The world has become a more uncertain place, as escalating tensions between the US and China could potentially damage the global economy on a bigger scale than anyone has thought, business leaders warn.
World trade volume is already falling at the fastest rate since the depths of the financial crisis in May 2009, and things could get worse if Washington and Beijing do not go back to the negotiating table. President Donald Trump is now threatening to tax another US$300 billion in Chinese goods by the end of June. That's in addition to the increase in tariffs from 10% to 25% on $200 million in goods earlier this month, met immediately by Chinese tariffs of $60 billion in American-made goods.
Given their location close to China and heavily economic reliance on both superpowers, Asean countries are unavoidably affected by the Sino-American trade dispute. Beyond those facts, such conflicts raise doubts about the future world economic order.
"When two elephants meet, you don't want to be caught in the middle. Everyone will be trying to avoid taking sides," said Simon Ogus, founder and CEO of the consultancy DSG Asia.
"The reality is that Asean countries want Chinese money, but they don't particularly like the attitude that comes with it," he told the Invest Asia 2019 conference co-hosted by Maybank Kim Eng and ICBC International, a Hong Kong subsidiary of Industrial and Commercial Bank of China Ltd.
While Beijing's Belt and Road Initiative (BRI) provides opportunity for many Southeast Asian countries, it also brings the Asean region closer into China's orbit, said Maybank Kim Eng regional economist Chua Hak Bin.
"I hope it doesn't come to a point where Asean will have to take sides. It's good to have more parties at the dinner table to dance with you," he said.
Tan Kong Yam, deputy chairman (China) of APS Asset Management, agreed, saying that Asean has become a theatre for superpower rivalry, with significant implications in the coming years.
"One should not underestimate the collective aspirations of China, the country with the largest population rising to be the largest economy in the world, trying to reclaim that perceived rightful place in the universe," he stressed.
With Japan struggling to revitalise its economy, the US becoming more inward-looking, and India yet to play the role many believe it could play in the global economy, Asean could be pulled further into China's sphere of influence, willingly or unwillingly.
"From Asean's strategic perspective, if there is only one person who could invite you for dinner and a dance, your scope is limited. In Asean's own interest, we should engage with the US and Japan as long as possible," Prof Tan added.
However, US-China trade tension could bode well for Asia, especially Asean, if Southeast Asian economies can navigate their way through this new global landscape.
"There are signs that the transition from globalisation to regionalisation is fast under way, with many of the world's future trends expected to converge in Asia," said Datuk Abdul Farid Alias, president and CEO of Maybank Group, Malaysia's largest financial services group.
"The region's rapid progress has surprised even the most critical sceptics, with the regional economy projected to grow bigger than North America and Europe combined by 2030."
Intra-Asian trade last year accounted for 61% of all trade in Asia, compared with 57.3% in 2016, thanks to new regional arrangements, he noted. Intraregional foreign direct investment (FDI) expanded to 50.2% in 2017 from 48% in 2015. About half of all jobs created from greenfield investments in Asia originated from within the region, he added.
SUPPLY CHAIN SHIFT
In Asean, there are signs of short-term benefits arising from the dispute between the US and China as businesses look for new production sites, said Nicolas de Loisy, president of Supply Chain Management Outsource Ltd (SCMO).
Vietnam and Thailand are the biggest winners. And of course, anything that comes to Asean will benefit Singapore as the city-state is the nexus between Southeast Asia and the world, he explained.
Dr Chua of Maybank King Eng agreed that Vietnam is set to be the biggest beneficiary from the production shift.
"Thailand is more integrated into the global electronics value chain, and hence more vulnerable to any weakening global electronics demand and escalation in US-China trade tensions," he said. "Vietnam, however, appears to be benefiting from potential diversion of trade due to higher US tariffs imposed on Chinese goods."
"There are signs that the transition from globalisation to regionalisation is fast under way," says Maybank CEO Abdul Farid Alias, addressing the Invest Asia 2019 conference in Singapore.
Vietnam's exports to the US have surged in recent months, rising 26% in February, following a jump of 42% in January, compared with the 17.5% in the last quarter of 2018. The pickup was particularly strong for goods that were hit by US and Chinese tariffs, he added.
DSG Asia's Dr Ogus said that even if only 5% of manufacturers from China move to Asean, the impact on the region would be substantial. Some of these moves were already under way before Washington and Beijing started squabbling, and trade conflicts only accelerated the process, he emphasised.
"According to our study, up to 35.4% of investors from the US who have businesses in China are considering to moving their manufacturing plants from China to other countries, as a result of [the trade war]," he said.
He added that 18.5% of American survey respondents who planned to relocate plants are studying the possibility of moving them to Asean countries. The top candidates are in the fields of consumer products, technology and telecommunications hardware, automotive production and chemicals.
TOURISM WINDFALL
Besides trade and investment, tourism is another area in which Asean could benefit. According to Maybank Kim Eng's recently released Asean Tourism Report, Chinese arrivals to the US have been contracting since 2018, given the intensifying trade spat.
"China is now the world's top tourism spender, spending more than the US and Germany combined," the report stated. "Chinese tourists have been the key growth driver across Asean countries over the past decade."
International visitor arrivals to Asean climbed to 135 million in 2018, with Vietnam, Indonesia and Myanmar seeing the fastest growth over five years, said Dr Chua.
"Chinese visitors have been driving the boom. They are skipping America and they like Thailand, Vietnam and Singapore," he said.
Low-cost air travel has also helped Asean's tourism industry with the presence of homegrown champions AirAsia and Lion Air. The relatively low penetration of low-cost carriers (LCCs) in potential markets such as China (14%) and India (23%) presents a huge opportunity for tourism growth for the region.
Dr Chua, nonetheless, pointed out that tourism infrastructure is a weak spot. Six of eight major Asean international airports are bursting at the seams.
The report notes that Ho Chi Minh's Tan Son Nhat airport is running at 50% above its designed capacity, while Bangkok's Suvarnabhumi and Don Mueang, as well as Manila's Ninoy Aquino are running at 40% above their capacity.
"Many Asean countries have underinvested in airport infrastructure and will need to step up investments to accommodate rising tourist arrivals," it said.
Vietnam, for example, plans to have 28 airports by 2030, up from the current 23, with 10 to 13 serving international flights. Tan Son Nhat will get a third terminal and double its annual capacity to 50 million passengers.
A new international airport, Long Thanh International, will be built in the southern province of Dong Nai at a cost of $16 billion. The first phase will be completed in 2025 with an initial capacity of 25 million passengers a year.
Cambodia, said Dr Chua, is constructing two international airports at Phnom Penh and Siem Reap, while Singapore recently added the S$1.7-billion, glass-domed Jewel at Changi Airport. The Philippines, meanwhile, has listed Clark International Airport as one of the flagship international projects under the Build Build Build programme. It is struggling to accommodate a surge in Chinese arrivals since 2013, when casinos started opening.
In Indonesia, President Joko Widodo's "10 New Balis" aims to attract more tourists to eco-destinations to distribute the benefits of growth more broadly. The first three priority locations are Mandalika Resort in Lombok, Borobudur Temple in central Java and Lake Toba in North Sumatra.