Strategic environment of post-2015 Asean

20 December, 2014
As appeared in TheStar.com.my

chairman_column_20jan

EVEN as Asean focuses on the nitty-gritty of integration and community-building, it should not lose sight of the strategic environment evolving around it.

While a number of measures and initiatives may seem – however large – to have singular implication, they will add up to geo-economic and geo-political change in the regional, even global, system.

China’s proposal at the Apec meeting in Beijing last November to revive the idea of forming the Free Trade Area of Asia Pacific (FTAAP) will have massive significance on Asean’s regional trading space if, after the two-year feasibility study, it is decided to set it up.

By that time, all things being equal, the AEC and the RCEP (Regional Comprehensive Economic Partnership, comprising Asean, China, Japan, Korea, India, Australia and New Zealand) would have been established – at least as free trade areas. While there are still problems in the RCEP negotiations in the common Asean position on tariff levels, a bigger issue that will arise will be the tariff level under the FTAAP.

Even with the most favored nation treatment, tariff levels are rarely uniformly the same, with so many exceptions given, and so many sectors exempted, over so many time periods. When it is not the same that is, higher in the FTAAP than under the AEC or RCEP, this will mean non-AEC and RCEP members of the FTAAP will have an advantage. The advantage will be enjoyed not just in trade but also in investment by their companies to penetrate markets in AEC and RCEP member countries – something which AEC and RCEP companies will not enjoy at the same level in those FTAAP economies.

However, assuming tariff levels are the same right across Asia Pacific, then it is survival of the fittest, which will also be a challenge. Already with the Asean Free Trade Area (AFTA) and the AEC, the world has been invited to come trade and invest in Asean to take advantage of our growing markets and the coming consumer boom.

Nothing wrong in that as long as Asean companies, particularly micro, small and medium enterprises, are able to get a piece of the action. Asean economies and companies are at a sweeping strategic turning point for which they must be prepared. This is serious business.

If we added and assumed the Trans-Pacific Partnership Agreement (TPPA, comprising at present 12 countries, not all of AEC member states, not all of RCEP members and not all of FTAAP countries) is already in place in the next year or so, there will be another layer of trade and investment commitments as well as standards not common with all the others. This will leave companies located in countries that have signed up at a disadvantage if they wanted to compete and penetrate markets of countries that have not because TPPA member companies will carry compliance and standard bearer costs only applicable to them. Non-TPPA companies, however, can have a good slice of TPPA markets on account of free trade agreements in place.

The asymmetries will make it extremely difficult for companies to trade and invest efficiently across Asia Pacific – unless every country joins the TPPA or unless the TPPA becomes more of a free trade agreement than the American gold standard of economic and business relations. Otherwise there could effectively develop two blocs in Asia Pacific, a mirror image of the geo-political change so often written about.

Even that discussion of the geo-political shift has strong economic under-pinning. It would be useful to examine China’s other recent initiatives which will have far-reaching strategic consequence, even if they do not come as an assault on the current global order.

Much has been made of the memorandum of understanding among 21 Asian states to set up the Asian Infrastructure Investment Bank (AIIB) with an initial capital of only US$50bil in a huge sea of Asia’s infrastructure development need of US$7 trillion-US$8 trillion in the next decade. In terms of quantum, it is no challenge at all to the Asian Development Bank (ADB), capitalised at US$174bil, but it is as precursor of things to come that the AIIB is seen as a grave challenge.

Asian countries, including Asean member states, may wonder how is it China becomes a threat when it is making a series of financial initiatives which will bring great economic benefit to the region.

But there are big stakes involved. Even the venerable Fareed Zakaria weighed in on this challenge to global values and standards as upheld by the Bretton Woods system of the IMF-World Bank and, in our neck of the woods, the ADB. In reality it is this: Western, particularly American, interests will be deeply affected.

The fact is China can put its money where its mouth is. The United States cannot, at least at the official level. It can only come with values and standards.

In Asia, not that I would agree, money talks louder than words. The future counts more than the past. And even if the past is examined, it is often seen as the foundation which gives China’s, or Asia’s, rise in this present century and beyond the character of a revival, not an intrusion or an abnormality.

Thus China’s further audacious initiatives of reviving the land and maritime silk roads carried a lot of pride and expectation across the region, not so much calculation of strategic implication.

Are China’s motives suspect, with intention either to presage domination of the Asian and even extra-Asian region or to replace Western-dominant rules, standards and institutions in international finance, economy and politics?

Actually China’s approach is not to allow pause to reflect on long-term outcome by offering a road to development and riches nobody else can offer.

There are a few of China’s interests served as well, of course. It will make China’s economic predominance a fact of life. If others will also benefit, why not? There is however the question of how China will use its dominance, always a risk with great powers.

The infrastructure development and connectivity with the silk roads will raise China’s FDI which rose 22% in 2013 and it is expected China will soon become net foreign direct investor to the world.

This will help to diversify China’s economy further and, if properly managed, provide a return even as the domestic economy slows – and even if China falls off the cliff in terms of economic growth and only achieves a large economy mean of around 2% as speculated by Larry Summers and Lant Pritchett from Harvard in a recent paper.

There is also the question of how China can use its huge foreign currency reserves of US$4.1 trillion productively by studious investment in financial institutions, infrastructure and connectivity projects, instead of being trapped mainly in US dollar-denominated financial instruments.

Some see in China’s initiatives a desire to achieve a phased internationalisation of the yuan that has been taking place. China’s Maritime Silk Road initiative, for instance, overlaps with a number of countries with whom there are bilateral swap arrangements with the yuan.

There does appear to be a new mindset in China. With consolidation of his power, President Xi Jinping is making confident major international moves which have replaced China’s low profile approach of the past. Connectivity and regional economic integration beyond FTAs seem to be the key. Those more amiable towards China see this as an attempt to surmount problems that may exist with the United States or India or with some Asean states in the South China Sea.

The real test will be how China-Asean developmental relations progress and how the South China Sea disputes are banished to the background. A lot of the initiatives actually start with Asean. It would be good for Asean to test the waters, to be positive, but not to be naive.

Tan Sri Dr Munir Majid, chairman of Bank Muamalat and visiting senior fellow at LSE Ideas (Centre for International Affairs, Diplomacy and Strategy), is also chairman of CIMB Asean Research Institute.