Impact of International Trade on Indian Grassroots: Why India dissented from RCEP
A reluctant participant in the dragged out RCEP negotiations that began in 2012, India gradually war
2018 proved to be a tumultuous year for the region. Some ASEAN countries faced major challenges. For example, Indonesia was struck by disasters multiple times from earthquakes to a tragic plane crash to a devastating tsunami. Elsewhere, countries were navigating their respective democratic paths. Cambodia and Thailand saw its institutions challenged with Hun Sen winning an allegedly rigged election in Cambodia while Thailand’s junta continued to delay elections it promised to hold. While in Malaysia, democracy flourished as its 60-year-old ruling party was surprisingly defeated in the country’s 14th general elections.
As a region, ASEAN has undeniably grown in importance. Southeast Asia is quickly establishing itself as an Industry 4.0 hub. Geopolitically, it has become a valuable site of contention with major powers such as the United States (US) and China looking to establish their influence over the region.
In 2018, trade dominated the political discourse. Largely responsible for this was US President Donald Trump who led the chorus against multilateralism and free trade and called for more insular policies. Earlier in 2018, he implemented tariffs against China and the European Union (EU).
The US remains an important trading partner of the region, with the country being the third largest trading partner with a two-way trade worth US$235.2 billion in 2017. In a statement released after the summit, it was noted that ASEAN was looking forward to improving trade between the two in the coming years.
Meanwhile, ASEAN is leading the charge against such challenges by proposing a trade agreement of its own, the Regional Comprehensive Economic Partnership (RCEP). If the RCEP does go through, it will be one of the biggest trade deals in history as it will encompass 25 percent of global gross domestic product (GDP), 45 percent of the total population, 30 percent of global income and 30 percent global trade. Other countries involved in this trade agreement are India, China, Japan, South Korea, Australia and New Zealand.
However, passing the agreement is a challenge on its own too. Last year, ASEAN and the countries involved missed its fourth deadline to sign the deal despite having negotiations for more than a year.
Thus, as the ASEAN-5 emerge from a difficult 2018, we see a divided growth outlook in 2019. Indonesia and the Philippines, in our view, will be bucking the global trend with accelerated GDP growth, while Malaysia, Singapore, and Thailand, will all be slowing due to weaker exports and structural constraints.
A key wedge driving the divergence of these two camps is slower external demand and the downcycle in the tech sector which we expect to deepen in H1 2019, hurting the second group of countries more. Structural issues such as deteriorating demographics and high household debt will also leave Singapore and Thailand even more susceptible to a slowdown. In Malaysia, we expect the spillover effects from a weak export sector to be relatively high at a time without policy buffers and commodity prices are falling, posing a potential negative terms-of-trade shock.
In contrast, we expect domestic demand in Indonesia and the Philippines to strengthen, receiving a near-term boost from election-related spending along with an expansionary fiscal stance. For both countries, we also see a continued uptrend in investment spending that is bolstering productivity growth.
Here, we take a look at ASEAN unfolding in 2019 with its international ties with major economies of the world and its outlook for the year ahead.
ASEAN (The Association of Southeast Asian Nations) consists of ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. ASEAN-5 includes Indonesia, Philippines, Malaysia, Thailand and Singapore. Founded to facilitate economic and political exchange in the region, ASEANfeatures the ASEAN Free Trade Area (AFTA) between members. In addition, the bloc has established FTAs with other major economic players in Asia and Oceania including Australia and New Zealand (AANZFTA), China (ACFTA), Korea (AKFTA), Japan (AJCEP), and India (AIFTA). Through these FTAs, enterprises can trade regionally with ease, export to new markets, and engage in more simplified import and export protocols. Below, bilateral relations (and general political happenings) between the bloc and specific countries of interest will be detailed more fully:
ASEAN and New Zealand – AANZFTA:
The AANZFTA deal was established in 2010 and offers comprehensive coverage on a variety of topics ranging from trade to intellectual property rights. By the year 2020, up to 99% of Australia-New Zealand trade with Indonesia, Malaysia, the Philippines, and Vietnam will be exempt from duties, and ideally by 2025, nearly all trade will be tariff-exempt, which will promote large savings from businesses and encourage activity. In addition, customs protocols shall be simplified,and foreign investments further protected potentially through investor-state dispute settlement proceedings. Combined, ASEAN nations, Australia, and New Zealand account for a total of $4 trillion USD in GDP and represent over 600 million people.
