Southeast Asian countries must deepen free trade and regional integration to mitigate the impact of tension between the US and China and attract more capital from the Asian superpower, according to industry experts.
The 10 countries that form the Association of Southeast Asian Nations are in a sweet spot when it comes to growth. According to estimates from the Asean+3 Macroeconomic Research Office (Amro), the region’s economy is set to grow 4.4% this year and 5% next, despite the anticipated weakness in the global economy in 2024.
Asean is benefiting from US companies trying to move manufacturing away from China, but it can also boast cost competitiveness.
A DBS Bank report published this month showed that while China had increased investments in Asean+6 (comprising Asean and six other Asia Pacific countries), the largest share of inward investment was now coming from the West, Japan, South Korea and Taiwan.
But Asean is enjoying the best of both worlds — it is growing in importance for China, too. China’s investment in Asean has risen over the past decade, in part driven by the Belt and Road Initiative.
Outward direct investment from China into Asean grew 8% between 2018 and 2022, according to DBS, hitting an impressive $18.7bn last year, 11% of China’s total ODI and more than it invested in Europe and the British Virgin Islands.
But the fraught relationship between the US and China — with China this week calling for a ceasefire in Israel/Palestine and speaking to the Palestinian government — is highly important for Asean’s future.
Amro’s senior economist Marthe Hinojales said US-China tensions remained the “most pertinent to Asean growth” in the medium term, “especially given the region’s high participation in global value chains”.
To protect itself, Asean needed “to remain committed to free trade and closer regional integration”, she said. “Strong policy signals that reaffirm the region’s deep and longstanding commitment to free trade and openness will help decrease market uncertainty that arises from geopolitical tensions.”
Asean could also improve domestic policies to raise competitiveness, she added.
For now, recovering trade, such as rising US durable goods demand, and improving growth momentum in China were helping Asean stay resilient, said Hinojales.
But if Asean countries and others in Asia want to keep their momentum going, they will have to be proactive in tackling the many challenges coming their way.
Lakshmanan R, a senior Asia Pacific corporate analyst at CreditSights, said that while growth in countries like Indonesia and the Philippines was robust, “pressure could come from higher oil prices” stemming from the Gulf tensions.
If the Israel-Hamas conflict broadens to encompass other Middle Eastern countries, this pressure could mount, he said.