The Asian Century

With a major new trade deal, favorable demographics and relative success managing the pandemic, Asia is fast assuming global leadership. Has the “Asian Century” just begun?

The moment when global leadership passes from one place to another often becomes clear only in hindsight. Did the US become preeminent in 1917 when it entered World War I? Or during the roaring 1920s, when its exports (including Hollywood’s) led the world and one in five Americans became rich enough to buy a car? In reality, the transition of economic, political and cultural power is incremental.

Pinpointing the shift in power from the US to Asia is no easier. Some claim it has already happened, highlighting the great financial crisis that left Asia relatively unscathed and positioned China as the savior of the global economy, boosting its prosperity and standing. Others point to former US President Donald Trump’s abandonment of the post-World War II rules-based order or his withdrawal from the Trans-Pacific Partnership trade pact as turning points: A geopolitical vacuum tends to be filled.

Most likely, the transition is ongoing. But it is clear that Asia—more than just a one-country story despite China’s superpower scale—is gaining ground on the West. The region’s growing wealth, farsighted decision-making, increasing commercial creativity and cultural visibility underpin its inevitable ascendancy. Asia’s capable management of Covid-19 and its swift economic recovery from the crisis are just the icing on the cake.

Making the Leap

To be a world power takes wealth. According to the World Bank, the East Asia and Pacific economy will continue to outperform in the near term, with growth accelerating to 7.4% in 2021, led by a rebound in China. In contrast, the eurozone will expand 3.6% and the US just 3.5%. To a large extent, this outperformance is business as usual: Asia’s growth in recent decades is unparalleled in history and unmatched by other emerging market (EM) regions.

However, to dominate the century, Asia needs to make a leap. Historically, escaping the middle-income trap—continuing to grow after the advantages of low wages diminish—is tricky. “Emerging markets in Asia have a better chance of escaping the middle-income trap than do countries in other EM regions such as Latin America,” says Tommy Wu, lead economist at Oxford Economics in Hong Kong. “In particular, China will continue to grow at a fast rate for some decades, enabling it to become a high-income country.”

What’s Asia’s secret? Wu says many Asian countries have opened up their economies and developed an export-oriented growth strategy that upgraded their industrial know-how, skills and manufacturing base. But crucially, as they have moved up the value-added chain, they have continued to invest in infrastructure and learn from the outside world, attracting foreign direct investment, developing human capital and raising productivity.

Meanwhile, Asia’s demographics are helping its economies to reconfigure, boosting their ability to escape the middle-income trap. “Alongside productivity gains, growth in the size of the working population is an important determinant of economic growth,” says Viswanathan Parameswar, head of Investments Asia at private equity asset manager Schroder Adveq in Zurich, Switzerland. “Globally, the working population is falling,” he says. “In Asia, it’s still rising.” Both Indonesia, the world’s fourth most populous country, and India, the second most populous, have a median age of around 29—almost two decades lower than Germany, for instance.

Asia does face pockets of demographic challenge. “Japan’s retirees account for a similar proportion of the population as in Europe,” explains Parameswar. “But China is in a roughly similar position to Japan 30 years ago, while India is where China was 30 years ago.” In other words, with 1.1 billion millennials across the region, according to UN data—compared to 76 million in the US and roughly 150 million each in the EU and Latin America—Asia will enjoy a demographic dividend for years to come.

Asia’s demographic advantages are amplified by its burgeoning middle classes, notes Parameswar. The Brookings Institution estimates that 2 billion Asians are already middle class; by 2030, the number could rise to 3.5 billion. The middle classes spend more on consumer products and services. About 50% of the growth in consumer demand over the next decade will come from the region, and 44% of international students are Asian. “A virtuous circle is underway,” says Parameswar.

The expanding middle class is turning domestic demand into an important growth driver and helping the region to become more self-sufficient, believes Wu. While the private sector’s dynamism can take much of the credit, government actions including directing resources, devising farsighted policies and taking a conservative approach to borrowing also increase the likelihood of escaping the middle-income trap. “This differs from other parts of the developing world, where high fiscal debt could pose [problems] and, in some cases, government policies are too often focused on the short term,” notes Wu.

Trusting in Trade

Asia has been a crucial part of global supply chains for decades. Indeed, exports to the US and Europe have driven its dramatic economic development. But intra-Asian trade has been meager in comparison, focused largely on raw materials or components. Trade in final products and services has been too costly (because of tariffs) or complicated (because of nontariff barriers), holding Asia back. “The Regional Comprehensive Economic Partnership [RCEP] will start to change this dynamic and make trade within Asia easier,” says Deborah Elms, founder and executive director of the Asian Trade Centre in Singapore.

RCEP, which was signed in November 2020, is not the first major multicountry Asian trade agreement. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), concluded in 2018, has some membership overlap with RCEP, including Japan and Australia. CPTPP is a broader and deeper agreement than RCEP, aiming to eliminate all tariffs on almost every product (soft cheese imported to Japan is one of a handful of exceptions). In contrast, RCEP covers fewer products and doesn’t seek to cut tariffs to zero. Moreover, its timeline extends to 20 years.

The strength of RCEP, however, is its scale. It covers 15 countries (China, Japan, South Korea, Australia and New Zealand, plus the 10 Asean countries) that account for almost a third of the world’s population and of global GDP. That makes RCEP the world’s largest free trade agreement—bigger than US-Mexico-Canada or the EU. RCEP began as an effort by the Asean countries to simplify trading standards—their exporters had to contend with five different agreements. But it snowballed to add more countries and broader goals. That 15 countries decided to reject protectionism and open markets at a time of tensions in the global trading system is significant, says Elms.

