Asia still needs Western capital and markets
While the region is becoming more connected through trade and investment, it still draws much of its growth impetus from the US and EU
Asia has one of the highest rates of economic integration outside Western Europe, but it can only be sustained with the help of consumers in the European Union and North America, recent research suggests.
The new Asia-Pacific Regional Cooperation and Integration Index reveals that Asia trails the European Union in its level of economic inclusiveness, but is ahead of Latin America and Africa. North America was not included in the index.
Regions were assessed on six different socioeconomic dimensions: trade and investment, money and finance, regional chain value, infrastructure and connectivity, movements of people and their institutional and social integration.
Asia’s trade and investment integration matches that of the EU and it does well in movements of people and regional value chains.
However, the region rates poorly for institutional and social integration, indicating that growth has been market-led and developed from the bottom up. Latin America is ranked higher than Asia in this category, as well as for infrastructure and connectivity.
Driven by a proliferation of free trade agreements, intra-Asian trade averaged an impressive 55.9% of the region’s total trade in 2010-15 and a record 57.3% share in 2016.
Asian investors also contributed 55% of foreign direct investment (FDI) flowing into the region in 2016, from 48% in 2015, even as total FDI declined.
There are now 147 FTAs in effect in Asia and a further 151 under negotiation between 48 Asian economies, alongside subregional groupings like the Association of Southeast Asian Nations (Asean), Greater Mekong Subregion, South Asia Subregional Economic Cooperation and Central Asia Regional Economic Cooperation.
Southeast Asia is the most integrated subregion, and it also dominates the country rankings, headed by Singapore and Malaysia, due to strong trade and investment links.
East Asia, which rates highly for regional value chains and institutional and social integration, is second in the index, followed by South Asia and Central Asia. South Asia is held back by its weak infrastructure and connectivity; Central Asia ranks below Asian averages in all categories.
Yet Asia continues to draw much of its growth impetus from abroad. Final demand accounted for only 36.8% of Asian exports in 2016, indicating the region relies heavily upon shipments of intermediate goods. About 27% of these goods are dependent upon demand from Western Europe and the US.
It is a similar picture with investment. The US was the second-biggest source of foreign direct investment in Asia in 2015, according to the latest complete data, with US$348 billion; four of the other top contributors were the United Kingdom, Germany, Switzerland and The Netherlands, which together contributed US$402 billion.
China and Japan, Asia’s leading economies, invested US$224 billion and US$216 billion respectively in the region in 2015. Hong Kong was the biggest investor with US$394 billion, while Singapore invested US$165 billion and Korea US$73 billion.
East Asian economies are helping to drive regional integration through new value chains as manufacturing plants move to low-cost hubs in the south and southeast, but expectations of a zone of prosperity based around China and – to a lesser extent – Japan and South Korea, have not been fully realized.
Although it was the second-biggest investor globally behind the US in 2016, China is parking much of its money in developed countries like the US, Australia and the UK. A big proportion has been in the form of real estate investments.
Chinese demand for Asian consumer and intermediate goods has slumped since it launched an economic restructuring in 2013 aimed at reducing its reliance on trade. Outward investment is also falling due to curbs imposed on some foreign spending by Chinese companies, especially overseas acquisitions.
The US withdrawal from negotiations on the Trans-Pacific Partnership (TPP) – now rebranded the Progressive Comprehensive Trans-Pacific Partnership – could also affect trade and investment flows to remaining members Singapore, Malaysia, Vietnam, Japan, Brunei, Mexico, Peru, Australia and New Zealand.
This could change if the door is opened to other Asian countries like China and India, or if Asean manages to get some progress on its own trade initiative, the Regional Comprehensive Economic Partnership, which includes those nations.
Then there is China’s One Belt One Road, which will channel investment into infrastructure in 60 targeted southern, southeastern and central Asian nations, as well as parts of Africa.
Projects with a combined inward investment stock of nearly US$6 trillion are planned and an outward stock above US$3 trillion. Some projects will be funded through the China-led Asian Infrastructure Investment Bank.
Trade connectivity will expand once transport and communication links are extended along emerging routes like the China-Pakistan Economic Corridor, the Silk Road Economic Belt in Central Asia and Mekong region super highways.
Integration is likely to be much slower at the monetary level, due to differing development stages and technology gaps. Institutional and social convergence will also remain a distant goal – and it may first require a political detente.