Dr. Sok highlighted the impressive progress of the trade and investment trends in ASEAN which is slated to become the world’s fourth-largest economy by 2030. But he also warned of the need to build an advanced capacity of ASEAN enterprises in the current context of “de-globalization” or “re-globalization”. The pace of the so-called “de-globalization” has picked up steam as policymakers and companies alike sought to secure new supply chains. However, he believed that the word “re-globalization” is more appropriate as we are talking about an evolution of the globalization process. The silver lining is that ‘re-globalization’ will likely increase investment opportunities generated by portfolio diversification. He concluded that unless geopolitical tensions are reduced we can’t hope to increase investor confidence and instill market stability. For now, RCEP is the main game in town that benefits the whole ASEAN.

You may find below the speech of Dr. Sok for your further reading.

Dr. SOK Siphana

Founder, SokSiphana&associates

Chairman, Asian Vision Institute (AVI), Cambodia

at the

Selangor ASEAN Business Conference 2022 (SABC)

“Selangor, Gateway to ASEAN and Beyond: From the Heart of Malaysia’s Economy To the Heart of Southeast Asia’s Economy”

6 October 2022

• Excellencies, Ladies, and Gentlemen,

1. First of all, let me set the context a bit for this panel discussion. According to the ASEAN Development Outlook report, ASEAN is on track to become the world’s fourth-largest economy by 2030. I would say that this is a fair assessment. When the ASEAN Economic Ministers met last month in Siemreap, Cambodia, the outcomes of their discussions on trade and FDI growth were quite impressive, both for intra-ASEAN as well as with its Development Partners. If we take into account what the region has undergone in the two last years with the COVID-19 pandemic, certainly this is a good sign.
2. All in all, the ASEAN economy expanded by 3.4 percent in 2021 with growth driven by a strong rebound in consumption, investment, and trade. I am of the view that the successful rollout of vaccination programs has enabled ASEAN economies to reopen domestically and externally. We have had double-digit growth in trade and investment across the board in 2021. For this year, real GDP growth is projected to reach 4.5 percent with authorities further relaxing travel restrictions, propelling economic recovery in key sectors such as tourism, travel, hospitality, wholesale, and retail.
3. To understand whether our region is growing or not, let me cite some statistics from the last AEM:
4. ASEAN’s trade had enjoyed a strong rebound with a merchandise trade of USD 3,340 billion or a 25 percent increase from the previous year. Investments-wise, it had a robust expansion reaching USD 174 billion or a 42 percent increase from the previous year.
5. ASEAN’s trade with non-ASEAN EAS amounted to USD 1.67 trillion or an increase of 25 percent year-on-year. With the ASEAN Plus Three Countries, trade has reached USD 1.098 trillion, or an increase of 25 percent. With Australia, we have recorded USD 95 billion, or an increase of 26 percent. With New Zealand, it was USD 12 billion, or an increase of 7 percent.
6. With the EU, merchandise trade reached USD 268 billion, reflecting a growth of 18 percent. In terms of FDI inflow, we have witnessed an increase of 42 percent with an amount of USD 26 billion. In the US, similar growth of 17 percent for trade reached USD 364 billion. FDI inflow was recorded at USD 40 billion, or an increase of 41 percent.
7. With Japan, trade has peaked at USD 240.2 billion, increasing by 17.2 percent while FDI inflows amounted to USD 12.0 billion, or an increase of 3.5 percent. With China, trade has reached USD 669 billion or an increase of 29 percent, retaining its position as ASEAN’s largest trading partner. FDI inflows amounted to USD 13.6 billion almost doubling the USD 7.0 billion in 2020.
8. All these great statistics tell the whole story. We are growing and expanding. Moreover, the 54^th AEM Meeting has initiated a series of actions to further deepen economic linkages and integration among the ASEAN Member States. They had agreed on a work program to support a circular economy, launched negotiations on an ASEAN competition framework, on upgrading ATIGA, as well as a policy toolkit focusing on women entrepreneurship, among others.

