Muhammad Habib & Muhammad Haikal
For the global economy, uncertainty will still be prominent in 2024. The Russia-Ukraine crisis, the unprecedented humanitarian crisis in Gaza, the Houthi-led attacks in the Red Sea, and the United States’ strategic competition with China have all taken a toll on global supply chains. Countries can no longer easily trade with and invest in each other as they used to do. Security has resurfaced as the primary consideration, above efficiency and the spirit to cooperate. Countries now filter interactions based on like-mindedness, potentially leading to a decoupling of the global economy. While there is nothing wrong with diversification per se, unhealthy suspicions should never drive the agenda in the very first place.
The trading partners diversification index of the United Nations Conference on Trade and Development dropped from 102 in 2022 to 95 in 2023, showing a more concentrated approach to trade. Foreign direct investment patterns have also changed, with investments based on shorter geopolitical distance increasing from 38 percent in 2010 to around 50 percent in 2021, implying a new trend in trade and investment that defied the conventional gravitational model focused more on economic size and geographical distance, showing increased weight is being given to geopolitical factors.
As a home for emerging economies and leading manufacturers of global products, the Asia-Pacific region is not immune to these trends. On the one hand, the short-term impacts may benefit some regional countries as they welcome more investment from the supply chain relocation of multinational companies. On the other hand, the long-term consequences do not look promising. The misuse of entity of concern provisions and environmental standards to deny market access could worsen as major powers diverge. Moreover, there is no sign that the fragmented globalization and inward-looking policies will reverse considering the possible election outcomes in major democracies.
It is undeniable that China’s rise as a global economic powerhouse has provided members of the Association of Southeast Asian Nations with modalities to navigate the geopolitical currents. China has introduced technology to process raw materials into intermediary products and expanded access to finance major strategic projects. Thanks to China, ASEAN members have more experience to elevate their participation in the global value chain. Unfortunately, these modalities are not sufficient if ASEAN countries continue to be weak in backward linkage with much reliance on assembly and natural resources. Even more so if compliance with international labor and environmental standards is lacking and domestic economic reforms are sluggish. In short, China and ASEAN can do more to upgrade their value chains.
Leveraging the Regional Comprehensive Economic Partnership is one way to do it. The RCEP offers a safe space for ASEAN, China, Japan, the Republic of Korea, Australia, and New Zealand to resist the geopolitical pressures and deepen their economic integration. The RCEP principles of openness and inclusiveness are anchored in the ASEAN approach to regionalism, enabling state parties to benefit from the removal of trade barriers and potential technical assistance. Indonesia has implemented zero tariff on 65.1 percent of products originating in China, and China also has implemented zero tariffs on 67.9 percent of products originating in Indonesia. Affirmative provisions and a package of support have been made available under the RCEP to the least developed parties, enabling them to be equally capable for offsetting geopolitical impacts using the region’s inner strength.
Needless to say, the RCEP must never be taken for granted. Its state parties must continuously promote the partnership to other parts of the Global South, showcasing that open-and-inclusive regionalism as embodied by the RCEP still presents practical benefits in this age of a fragmenting world. The RCEP also symbolizes that the Global North and the Global South can achieve greater prosperity as long as the rules of the game are jointly crafted with good faith and frank conversations. Indeed, promotion to external parties alone will not guarantee the partnership thrives. It requires all state parties to honor the commitments that have been made.
For Indonesia, the homework is even more taxing. The RCEP should not only offer a moment of truth that ASEAN-led regionalism delivers, but also serve as a litmus test of whether ASEAN countries can seize this momentum to meaningfully participate in the global value chain. Indonesia has a chance to exercise an enabling role here. First, Indonesia could coordinate all RCEP parties to expedite the operationalization of RCEP Support Unit. Second, Indonesia, along with other ASEAN members, could try to ensure that substance under different RCEP Joint Committees are aligned and responsive toward emerging issues. Third, Indonesia could contribute to the provision of technical assistance to the least developed RCEP parties. However, success hinges on Indonesia’s completion of domestic reforms.
To conclude, it is pressing to emphasize that any geopolitical moves to completely exclude emerging economies from the conversation will likely be counterproductive. Open and inclusive ASEAN-led platforms, including the RCEP, have demonstrated that working with everyone could explore every untapped potential and offset the cost of extraregional circumstances. As it is open and inclusive in nature, the ASEAN-led platforms also demonstrate that distributing the pie to everyone matters. The supply chain should not and cannot be dependent only on certain countries. We should give full play to ASEAN-led regionalism to shine a light in this dark hour.
The China Daily
