Southeast Asia And Europe Forge Tighter Links

With the European Union (EU) gobsmacked by terrorism, a refugee crisis, a possible Brexit and a lingering eurozone crisis dampening growth, euro-optimism is scarce these days. So there’s no better time for Brussels to prioritize closer economic ties with the Association of Southeast Asian Nations (Asean), many of whose 10 members look set to enjoy some of the fastest growth rates in the world in coming years.

“Compared to many regions, Asean really is a bright spot, especially for European exporters keen to find new markets and for an EU keen to revive flagging growth,” says Gareth Leather, South Asia analyst for London-based consultancy Capital Economics. He noted Asean’s young and dynamic population, its increasingly diverse and sophisticated economy and the fact that the GDP of the Asean 10 is bigger than that of India or emerging Europe.

Leather says that although average GDP growth within Asean will slow over the next 10 years to around 4.7% from the 5.2% average of the past decade, many countries will grow at rates well above 6%, making them attractive partners for EU exporters and investors. And the potential to boost EU trade with the Asean 10 is huge: At present, tiny Singapore accounts for one-third of total trade and two-thirds of investment, making it by far the EU’s largest partner in the block. By contrast, trade with Asean’s most populous countries, Indonesia and the Philippines, is minimal.

Asean also has much to gain. Manufacturing is increasingly important for many of its poorer, highly populated members, who are essentially taking over China’s role as producer of low -cost products as wages in China rise (manufacturing sector salaries in China are now around $10,000 a year, much higher than the Asean average).

Intra-Asean trade and foreign direct investment (FDI) remains sluggish for historical-cultural reasons and because of poor infrastructure and the fact that many countries have similar economic profiles and bureaucracy. This makes closer relations with the EU an obvious choice for Asean countries wanting to access alternative markets.

The EU is already Asean’s third-largest trading partner, with trade in goods and services reaching almost $200 billion in 2013; Asean is the EU’s fifth-largest partner. The EU is also the biggest provider of FDI into Asean—some 22% of the total. More than 10,000 EU companies are active in the region.

“Both Asean and EU have benefited greatly from growing commercial ties,” says Jayant Menon, lead economist at the Asian Development Bank (ADB) for trade and regional cooperation. “Developing Asia has benefited from imports of capital goods produced in European countries, from direct investment capital flows and associated technological transfers, and from access to the large, high-income European markets. Europe has reaped similar benefits, particularly with the rise of ‘Factory Asean,’ through the spread of global value chains and the emergence of opportunities for investment diversification.”

High-level talks for an EU-Asean Free Trade Agreement (FTA) started in 2007, only to be shelved two years later as a result of growing European concerns about human rights abuses in Burma. The EU instead went on to sign a number of bilateral free-trade agreements with other Asean members, including Singapore, South Korea and, most recently, Vietnam. Negotiations with Malaysia and Thailand continue. Talks with the Philippines started in January.

However, with human rights in Burma improving—against the backdrop of Aung San Suu Kyi’s National League for Democracy’s victory in last November’s elections—and its government now pursuing economic and political reforms, the main roadblock to multilateral FTA talks is gone.

Growing wealth in Asean nations makes an FTA with the EU particularly attractive as Europe’s products become more affordable to more people. Between 2007 and 2013, nominal Asean GDP almost doubled, from $1.3 trillion to $2.4 trillion, with per capita GDP also rising dramatically, from $2,249 to $3,832. Although huge gaps still separate wealthy members like Brunei and Singapore from, say, Burma, Cambodia and Laos, inequalities have narrowed. The GDP per capita of the richest Asean economy was 105 times that of the poorest one in 2007, but by the end of 2017 it is expected to be just 47 times.

The ADB’s Menon says the creation in 2015 of an Asean Economic Community (AEC) will spur progress toward an EU-Asean FTA. “Regional integration through the AEC will benefit not only businesses and investors within the region, but those outside the region as well,” he says, pointing to simplified and harmonized rules that will make doing business within the region easier and create a level playing field between local Asean and European companies. Joint ventures and outsourcing will become more common, and services increasingly important, in the more advanced Asean economies in particular, he says.

So what are the biggest obstacles to closer EU-Asean trade relations, and indeed a full FTA?

Last July the EU-Asean Business Council identified nontariff barriers within the Asean region as the major challenges to enhanced trade, along with bureaucracy—including the unpredictable application of laws and cumbersome customs procedures—restrictions on foreign ownership and lack of harmonized standards. Within the EU, excessive regulation was seen as a major constraint. The hope, however, is that over time, the AEC will reduce or eliminate these barriers, and the EU will identify and remove key trade bottlenecks among its member states.

Some observers, like Ji Xianbai of the European Union Centre in Singapore, say an FTA between the EU and Asean could lay the foundations for even closer relations. “Thirty-five years after the EU and Asean signed their inaugural inter-regional cooperation agreement, it is time to consider upgrading the relationship from an enhanced partnership to a strategic partnership,” he says. “An Asean-EU FTA could well be the stepping stone to doing that.”