Global trade is changing. The kinds of multilateral agreements that characterized the postwar years have stalled over the past two decades, prompting countries and economic blocs to try to negotiate smaller deals with fewer partners. Nations and blocs have more leeway under this new model to negotiate the trade agreements that best suit their interests and to avoid those that don't. Now, more than ever, the future of international trade depends on a country or bloc's defensive interests, offensive interests and underlying factors of production. Our fortnightly Trade Profiles aim to break down these factors to facilitate an understanding of where global trade stands today and where it's headed.
In the 14th installment, we focus on the Association of Southeast Asian Nations.
The Association of Southeast Asian Nations (ASEAN) is a loosely aligned bloc that seeks to channel the often-divergent trade interests of its 10 member states. This is challenging: After all, the concept of a "Southeast Asia" stretching between India and China failed to gain widespread acceptance until World War II, and the region is still defined by its deep geographic and economic divisions. In terms of trade policy, ASEAN's history has been relatively short. Though the association was founded in 1967 with the Bangkok Declaration, it did not begin to prioritize a trade agenda until the late 1990s when it shed the baggage of the Cold War and its four final members joined (Cambodia, Laos, Myanmar and Vietnam). Given that its members share a history of foreign domination, ASEAN's operating principles emphasize sovereignty, consensus and non-coercion — priorities which limits the bloc's capacity to strike deep, meaningful trade deals.
Though ASEAN's members are diverse, they are united by the fact that they compete with other lower-end manufacturers for overseas markets and by their shared security and strategic interests. Cooperation among ASEAN members is adaptive given the small size of their individual clout compared to the markets they are attempting to access. Together, however, members have the potential to become a globally significant presence: With 690 million people, the ASEAN bloc comprises 3.3 percent of global gross domestic product, trades goods totaling $2.27 trillion and boasts robust economic growth. Since 2000, the bloc has successfully negotiated six ASEAN+1 trade deals with non-members including China, South Korea, Australia/New Zealand, Japan, India and most recently Hong Kong. In 2015, the bloc also established the ASEAN Economic Community, lowering some internal trade barriers with the hope of integrating and strengthening members' supply chains and infrastructure. ASEAN has also benefited greatly from integration with China's industrial base, assuming responsibility for some low-end manufacturing as the country moves up the value chain.
The ASEAN+1 deals, however, are broad and shallow agreements that are products of compromise among the loosely bound member states. Naturally, the interests of each member can differ sharply. The foundational divide within ASEAN runs between the so-called "ASEAN Six" (Singapore, Malaysia, Thailand, Indonesia, Philippines and Brunei) and the newer arrivals, the CLMV countries (Cambodia, Laos, Myanmar and Vietnam). The CLMV are still playing catch-up, although Vietnam has pulled far ahead of its cohorts to the point that it has largely closed the gap with the ASEAN Six. Together, the ASEAN Six handle 80 percent of the region's trade and account for 88 percent of its GDP; Vietnam alone accounts for 87 percent of the remaining portion.
ASEAN+1 deals are structured to allow more implementation time for the four CLMV members. For example, in the Japan-ASEAN Economic Partnership Agreement, CLMV countries do not need to comply with regulations until 2020-2025, while the ASEAN Six must implement the required measures by 2018. The CLMV countries were likewise granted five extra years to accomplish internal ASEAN Economic Community integration goals. At the same time, ASEAN permits members to strike bilateral deals to facilitate deeper market access than possible under the bloc's other multilateral agreements or to target business with a non-ASEAN+1 country. The end result of overlapping bilateral and multilateral trade deals has earned comparisons to a "noodle bowl," which the Regional Comprehensive Economic Partnership (RCEP) was created to streamline.
The ASEAN economies — all export based with relatively small internal consumer bases — share an interest in sustaining and cultivating their manufacturing sectors. Machinery is the top export of the bloc's six largest exporters: Singapore, Vietnam, Thailand, Malaysia, Indonesia and the Philippines. Thailand is ASEAN's top automobile exporter. For late-developing Vietnam, garments and footwear still comprise a major portion of exports and are the leading export sector for Myanmar and Cambodia. Tiny, isolated Laos largely relies on primary resource exports but has a small and growing manufacturing sector. But as small manufacturers, individual ASEAN members find it difficult to achieve the economies of scale necessary to move up the value chain or to muster the clout that is required to access major markets. Two factors helping members overcome such problems are deeper internal integration and multilateral negotiations. ASEAN has also pushed for access for intermediate goods, enabling the bloc to integrate into larger global supply chains, such as that of China.
