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Envisioning ASEAN’s comprehensive response to regional dynamics
Foreign direct investment from the US to economies outside Asia has increased by 21.6 percent while FDI to China and other Asian countries has dropped quite significantly.
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People pose on Jan. 29, 2023, with the new logo of the Association of Southeast Asian Nations (ASEAN), as Indonesia officially assumes the group's chairmanship following a ceremony in Jakarta. (AFP/Goh Chai Hin)
O
ne important lesson learned during Indonesia’s Group of 20 presidency last year was that economic cooperation cannot be separated from the security and political contexts. While Indonesia attempted to keep the G20’s attention fixed on economic issues, it became increasingly evident that geopolitical issues were too intertwined with economics to be ignored.
As Indonesia chairs ASEAN, the country should take a more active role in encouraging the regional bloc to appropriately respond to geopolitical dynamics, particularly the escalating rivalry between major powers.
These rivalries have brought significant implications to the global and regional economies. Through the lens of political and security considerations, economic interdependencies are increasingly viewed as a source of potential vulnerability that could lead to the fragmentation of the world economy.
The effect of this division would be quite significant. The IMF estimated that developing countries are disproportionately affected, with losses of about 3.3 percent of their gross domestic product (GDP) in the more severe decoupling scenario. Another estimation suggests the global GDP will shrink by US$52.8 trillion in the coming decade under a worst-case scenario of full decoupling.
At first glance, it seems that economies in Southeast Asia stand to benefit from the relocation of investment from China. Indeed, the foreign direct investment (FDI) inflows in ASEAN recorded an increase of 42 percent in 2021 to $174 billion. However, the trend might have shifted as more companies seek to diversify from China by reducing their exposure to policy risks and trade tensions.
A comparison of greenfield investment data in 2015 and 2022 found that FDI had already started to move away from China and ASEAN countries. FDI from the United States to economies outside Asia has increased by 21.6 percent while FDI to China and other Asian countries has dropped quite significantly. FDI is becoming more sensitive to geopolitical tension.
The ongoing technological war will also affect the regional economy due to reduced knowledge diffusion and dampened innovation which could lead to lower productivity. Most importantly, it is harmful to the region’s technology supply chain. For example, when the US implemented export controls on Huawei in 2020, it was estimated to cause a 3.3 percent decrease in Japanese exports compared with 2019.
