Indonesian Bureau of Economic Research and the Asian Bureau of Economic Research
In 2020, Asia will face the most challenging external environment since the end of World War 2. The pillars of Asia’s prosperity and its ability to raise living standards and reduce poverty—trade, financial integration and global cooperation—are under attack.
Asian economies cannot rely on the rest of the world to solve these challenges. The solutions being proposed by the world’s largest power are not in Asia’s interests. Asian economies must show leadership. They must step-up, work together and engage with others to solve these challenges themselves. It would be a negative precedent if trade tensions are resolved through a US-China deal which the others are not part of.
The US-China trade war is already weakening global growth. The IMF’s estimates—that the trade war could reduce global GDP growth by up to 1 per cent in 2019—underestimate the damage being caused. The uncertainty being created by the trade war has already seen global trade growth more than halve since 2017 from 4.6 to 2.6 per cent—and global foreign direct investment has fallen by 27 per cent. It will take years before the full cost is known. Disruptions in trade also disrupts financial and capital flows, as well as causing uncertainties in the conduct of macro policies.
Financial risks in Asia are high. Much of Asia’s financial integration has been catalyzed by trade. This collapse in trade threatens to trigger an unravelling of financial integration, reducing growth and reducing standards of living to an unknown degree. Uncertainties in growth and investment, also has made macro responses more difficult. Asian supply-chains and production networks are starting to unravel. A study of multinational firms by Baker and McKenzie found that nearly half of the 600 firms surveyed were making major changes to their supply chains. 12 per cent were considering a complete overhaul.
This hostile environment makes it harder for Asian economies to deal with their core economic challenges: sustainable development, poverty alleviation, improving the environment, managing climate change, responding to rapid technological transformation and strengthening political and legal systems. Regional cooperation is desperately needed.
The cost of the current drive towards isolationism, unilateralism and protectionism hurts Asia more than any other part of the world. It therefore falls to Asia to step up and show leadership. Asian economies must come together to protect the cooperation, integration and the rules-based order that has underpinned their prosperity.
On trade, the root cause of the trade war lies in domestic failure: a failure to distribute the massive gains from trade more equitably. The world’s trading rules do need updating. They fail to deal with issues like subsidies, state-owned enterprises, cross- border data flows, technology, intellectual property, services and many other issues currently inflaming tensions. Safeguarding followed by reforming the WTO and updating the global trading rules should be the top priority for the region.
Regionally, Asian economies must put their weight behind RCEP—the Regional Comprehensive Economic Partnership. RCEP will not only boost growth in the region, it will boost confidence by sending a powerful message that Asia remains committed to trade reforms and openness, through working together and open regionalism. Trade needs a win, and RCEP is the best chance of delivering it because the countries in Asia increasingly constitute the biggest game in town. If concluded it will be the biggest mega regional today other than the EU, accounting for 30% of world trade and GDP and half of the world’s population.
Asia must fast-track domestic reforms to manage the adjustments that come from technological change and globalization. Now is the time to be strengthening social safety nets, not weakening them. Having a strong safety net and domestic policies to ensure inclusiveness is vital to ensuring community support for reform. Asia must strengthen its regional safety nets, too, to help countries that face financial and economic challenges. This means reforming the IMF, better integrating regional and global safety nets and ensuring they have the resources they need to stop shocks from becoming systemic crises.
Asia must also bolster cooperation through regional and global forums like APEC, ASEAN, East Asia Summit, and the G20 and the important cooperation arrangement that will come from the conclusion of RCEP. These forums are powerful tools through which to mobilize political will on the big challenges that face our region today. Asian economies should redouble efforts to use these forums to address these challenges and advance our national interests.
The current shift from multilateralism to bilateralism is a shift from success to failure.
It now falls to Asia to stand up and show leadership to defend its interests in the multilateral order and help deliver the reforms that are needed to strengthen it.