RCEP’s impact in terms of boosting GDP growth looks underwhelming in the short term: The Peterson Institute for International Economics estimates it will boost global GDP by less than 0.6% of 2019 GDP based on World Bank figures. However, such projections are based on the benefits to trade if tariffs are reduced; and RCEP has modest tariff-reduction goals. Elms believes the agreement might ultimately have a profound impact. “Firstly, RCEP covers services, which account for half the global economy,” she says. “Secondly, it enables companies whose ambitions might have previously been limited by the size of their domestic markets to think of Asia as their marketplace, creating enormous new opportunities.”

Perhaps most important, RCEP lays the foundation for future advances. “RCEP will have a secretariat and regularly scheduled meetings, including an annual summit of leaders. Consequently, it has the potential to become a forum where officials talk about new rules,” says Elms. “It’s not going to become an Asian version of the European Union, but it could result in greater interoperability. For instance, it could eventually result in standardized rules on food safety, energy exports or the Internet of Things.” RCEP’s common rules of origin for the entire block will accelerate intraregional integration—companies will create supply chains that no longer involve Europe or the US. “That will accelerate economic growth and expand the middle class,” says Elms, helping to create the Asian Century.

Every so often, history presents an opportunity for countries or regions to rise to the occasion. Covid-19 is one such event. While success is relative, given the global tragedy of the pandemic, Asia has undoubtedly fared better than much of the West. Eight of the top 15 countries in Bloomberg’s January Covid Resilience Ranking, which provides a snapshot of government effectiveness and social and economic resilience, are in Asia. Neighboring New Zealand and Australia also feature in the top 15. Europe, in contrast, occupies just two top 15 spots. The US languishes in 35th position.

Asia’s Covid-19 performance matters for two reasons. First, the ability of countries such as Korea and China to deal with the pandemic has economic benefits. “They are outperforming on a relative basis,” notes David Rees, senior emerging markets economist at Schroders in London. That means Asia’s economies will be less scarred by Covid-19. Moreover, their resilience will attract businesses seeking stable supply chains. At the same time, according to Oxford Economics’ Wu, Asian government debt-to-GDP ratios—already lower than in Europe—leapt by around 10 percentage points during the Covid-19 crisis, while those in Europe grew by 20 to 30 percentage points. That should give Asia greater flexibility in the future.

The UK-based Centre for Economics and Business Research consultancy recently said China will overtake the US to become the world’s largest economy by 2028, five years earlier than previously forecast, as a result of this divergence of growth and debt.

Second, Asia’s Covid-19 competence reinforces the perception, growing since the financial crisis, that the region is no longer outshone by the West. Cultural factors explain some of Asia’s Covid-19 outperformance—citizens are more willing than Westerners to accept restrictions for the common good. But Asian governments were also more willing to act boldly than the West, shutting down borders quickly to prevent imported cases while introducing strong domestic controls and successful contact tracing, says Wu. China has subsequently bolstered its reputation—and relations with key developing countries such as Brazil, Indonesia and Turkey—by signing distribution deals for its domestically developed Covid-19 vaccines. Indeed, for many EM countries, China—rather than the US—is now the exemplar for governance, economic expertise and technological know-how.

Combined, these developments will—over time—boost Asia’s geopolitical influence at the expense of Europe and the US, which were already losing power. “Before the crisis, part of the global economic and political challenge was accommodating a fast-rising Asia (even beyond China),” says Robert Kahn, director for global strategy and global macro at the Eurasia Group. “Covid-19 gave additional impetus to this.” Change will not occur overnight. “The pandemic is not the triggering event that leapfrogs Asia into preeminence,” he says, “but it is an accelerant of the pressures that will lead to its preeminence.”

To be powerful, scale is important. “Four out of every seven people on Earth are in Asia,” notes Schroder Adveq’s Parameswar. But size alone doesn’t confer success. Asia’s ascent is also driven by thriving entrepreneurship, a critical mass of manufacturing and services, and robust demographics. Indonesia is widely seen as the next hot spot for tech growth: the likes of Facebook, Google and Microsoft have recently made sizable investments in Gojek, Indonesia’s largest tech company, and e-commerce platforms Tokopedia and Bukalapak.

Other countries in southeast Asia, most notably Vietnam, have rapidly achieved critical mass in manufacturing, as businesses move out of China in search of lower costs and to avoid US trade sanctions. Meanwhile, the region can call on worldleading financial centers in Shanghai and Singapore and the information technology prowess of India, which—among much else—has given the country a powerful diaspora in Silicon Valley. This economic diversity gives Asia real strength. History is also on the region’s side. “We shouldn’t forget that Europe came to dominate the world only from the 1700s—and the US much later,” says Parameswar. “Now the pendulum of history has swung back.”

What might upset this trajectory? Despite recent antagonism with the US, the greatest threat to Asia’s primacy is likely to come from within the region. Politically, Asia runs the gamut from fully-fledged democracies to totalitarian states. Unsurprisingly, tensions can run high. Recently, China has taken to flexing its diplomatic and military muscles with economic sanctions against Australia and border skirmishes with India, China’s greatest long-term rival in the region given its scale and potential. But it’s important to remember that the Asia story is much bigger than China alone: Measured by purchasing power parity, India is the third economy in the world, while Asean is fourth. Moreover, as large and mature economies, Korea and Japan will continue to act as valuable counterbalances to China.

The 19th century French economist Claude-Frédéric Bastiat is widely quoted as having said: “When goods do not cross borders, soldiers will.” The success of trade deals such as RCEP and CPTPP at a time when global trade is floundering indicates that regional powers understand Asia is stronger together. Achieving a shared interest in stability—through deeper supply chains, closer trading relationships and broader cultural interaction (K-pop is popular in China)—looks set to be the making of the Asian Century.