By Chheang Vannarith
Phnom Penh, Cambodia, July 21, 2016
East Asia’s economy is entering a new phase of uncertainties and challenges stemming from complex geopolitics, a weakened European Union (EU) after Brexit, domestic political unpredictability in the US and an economic slowdown in China.
To maintain economic dynamics, regional countries need to deepen and speed up social, economic and financial reforms. The region needs to continue promoting an open and inclusive regionalism.
Regional cooperation projects need to be inclusive, build on people-centered and people-oriented development models. The people across the region should fairly benefit from regional integration.
China is facing structural economic issues including production overcapacity – supply exceeds demand, high non-performing loans, particularly corporate debts, and social issues – gaps in education and health, and aging populations.
To concretize its community, Asean needs financial support, foreign direct investment (FDI) and extra-regional markets from key dialogue partners such as China.
The strength of Asean is based on the comprehensive strategic and economic partnerships that Asean has built with major economic powers in the region and beyond.
Asean has integrated itself into the global economy.
Asean’s intra-regional trade accounts for only a quarter of Asean’s total trade, meaning that Asean trades with other countries much more than within themselves.
Intra-Asean investment remains low. It reached $24.4 billion in 2014 – accounting for 18 percent of total investment inflows into the region.
Therefore, to sustain economic growth, Asean needs to attract FDI from other countries and regions.
Asean has become the largest recipient of FDI in the developing world. The EU, US and Japan are the top investors in Southeast Asia.
Bilateral economic ties between China and Asean have expanded significantly over the past decade, particularly in trade and investment.
Since 2009, China has become the largest trading partner of Asean, while Asean is China’s third-largest trading partner.
In 2010, the China-Asean Free Trade Agreement (CAFTA) came into force. In 2015, CAFTA was upgraded to include the service sector and promotion of capital flow.
Bilateral trade volume between China and Asean doubled between 2010 ($232 billion) and 2015 ($500 billion). Trade volume is expected to reach $1 trillion by 2020.
In terms of FDI, China invested about $120 billion in Asean, which is relatively low compared with bilateral trade volume. China’s investments in Asean are expected to hit $150 billion.
However, Asean has a huge trade deficit vis-à-vis China. In 2013, Asean registered a $45 billion trade deficit with China.
Asean mainly exports agriculture products, raw materials and light industrial products to China. Asean imports high-value added goods from China, including machinery, electronics, chemical products, and consumer goods.
Chinese investments in Asean have relatively low spillover effects on local economies compared with Japanese and South Korean investments. Chinese firms have little interactions with local firms, which results in a low transfer of knowledge and technology.
Moreover, some Chinese companies, particularly in the mining sector, have damaged local environments and caused certain social problems.
Chinese investment in Asean mainly concentrates on resource seeking and labor-intensive industry such as textiles in less-developed Asean economies. For developed markets like Singapore, Chinese FDI focuses on the services sector and smart technology.
Singapore continues to receive the lion’s share of total FDI in the region. The city-state’s attraction for foreign investors derives from good governance, human capital and well-developed infrastructure. Singapore is a gateway routing FDI into other locations in Asean.
China and Asean need to strengthen the linkages between trade liberalization and facilitation with poverty reduction, narrowing the development gap and promoting sustainable and inclusive growth.
Trade in services need to be further facilitated, particularly in the new economic sectors such as information and telecommunications, financial services, smart technology, healthcare, education and tourism.
Chinese investors need to have more interactions, joint ventures or partnerships with local firms in Asean in order to promote knowledge and technology transfers.
To integrate CAFTA with the newly established mechanisms such as the “Belt and Road” initiative, the Asian Infrastructure Investment Bank and the Lancang-Mekong Cooperation body requires collective efforts and leadership.
Under these frameworks, China and Asean need to work together to identify overlapping areas, priority areas, short-term, medium-term and long-term action plans, and new areas for future cooperation.
Knowledge transmission and people-to-people ties deserve more attention and efforts.
Innovation and knowledge-based economies are the sources of growth in the region.
Public-private-people partnerships need to be developed and strengthened in order to realize a sustainable and inclusive regional development.