Proponents of ASEAN integration often play up the region’s combined superlative potential. If ASEAN were a single superstate, it would be the world’s third most populous country and fifth largest economy.
While critics are quick to point out the slow pace of economic integration within ASEAN, recent moves by China and the UK in multilateral trade provide the strongest hint yet that ASEAN has the potential to become the world’s supply chain bloc.
Singapore will need to maintain its competitive edge to defend its hub status and become more involved in regional development to continue acting as the gateway to ASEAN.
Interconnected advantage
China’s decision to enter the Regional Comprehensive Economic Partnership (RCEP) reflects a change in its growth strategy and its recognition of ASEAN’s burgeoning role in global supply chains. It understands that its export oriented economic growth may wane in the near future. Key factors that made China the “factory” of the world, such as low labour costs, are slowly disappearing as its economy matures and standards of living rise.
China must pivot from its old economic model, but it cannot afford to abandon its export-oriented businesses. The solution lies within ASEAN where manufacturers can relocate to enjoy a lower cost base and repatriate the profits back to China.
Its recognition of ASEAN’s potential is a natural consequence of the increased connectivity that ASEAN countries have built between themselves.
This connectivity is due, in no small part, to the complementary trade patterns, differentials in economic development and demographic factors. These differentials have fostered a fertile environment for cross border, intra-ASEAN trade and investment relationships.
Indonesia has the comparative advantage to advance itself as a technology hub, thereby resulting in the rise of technology value chains emerging with Indonesia at its centre. Vietnam, with its large population, strong political will, long-term planning and favourable business environment, stands to be the factory of the world. Laos PDR may lend its services as ASEAN’s battery with the Philippines acting as the outsourcing hub of IT and other support services. Each plays a unique complementary role that makes ASEAN an attractive destination to establish a supply chain.
However, these countries wouldn’t have been able to go forward with their plans without the complementary strengths of their neighbours. For instance, Singapore’s provision of financial and other professional services has served as an enabler for Indonesia’s technology services sector and Vietnam’s manufacturing ambitions. Capital flows from Singapore invariably create value in other ASEAN countries via greenfield or brownfield transactions.
ASEAN’s growth trajectory also provides further opportunities for Singapore’s continued development through investment and collaboration in much needed infrastructure across ASEAN. For shared prosperity, Singapore must support the development of its ASEAN neighbours in critical economic sectors that are crucial for an integrated supply chain bloc to flourish.
Increasing intra-ASEAN linkages, such as flow of capital, integration of production networks, vertical and horizontal integration of supply chains, are driving optimism for the convergence of ASEAN into the world’s supply chain bloc.
As the growth of these linkages has accelerated, so has the density, leading to deeper connections between ASEAN members and greater interdependence of their economies.
These linkages are crucial for ASEAN to develop into an economic community that serves as the supply chain centre of the world.
Latent opportunity
The UK’s decision to formally apply to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in February was touted as an effort to deepen the UK’s access to fast-growing markets. Yet the UK’s benefits under the CPTPP are expected to be marginal in the near term as it already has pre-existing bilateral free trade agreements with several CPTPP signatories including Singapore.
Beyond marginal gains, the less obvious factor driving the UK’s move is its recognition of the CPTPP’s future potential, especially the emergence of ASEAN as a global supply chain bloc.
The CPTPP removes unnecessary barriers for businesses, provides preferential tariff rates, simplifies customs clearance, enables easier cross border movements and time guarantees for shipments. These advantages facilitate supply chain movements and manufacturing integration across CPTPP signatories.
However, ASEAN CPTPP signatories will likely develop further and integrate better as a supply chain bloc due to geographical advantages. There are significant cost savings for businesses to locate most of their supply chain within the ASEAN region than to spread it out between other CPTPP signatories like Mexico and New Zealand.
In addition, ASEAN countries are increasingly producing parts and components used as intermediate inputs for downstream manufacturing processes located in other ASEAN countries. The growing vertical integration of production networks across ASEAN reflects the deepening linkages within the region. With pre-existing supply chain infrastructure in place, ASEAN is more likely to become the supply chain bloc of the CPTPP.