ASEAN and China – ACFTA:
This free trade agreement was established in 2002 and ever since, China has benefited greatly from the deal. Under the Agreement on Trade and Goods, all ten bloc members of ASEAN removed 90% of tariffs on products by 2015.China has remained ASEAN’s biggest trading partner since the establishment of ACFTA, accounting for $346.5 billion USD in merchandise trade (15.2% of total trade volume) in 2015. By 2020, both parties aspire to account for a combined $1 trillion USD in trade and $150 billion USD in foreign direct investment (FDI).
ASEAN will play an increasingly critical role in Chinese geopolitical affairs in the region. In 2017, the U.S. announced the establishment of a so-called “Free and Open Indo-Pacific” (FOIP), which promotes freedom for enterprises and navigation, respect for sovereign rights, and protection of the rule of law. The U.S. is joined by three other major democratic players in the area to comprise a “quad”: Australia, India, and Japan. While this initiative was not explicitly announced with the intention of curbing Chinese presence in the region, it seems plausible that it was partially motivated by such. China has increased its military activity in the Indian Ocean recently as well as placed missiles on contested islands in the South China Sea, which has concerned regional bodies.
ASEAN finds itself in a unique situation, as its members must leverage both sociopolitical and economic interests. Given that ASEAN does not explicitly enforce relations between member and non-member states, it is more likely that individual bloc members will pursue their own agendas when dealing with China and its FOIP rivals. Nonetheless, both sides will continue to vie for ASEAN member support. For example, in May 2018, Prime Minister Modi of India and President Widodo of Indonesia openly discussed the need for transparency and peace in the Indo-Pacific region amidst growing Chinese military activity. Ironically, three months later in August, China and all ten members of ASEAN held a joint maritime military exercise (the first of its kind). Thus, as China and its rivals vie for power in the region, ASEAN will become increasingly important in channeling both sides’ interests. The bloc is notable for its commitment to consensus. However, the China issue could prove to be a point of contention for its members in the upcoming near future.
ASEAN and India (AIFTA):
India retains great geopolitical and economic interest in South Asia and in the Indian Ocean. Nonetheless, considering that India’s strengths lie in domestic manufacturing coupled with ASEAN’s emphasis on reducing ease of exports, the two bodies appear to have misaligned agendas. This has led to both parties experiencing a sort of disenchantment from previous expectations; India hoped to utilize ASEAN as a means of boosting regional influence to counterbalance China, while ASEAN nations looked to benefit from India’s access to new markets. New Delhi remains particularly interested in Thailand and Myanmar as it looks to promote its presence in southeastern Asia; as part of its Act East policy, the three are currently engaged in constructing a Trilateral Highway, a 1360 km long initiative to boost trade and exchange. Plans are underway to have the highway extend further to Cambodia, Laos, and Vietnam; however, it remains to be seen whether this will fully materialize. Nonetheless, India has focused more on cultivating individual relationships with bloc members as opposed to engaging fully with ASEAN as a collective. Given India’s large resource base and capacities, there is great potential for it to more fully integrate itself into this network for economic and geopolitical benefit. However, given the accelerating pace of China’s influence in the region, effective and methodical decisions must be made soon.
ASEAN and Japan (AJCEP):
Japan remains strongly integrated into the ASEAN community. At the 21st annual ASEAN-Japan Summit in November 2018, Singaporean Prime Minister Lee Hsien Loong noted his support for the Japanese Free and Open Indo-Pacific Strategy, which emphasizes unity across the region, protection of international law, and promotion of free enterprise. At the conference, Japanese Prime Minister Shinzo Abe reiterated his commitment to helping develop ASEAN infrastructure by discussing how Japan has exceeded its goal of providing 2 trillion yen in development over the last five years. Interestingly, the Free and Open Indo-Pacific Strategy, despite increasingly strained relations between the Japanese and Chinese, explicitly extended membership to China. This was seen as an attempt to further foster unity in the region and cautiously regulate Japanese attempts to limit Chinese influence (this development provides an interesting juxtaposition to Japanese membership in the FOIP quad as discussed earlier). Japan thus appears to be more patient in its outlook on Chinese influence and its friendly relations with the ASEAN can serve as a conduit through which to channel its presence in the region.