• Excellencies, Ladies, and Gentlemen,

9. Indeed, ASEAN as a unified group looks appealing on statistics and on paper, but the reality on the ground seems to be more complex. How can businesses and entrepreneurs navigate through ASEAN in terms of doing business? That is the big question. The role of chambers and sectoral associations is very important. That’s one easy answer. What else? How can they know what the existing FTAs + 1 can do for them? What is the latest implementation of Non-Tariffs Measures (NTMs)? How can they push for more intra-ASEAN trade through better utilization of the ATIGA preferences? All these questions would require a much more thorough and analytical response.
10. For multinationals, no issue as they have an army of technical experts and teams of trade lawyers to navigate through the maze of these trade and investment rules. But we can’t say the same for smaller to medium size companies. Awareness building and advanced capacity strengthening for these enterprises are essential and, in the current context of “de-globalization” or “re-globalization”, it could mean the difference between their successes or their bankruptcies.

• Excellencies, Ladies, and Gentlemen,

11. The global shocks of the recent past have triggered a shift in economic megatrends across the world. The onset of the COVID-19 pandemic and the Russian-Ukraine war has accelerated the wheels of change – initially kicked started by the Sino-US trade war, triggering a new set of long-term structural trends leading to the emergence of a bipolar, and increasingly multipolar world. Quite obviously, the post-COVID-19 economic recovery remains vulnerable to these adverse global and regional trends. The pace of the so-called “de-globalization” has picked up steam as policymakers and companies alike sought to secure new supply chains. I am afraid to say that with the erosion of trust among the “China-US-Russia trinity”, the likelihood of global supply chains returning back to normalcy seems pretty bleak.
12. In my view, globalization, better known for its low-inflation world, was fueled by three things: first, cheap Russian natural gas fueling European industry; second, cheap Chinese goods; and third, cheap immigrant labor keeping nominal wage growth stagnant in the US. But those days are over now. At present, what we have are giant geo-strategic and geo-economic blocs competing for supremacy or survival. We are witnessing the gradual but inexorable multiple bifurcations into a Russian bloc, a China bloc, and a Western bloc.
13. The de-globalization process will result in a restructuring of supply chains that will be inherently inflationary as production moves away from the lowest marginal cost. Geopolitical conflicts will drive supply chain realignments to more secure and accessible sources of supply within the control of certain economies at the expense of trade flows optimized by comparative advantage, efficiency, and cost of production.
14. The shift towards a de-globalized world will be characterized by more localized regulations and cross-border controls driven by diverging national economic interests. Markets have already experienced these divergences. The “re-shoring” of manufacturing and nationalist/protectionist industrial policy are becoming more politically popular. Take the S. CHIPS Act (Creating Helpful Incentives to Produce Semiconductors), for example. For the US, securing critical inputs is important for its economy and its national security interest.
15. The Inflation Reduction Act of 2022 (IRA) is another recent one. It incorporated some of the Build Back Better Act’s provisions where the Biden administration aimed to revitalize the domestic manufacturing base and create more clean-energy jobs in America. Overall, the IRA is largely a domestically driven agenda to help revive the US Amidst increasing inflationary pressures and rising recessionary fears, the emergence of a security-driven Indo-Pacific Economic Framework (IPEF) adds another commercial and trade fence against China, which in the last decade has emerged and was recognized as the fulcrum of the global supply chains.
16. All the while at the WTO level, despite the G7 members reiterating their commitment to reform the rules-based multilateral trading system with the WTO at its core, the United States has stated that it was still not in a position to agree to a joint proposal by 126 WTO members that called for the launch of the selection process to fill seven vacancies on the WTO’s Appellate Body.