Increasing intra-ASEAN linkages, such as flow of capital, integration of production networks, vertical and horizontal integration of supply chains, are driving optimism for the convergence of ASEAN into the world’s supply chain bloc.
ASEAN also provides a greater latent opportunity for the UK to provide professional services for the burgeoning supply chain shift into ASEAN. The continued growth of manufacturing in ASEAN and the anticipated supply chain integration across the region will catalyse the demand for professional services.
In 2019, the UK’s exports to ASEAN member states stood at GBP11.4 billion ($21.16 billion), of which, services comprised 41.6%. This number will continue to grow as ASEAN emerges as a supply chain bloc.
The UK believes that the CPTPP will provide it with a foothold in the growing convergence of ASEAN as the supply chain bloc of the world, consisting of every component of the value chain, of any industry. This proposition is set to grow stronger as more ASEAN member states including Indonesia, Thailand and the Philippines express interest to join the CPTPP.
Singapore’s role
As a CPTPP signatory and regional hub for finance and trade, Singapore is well-positioned to capture new growth opportunities.
As ASEAN becomes a more important supply chain bloc, the region’s appetite for investments will be in the trillions and capital flows from multiple sources will be needed to close the gap. With capital flows, ancillary services crop up, thereby, creating a market for professional services.
With ASEAN member states at different levels of development, some will invariably have to rely on established players, like Singapore and the UK, with the capability to handle highly skilled professional services.
Despite the growing market for professional services, Singapore has two distinct advantages over UK firms. First, Singapore companies are more likely to be familiar with local customs and regulations. Second, Singapore companies may find it easier to join hands with local partners across ASEAN as some countries in the region have yet to fully liberalise their financial sector following the 1997 Asian Financial Crisis.
With the expansion of intra-ASEAN trade, Singapore’s current strategy of being a gateway to the region will result in further gains as new players enter the region. More multinational corporations are expected to use Singapore to set up their regional headquarters to oversee their production in the region.
ASEAN’s growth trajectory also provides further opportunities for Singapore’s continued development through investment and collaboration in much needed infrastructure across ASEAN.
For shared prosperity, Singapore must support the development of its ASEAN neighbours in critical economic sectors that are crucial for an integrated supply chain bloc to flourish. These sectors include transport, telecommunication, information technology, energy and financial services.
Singapore has deep expertise in these sectors and must act as the conduit or originator of technology, knowledge and capital to grow the region’s infrastructure and interconnectivity. By playing a role in the region’s development, Singapore stands to gain from deeper linkages with its neighbours and maintain its gateway status for decades to come.
No free trade agreement has the power to create this new reality. The RCEP and the CPTPP merely reinforce ASEAN’s existing growth trajectory. It will be up to entrepreneurial Singaporean companies to pursue a strategy of regionalisation to cement Singapore’s place in a rising ASEAN.
Azman Jaafar
Azman Jaafar is managing partner and one of the founding members of RHTLaw Asia. His corporate and capital markets practice focuses mainly on energy and resources, and hospitality industries. He has advised and represented clients in numerous transactions involving mergers and acquisitions, corporate finance, mining and oil and gas in Singapore, Indonesia and China. He also heads the firm’s Indonesia Practice and manages the ASEAN Plus Group. Azman was named IFLR1000 Leading Lawyers 2015 – M&A, Project Finance, Energy, Mining and Oil & Gas, as well as AsiaLaw Leading Lawyers 2009 – Capital Markets/Corporate Finance and Corporate Governance. Azman was awarded a Public Service Medal (Pingat Bakti Masyarakat, PBM) by the President of the Republic of Singapore in 2007 in recognition of his voluntary work as a councillor with Northeast Community Development Council since 1997.
Saravanan Rathakrishnan
Saravanan Rathakrishnan is an associate of RHTLaw Asia's Corporate and Capital Markets Practice. Funds, capital markets, mergers and acquisitions are among his areas of expertise. Saravanan is engaged in the startup community, consulting a variety of startups in relation to contract terms, regulatory obligations, legal commitments and corporate structure. He maintains a keen interest in finance, economics, and law and has published a host of legal, economic and finance articles.