ASEAN and South Korea (AKFTA):
In 2017, trade volume between South Korea and the ASEAN bloc was valued around $150 billion; in fact, ASEAN is Korea’s second largest trading partner after China. In November of 2018, President Moon-Jae-in reaffirmed his commitment to the so-called “New Southern Policy,” an initiative to reduce Korean economic dependence on the U.S., Japan, and China, and Russia by strengthening relations with southeast Asian nations as well as India. Both ASEAN and Korea aspire to have total trade volume reach $200 billion USD by the year 2020. The reinforcement of these ties is intended to promote economic growth as well as regional stability (particularly with regards to relations across the Korean peninsula). Peace is prioritized on both sides as a means of enabling prosperity.
ASEAN and EU:
Both blocs have great potential to set up strong bilateral relations; however, their current relationship can be muddied at times. Several ASEAN members feel belittled by their EU counterparts, which has created tension. For example, Indonesia and Malaysia disapprove of the EU’s standards for agricultural products. Nonetheless, there have been attempts to strengthen ties between the two. On October 19, 2018, the EU-ASEAN Leaders’ Meeting was held in Brussels, which was intended to promote investment, trade, and discuss policy and security issues in the ASEAN fora. In addition, in January 2019, the EU-ASEAN Ministerial Meeting was held with the goal of reinforcing their “strategic partnership.”Nevertheless, no formalized large-scale free trade agreements exist between the two. Recently, there have been increased talks of establishing a Comprehensive Air Transport Agreement (CATA); however, this has yet to be fully implemented. Most of the discussion in ASEAN and EU circles has yet to be proven as substantive.
In addition, the EU and Cambodia remain in dispute over the EBA (“Everything but Arms”) agreement. Under this arrangement, imports from developing countries are exempt from duties and quotas when entering into the EU market; however, given Cambodia’s record with human rights under the leadership of Prime Minister of Hun Sen, this privilege may be revoked. This would be a significant blow to the Cambodian economy, as the EU is the country’s largest market (40% of exports, mainly in the garment industry). Experts predict that this stripping of EBA access would lead to a 12% increase in tariffs in the garment sector and an 8-17% increase for footwear, which would levy an additional $676 million USD in taxes on exports. This would prove to be particularly damaging to the livelihood of rural women, who already face much duress in their home country. The EU’s decision on whether or not to suspend EBA privileges could come by August 2020 and monitoring this situation will be critical in the upcoming months.
ASEAN and the U.S.:
The U.S. partnership with ASEAN emphasizes economic integration, maritime cooperation, strong ASEAN leadership, opportunities for ASEAN women, and transnational challenges. ASEAN is the U.S.’s fourth largest export market; as of 2016, the volume of two-way trade was worth $234 billion USD, and the U.S. had exported $27.1 billion worth of agricultural products to the bloc (mostly soybeans, cotton, and dairy). The U.S. has operated under the framework of the Trade and Investment Framework Agreement (TIFA); however, overall, ties with the region have fallen (particularly under the current Trump administration). In 2016, while U.S.-ASEAN trade volume was $234 billion, China-ASEAN trade volume was valued at over $500 billion USD.
As discussed earlier in the document, China-U.S. increasing rivalriesmay substantially impact bilateral relations with the bloc. ASEAN may potentially serve as a buffer to help mitigate the tension; this hypothesis remains to be tested (Pongsudhirak). However, the bloc has remained receptive to growing Chinese expansion (particularly with regards to the Lancang-Mekong Cooperation agreement, which has led to damming of critical stretches of the Mekong River in the name of infrastructural and economic revitalization). Thus, China has seen its stake in the region grow while the U.S.’s has fallen. To quote the Trump administration, “we need ASEAN to do more for us.” In addition, given its “American First” policy, the U.S. has increasingly sought to negotiate individual bilateral terms with each individual economy in the bloc.
