7 sources of geo-economic risk in East Asia

Companies assessing where to invest, or governments considering their foreign policy and global economic objectives, need to understand transformations in geopolitics and international security. More than ever, geopolitics is linked to global and regional economic developments, with immediate and long-term impacts.

This was the key message from a discussion on geo-economics that brought together more than 150 participants, including business leaders and experts on geopolitics and economic strategy at the World Economic Forum’s East Asia Meeting in Jakarta last month.

What follows are key reflections from the Summit discussions on some of the region’s geopolitical conundrums:

At the outset, participants explored the meaning of geopolitics and geoeconomics. Geo-economics can be understood as the interplay of international politics and the global economy, it captures the interaction between the region’s geopolitics – most visibly its security issues — and its economic development, notably business-driven cross-border integration of markets. This nexus has gained relevance in East Asia in recent years.

Contradictory trends in East and South East Asia 

On the one hand, there is cross-border integration of markets through trade and foreign investment. This has given rise to regional production networks at the heart of global value chains, especially in manufacturing and services. These supply chains are major drivers of productivity, employment and growth, and are the engine of regional integration. They have proved resilient during the global financial crisis. Regional production networks were enabled by unilateral (country-by-country) trade and investment liberalisation. But on top of that are a plethora of bilateral and plurilateral free trade agreements. These include regional and mega-regional initiatives such as the ASEAN Economic Community (AEC), the Trans-Pacific Partnership (TPP). and the Regional Comprehensive Partnership (RCEP). Sub-regional economic integration is also speeding up, e.g. in the Greater Mekong Sub-Region, and across Thailand’s borders with Laos and Myanmar. Finally, cross-border hard infrastructure (or “connectivity”) is improving rapidly – much of it involving China. Roads, railways and ports are being built apace, connecting China with Southeast Asia, South Asia and Central Asia.

At the same time, the region faces a more volatile geopolitical environment. There is increasing tension between the USA, the established global power, and China, East Asia’s rising power. Tensions are also simmering among Asia’s three major players, China, Japan and India, played out between China and Japan in the East China Sea, and between China and India in the Indian Ocean. Flashpoints are at sea (East China Sea, South China Sea and the Indian Ocean) and over natural resources. All three powers want to ensure security of their energy supplies, most of which travel across the seas. Global and regional institutions exist to manage tensions and contain conflict on trade and investment issues, but they are largely absent on security issues in the region. That leaves an unstable balance of power – with disturbing parallels to Europe prior to the First World War.

This duality raises critical questions. Is East Asia’s economic progress and cross-border integration sufficient to contain its geopolitical tensions? What are the risks of the latter getting out of hand and compromising the region’s economic development? How can they be contained?

Key takeaways

First, rising nationalism seems to be accompanying economic progress. This is evident particularly in China and Japan, though less so in Southeast Asia. For example, Japanese multinational corporations in the automotive and consumer-products industries are deeply embedded in the Chinese market, but they have faced the brunt of a nationalist backlash when bilateral relations have taken a turn for the worse. Discussants agreed that the risk of international conflict would increase if the rise of nationalism was not contained and domestic stability endangered within countries in the region. Domestic instability spilling over to other countries and rippling  across the region was a key concern. Territorial disputes at sea, linked to resource nationalism, are among the biggest threats to domestic and regional stability.

Second – and related to the first point – geopolitical concerns are more grave in Northeast Asia than in Southeast Asia. If the tensions between China and Japan (with South Korea caught in the middle) were to worsen, they would have alarming implications for international security and the global economy. If there is a “great game” in Asia, it is centred in its northeast corner. For all the problems between China, on the one hand, and Philippines and Vietnam, on the other, in the South China Sea, it is “business as usual” in terms of ever-greater Chinese trade and investment with these two countries.

Third,  another item of discussion was the role of China, Japan and the US in South East Asia. Will growing strategic competition among these three powers strengthen ASEAN as a regional bloc, or pull its individual countries apart?

Fourth, there is growing militarisation in the region, which overshadows established dialogue mechanisms.

Fifth, participants discussed a disconnect between the official rhetoric on the AEC and what businesses think of its progress (or the lack thereof). ASEAN governments say AEC is on track to fulfill its targets by the December 2015 deadline. The AEC official scorecard shows a 92% success rate so far. But the consensus among business participants was that little progress has been made and that an AEC Single Market remains a distant dream. Governments are not tackling the main non-tariff and regulatory barriers (on goods, services, investment, standards, intellectual property and trade facilitation) that are the biggest impediments to cross-border commerce within ASEAN.

Sixth, some participants expressed concern with the “noodle bowl” of multiple and overlapping FTAs in the region. Governments of poorer and weaker countries face capacity overload in managing all these free trade agreements. Where they are exclusive (e.g. the TPP excluding China, and RCEP excluding the USA), they could exacerbate political and economic divisions in the region.

Seventh, despite the anxieties expressed in preceding points, the overwhelming sentiment coming out of the discussion – especially from business participants – was one of bullish optimism. There is sufficient bottom-up economic opportunity and progress – from global value chains, connectivity, urbanization, growing consumerism, the emerging middle class, young demographics – to contain geopolitical tensions and conflict. Pragmatism will prevail. China and its neighbours have too much invested in their economic linkages to put them at risk. This is the region’s mutual insurance policy.

In conclusion, the challenge is to ensure continued economic momentum coupled with political measures to lessen domestic instability and geopolitical uncertainty. Enlarging regional business opportunities can undoubtedly help to contain geopolitical volatility.

Authors: Anja Kaspersen, Senior Director and Head of Geopolitics and International Security, World Economic Forum and Razeen Sally, Associate Professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.