With the exception of Brunei and Singapore, all ASEAN countries also possess extensive, less-developed rural hinterlands. To maintain stability and distribute economic growth, members seek to protect these regions from competition while opening up markets for cash-crop exports. Palm oil is Indonesia's second largest export and Malaysia's fifth, and ASEAN prioritized access for the product in trade talks with India. Thailand, Indonesia and Malaysia are among the top 10 exporters of rubber, which featured prominently in ASEAN-China trade talks. Thailand is also the world's second-largest exporter of rice, with fellow ASEAN members Vietnam, Myanmar and Cambodia also finding a spot in the top 10. And in Myanmar, Laos and Cambodia in particular, agriculture comprises a larger portion of GDP (more than 30 percent) than industry. But in addition to being a potential driver of rural development, the agricultural sector is also vulnerable to competition from overseas. Farmers in Cambodia, Vietnam and Laos all rely on internal markets to purchase their food crops. Thailand's rural north, which has been the source of serious political turmoil, requires similar insulation. As a result, all four of these ASEAN members have higher tariffs on agricultural goods, even as they also seek markets for their chosen export crops. Such issues were manifested in the China-ASEAN deal, in which the bloc jointly pushed for longer lead times to phase in sensitive agricultural products. At the same time, ASEAN pushed aggressively for palm oil access in talks with India. Similarly, Thailand championed access for its rice exports during ASEAN's talks with South Korea.
Singapore has been at the fore of advancing the ASEAN free trade agenda, prioritizing the issue to a greater degree than its fellow members amid an attempt to pull the bloc toward more integration and external liberalization. As a tiny shipping hub, the city-state has few protectionist interests and relies entirely on trade openness. Other ASEAN members have largely followed Singapore's lead in forging multilateral deals, although each has inserted exceptions or established informal barriers to protect its unique economic interests. CLMV countries already benefit from a longer implementation deadline as part of the ASEAN+1 structure, but all members can also compile a list of sensitive exceptions to trade deals or opt out entirely.
Indonesia has followed a slightly different path from the other ASEAN Six countries. Although relatively open, Indonesia has erected numerous non-tariff barriers to protect its steel, garments, electronics and refining sectors. Following trade talks with Australia and New Zealand, Indonesia delayed the ratification of the agreement out of concerns for its manufacturing sector and applied for exceptions for the aforementioned industries in talks with China. The moves stem partly from the fact that Indonesia lags behind nearby Malaysia and Singapore in terms of its manufacturing exports because of the outsized importance of commodity exports (hydrocarbons and minerals). Protectionism is also adaptive because, as ASEAN's largest member (with over 40 percent of the population), it can rely partly on its internal consumer base to strengthen these sectors over time.
In terms of the bloc's future trajectory, the ongoing Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) talks will be critical. This high-quality trade deal was partly aimed at pushing two of the ASEAN signatories (namely Vietnam and Malaysia, but also Singapore and Brunei) to make deep, substantive reforms to their institutions, labor practices and state-owned enterprises. If completed, the deal could incentivize other ASEAN members to try to compete by making similar reforms. Such changes could allow ASEAN to negotiate deeper, stronger trade deals as a bloc. Similarly, China's Belt and Road Initiative seeks to forge deeper infrastructure links throughout Southeast Asia, which would help to tie together regional supply chains and make ASEAN exports more efficient.
Taken in aggregate, ASEAN is offensive in terms of its machinery, electronics and low-end manufacturing exports. As a bloc, all members seek to enhance their industrial capacity by gaining deeper access to large consumer markets overseas that they lack at home. ASEAN countries also benefit from integration into global supply chains, allowing them to supply intermediate goods to downstream processes in more advanced economies.
ASEAN is also broadly offensive in terms of cash crops, particularly palm oil, rubber and, to some extent, rice. Exports of agricultural products are critical to all ASEAN member states (besides Brunei and Singapore) because of their substantial rural populations, which rely on these products for income.
ASEAN is also partly defensive in terms of providing access for manufactured goods, particularly among its members who are still trying to ascend the value chain. As a whole, ASEAN might need to access external markets, but opening up internal markets too quickly — particularly to manufacturing powerhouses such as China — risks overwhelming these budding industries. For this reason, ASEAN's trade deals usually provide exceptions or phase-in periods to provide time for these industries to adjust. Such concerns are receding, however, as China moves up the value chain and ASEAN's industries become inputs for downstream processing in China.
Countries with low levels of rural development and poor market linkages (namely Cambodia, Laos and Myanmar) have also displayed a defensive posture in terms of food crops to protect rural populations that rely on subsistence farming.