Furthermore, despite the decrease in economic activity, the U.S. has increased its military presence in the region. Military expenditures in Asia and Oceania were valued at almost $500 billion USD. This militarization may further weaken the U.S.’s position and create more tensions.
Top 10 commodities for the year 2016
Top ten commodities for the year 2017
Percentage of GDP by sector in 2017 per ASEAN member
ASEAN has open access to a large amount of arable land (roughly around 60 million hectacres) in addition to large swaths of rivers and forests. Given this abundant supply of natural resources, major commodities from the bloc include rice, sweet potatoes, corn, sugarcane, rubber. Other plantation crops such as tobacco and oilseeds are also popular. Indonesia, Thailand, and Malaysia combined account for roughly 70% of the world’s rubber production (approximately 3.3 million tons annually). Indonesia and Malaysia also produce around 90% of the world’s supply of palm oil.Finally, aquaculture remains an integral part of the export economy. Thus, overall, given ASEAN’s access to abundant natural reserves, agriculture and food production remain integral to the bloc’s prosperity, particularly for less developed countries such as Cambodia. However, overuse of these resources and concerns with sustainability have become increasingly relevant as of recent, and their effects remain to be seen.
In addition, exports such as electronics, oil, gas, and metals are also significant. More developed countries like Brunei, Indonesia, Singapore, and Malaysia have paved the way for these exports. There is a disparity between the exports of richer and poorer members, but increased connectivity both within the bloc and via bilateral relations may help close the gap.
ASEAN 2019 Outlook:
According to market predictions, growth appears poised to slow for the year 2019 in the Asia-Pacific region, given the United States’ aggressive push for economic isolationism, tighter monetary policies for most countries across the board, and growing government deficits.However, within ASEAN itself for 2019, members appear to be hitting a fork in the road. Experts predict that both Indonesia and the Philippines will experience growth, while Malaysia, Singapore, and Thailand will see slowing due to decreased demand for tech products, increased debt per household, as well as shifting demographics. On the other hand, Indonesia and Philippines are predicted to grow because of higher government spending and expansionary monetary policy.In addition, elections are on the table in Indonesia, Thailand, and the Philippines, which will shape the approaches that these nations take over the course of the year.
Regarding general issues, trade was a strong theme in 2018, particularly given Donald Trump’s crusade against multilateralism and free trade between countries. As a response, ASEAN proposed the Regional Comprehensive Economic Partnership (RCEP), which would encompass over 25% of global GDP and involve various strong trading partners including India, China, and Japan. However, the passage of this legislation has been difficult to pass (missed its fourth deadline last year); nonetheless, a major bill is in the works that could transform the global scene.
Also essential to 2019 will be the topic of the South China Sea. This region remains contested by many, as it is a conduit for global trade and is rich in natural reserves (approximately 11 billion barrels of oil and 190 trillion cubic feet of gas lie beneath its seabed). China has looked to expand its presence in this body of water; however, the United States has disapproved of this and attempted to curb its influence. In response, China has extended cheap lines of credit and glamorous infrastructural projects to win over ASEAN member states, which has directly challenged the bloc’s centrality. Some suspect that China has proposed these options in the hope that the debtor’s default, in which case China would assume command of their resources. At the last ASEAN summit, China and the bloc made progress on a Code of Conduct in the South China Sea; however, the details of this deal remain unclear and more importantly, it remains to be seen if China will abide by its stipulations.
ASEAN remains a strongly integrated bloc that maintains a complex array of bilateral relations with a host of countries across the globe. Given the accelerated pace of global trade along with growing rivalries and conflicting geopolitical interests, it is difficult to make comprehensive predictions about what the future holds. Nevertheless, it seems likely that ASEAN will come to play an increasingly important role in maintaining balance of power in the region and leveraging various parties’ agendas.
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