent rifts are threatening the continued progression of the group and compromising its ability to move forward in the modern geopolitical environment.
The South China Sea issue remains unresolved
The issue of the South China Sea has thrown light on the deep fault lines emerging across ASEAN. While the problem is certainly not a new phenomenon, increased Chinese aggression over the South China Sea region is bringing the issue to a dangerous crescendo.
ASEAN failed to reach a joint communique in response to Chinese aggression in 2012, despite having Beijing’s claims dismissed in the Arbitral Tribunal in The Hague. Cambodia refused to turn its back on its Chinese economic supporter. Hun Sen said he had made a “strategic choice” in his decision to uphold China’s claims and block an ASEAN communique.
It was an opportunity for ASEAN to show its strength but instead exposed a glaring chink in ASEAN’s armour. The issue of the South China Sea begs the question, if ASEAN is unable to make a decision and take a stand on such a central global issue unfolding in its own waters, how can the organisation be taken seriously internationally?
The root of the disunity is economic
The South China Sea issue highlights ASEAN disunity, but it is not the root cause of it. The objective to create a liberal economic zone in Southeast Asia is faltering. Economic nationalism across the region has created obstacles to doing business. Domestic companies are still hampered by tariffs and labour mobility is still not encouraged across ASEAN. The CEO of DBS, Piyush Gupta, one of Singapore’s largest banks, said, “we are a long way from where we need to be”.
He is right. ASEAN still grapples with 10 different tax systems and Indonesia, ASEAN’s largest member state, continues to pursue an economically protectionist policy. Foreign ownership is still limited in Indonesia and the hiring of foreign workers is strictly controlled.
Infrastructure investment is also key to increasing trade between member states. Transport costs are high both within Southeast Asia and internationally. To get the most out of existing ASEAN trade deals with countries like India, Japan, South Korea, Australia and New Zealand, the infrastructure within member nations needs improving.
China is looking to undermine ASEAN through economic means
The battle to stay relevant in a shifting global economy is not an easy one. It is made harder by deliberate Chinese attempts to undermine ASEAN relevance and playing member states off against each other.
ASEAN nations occupy a broad spectrum of economic development levels. Some have matured and established economies, while others are emerging and fledging. For these emerging economies, China represents a fast track to economic growth, not ASEAN. It was this vein of thought that led Hun Sen of Cambodia to preserve Cambodia’s economic interests by refusing to reject China’s South China Sea claim.
The projected “One Belt, One Road” (OBOR) investment looks set to increase Chinese political influence in the region. The stronger economic ties between China and individual ASEAN member states will only serve and heighten divisions.
The Chinese Communist Party decided to make the development a pillar of Chinese foreign policy. The route is presented as an investment in China’s economy and infrastructure, but the route has a far greater strategic and geopolitical importance to China. This is not just an economic project, but an attempt to export Chinese influence across the region. Charles Parton, a former EU diplomat in China, called OBOR “a domestic policy with geostrategic consequences”.
While ASEAN member states cannot compete with China economically, together, through the establishment of a common market and a shared labour force to drive production, it could moderate the growing Chinese influence in the region.
This growing influence is only aided by US withdrawal from the TPP
Donald Trump’s decision to withdraw from the Trans-Pacific Partnership (TPP) has left China in a position to increase its influence over ASEAN. Last year eight former foreign and security officials warned that failing to ratify the TPP would “cede to China the role of defining regional trade rules.”
Without the TPPs promised reduced trading tariffs with the US, China is the only option for the growth and prosperity of an ASEAN nation. Trade with China, or suffer slow economic growth. This is especially true in the cases of Vietnam and Malaysia, for whom the TPP represented the introduction to the American market.
Even for richer nations like Singapore, which already exports to the US tariff- free, the TPP would have been a boost. Singapore was involved in shaping the rules of the TPP, which would have given Singaporean and other ASEAN companies a competitive edge in the negotiation.
This is set to continue beyond 2017
Chinese e-commerce companies like Alibaba are pouring investment into the ASEAN economic block. Last year, the e-commerce mammoth injected US$250 million into Singapore Post to jointly develop their logistics network across ASEAN. The move would open the whole region up to Chinese e-commerce giants.
The e-commerce market is there for the taking. Currently, online retail accounts for less than 1% of total retail sales in most ASEAN nations. The industry is set for an explosion and China is working to ensure their companies will be the ones to profit from it.
Countries like Thailand are expected to triple their current retail e-commerce market by 2020. In Malaysia, Alibaba has been named the official launch partner for Malaysia’s Digital Free Trade Zone. Even within the ASEAN economic bloc, it is Chinese companies which are driving the expansion of new industries.
In some ways, China has already accomplished her aims
China may have already signed and sealed ASEAN’s fate. Since the establishment of the ASEAN-China Free Trade Agreement (FTA), ASEAN member states are doing more trade with China than with each other. In 2001, intra-ASEAN exports made up just 20% of ASEAN’s total exports, a number that has remained the same since 1970.
While ASEAN has been resting on their laurels, the Chinese have been seizing opportunities. From 2004 to 2014 Chinese investment in ASEAN rocketed by 350%. China is the main importer to the Philippines, Singapore, Malaysia and Indonesia.
The export picture does not look any different. China takes the lion share of exports from the Philippines and Malaysia and is the second largest export destination from Singapore and Indonesia, behind Hong Kong and the United States respectively.
The FTA with China severely mitigated ASEAN’s relevance as a trading bloc. The removal of tariffs on Chinese products gives China an edge in manufacturing, due to an enormous cheap workforce.
Member states have been seduced by Chinese investment and the group’s significance is rapidly fading. But the group’s political aims are becoming more important in the evolving geopolitical climate.
As the US and China posture up over the South China sea, if ASEAN is to have any input at all in what the future of its surrounding waters will be, it needs to unify. Chinese money may be alluring, but chasing Chinese yuan is tearing at the fabric of ASEAN unity. Together, the ASEAN member states have a voice, individually they are drowned out by the US and Chinese clamour.