Excellencies, Ladies, and Gentlemen,

17. In my humble view, expecting the world to ‘de-globalize’ is too clear-cut. One can’t undo overnight what has taken years to build. Perhaps the word “re-globalization” is more appropriate as we are talking about an evolution of the globalization process. Economic interconnectedness does not seem to be on the decline, at least in our ASEAN region, as seen from the statistics I have highlighted earlier.
18. Our view is that ‘re-globalization’ would entail more the restructuring of trade and investment relationships based on geographic, sectoral, or security goals. This is more likely to occur rather than a full resumption of global integration or a widespread de-globalization.
19. Like in any situation there is always a silver lining. “Crisis Sparks Up Opportunities,” as they say. The silver lining is that ‘re-globalization’ will likely increase investment opportunities generated by portfolio diversification. The global supply chain is no longer about meeting demand from the West. The consumers of emerging economies like the BRIC are steadily growing as well.
20. But we need to be mindful that re-globalization poses its own unique set of challenges as well as new opportunities. Companies are diversifying their supply chains to reduce disruption risks by moving their manufacturing processes to other emerging markets, where labor costs are lower. China’s COVID-Zero policy is a harsh account of companies rethinking were to move in the most urgent way their manufacturing and distribution chains. For its part, the IPEF’s trade diversification would involve ‘re-shoring’ to other ASEAN nations like Malaysia, Vietnam, and Thailand, among others. In sum, in this ‘re-globalized’ world, companies that can adapt to this new trend will be the long-term winner.

Excellencies, Ladies, and Gentlemen,

21. In light of these worrisome trends, one may ask what is the trajectory and impact of the Regional Comprehensive Economic Partnership (RCEP) on the ASEAN economy, particularly for businesses?
22. While re-globalization risks due to bloc tensions are on the rise, the RCEP is gradually gaining momentum. Last month, the RCEP Ministers’ Meeting just inaugurated the implementation of RCEP after its entry into force in January 2022.
23. Asia was an important hub for these new-generation FTAs, be it the RCEP, the CP-TPP, or the IPEF. I can point to three main reasons why this is so. First, Asia is a high-growth region with a growing market combined with great prospects for economic expansion. Second, it is also an important source of raw materials, perhaps second only to Africa. This is an important strategic consideration for developed economies as they need to secure access to these raw materials to maintain their competitive Third, it is China, the reason is quite obvious and I don’t need to expand on it.
24. My Prime Minister Samdech Techo Hun Sen has stressed that the RCEP free trade pact is the best example of an open, inclusive and rules-based trading system. The RCEP is currently the world’s largest free trade area that encompasses a market of 2.2 billion people or 30 percent of the world population, generating a third of global GDP or some USD26 trillion, a quarter of trade in goods and services, and 31 percent of global FDI inflows.
25. ASEAN countries can certainly benefit from the harmonized rules of origin under the RCEP as intermediate goods can be sourced across any of the 15 RCEP countries. The tariff concessions and the simplification of customs procedures will enable companies to purchase raw materials and equipment more efficiently and at a lower cost. This would lower the overall production costs, enhance the resilience of regional supply chains, generate more investment, and ultimately spur higher economic growth.
26. Participating countries will benefit from RCEP at different levels. According to a World Bank research paper, Cambodia ranked third after Vietnam and Malaysia in terms of real income gains and export growth under RCEP. ASEAN is likely to benefit from Japanese companies with manufacturing bases and supply chains across RCEP countries. As a matter of fact, this is the FTA that includes Japan and two of its biggest trading partners – China and the Republic of Korea. We all know how political relations with both countries are sometimes controversial. So, RCEP may improve economic relations when politics are tense.
27. For China, RCEP will provide increased market access for their state-owned enterprises as well as a tremendous opportunity to reinforce its strategic position in the region, or at the very least to support the status quo as it is already ASEAN’s biggest trading partner.

Excellencies, Ladies, and Gentlemen,

28. In sum, let me say that only when geopolitical tensions are reduced can we hope to increase investor confidence and instill market stability. For now, I just don’t see it materializing soon. Global supply chains work only in peacetime, but not when the world is at war, whether it is a hot war or an economic war. For now, RCEP is the main game in town that benefits the whole ASEAN.

Thank You.