Dec 10, 2024
Intro: You are listening to Foreseeable, a production of Global-is-Asian, the flagship thought leadership digital platform of Singapore's Lee Kuan Yew School of Public Policy. Each episode we invite an expert for a conversation relating to their field of study or experience and to find out what they foresee happening in the future.
Dr Denis Hew is Senior Research Fellow at the National University of Singapore's Lee Kuan Yew School of Public Policy. Prior to taking up his current appointment, he was director of the APEC Policy Support Unit, PSU, from 2011 to 2022. Dr Hew also spent two years in the Asian Development Bank, ADB in its Southeast Asia department, where he managed technical assistance programmes on regional cooperation and integration.
Our discussion in this episode focuses on the immediate and potential challenges and opportunities posed to Southeast Asia by the re-election of Donald Trump at the US presidential elections, which took place on November 5th, 2024. Dr Hew will discuss both the obvious and the obscure obstacles awaiting the region, as well as the numerous ways in which the region can adapt to the impending changes in US foreign policy.
David Austin: Thank you, Denis. I'm so excited to hear what you have to say today, because I'm basically going to plan my next four years based on what you answer these questions this morning. So, let's just dive right into it — were the recent US election results a surprise here in Southeast Asia? And how prepared is the region for Trump 2.0?
How prepared is SEA for Trump 2.0?
Dr Denis Hew: Thanks for having me. I guess to answer your first question, it's not entirely a big surprise. We thought that it's going to be a pretty tight race, but we all know now it was a decisive victory.
Now, how prepared is Southeast Asia for Trump 2.0? I think it's a lot more different than its first administration in the sense that the region's been through a lot. The region's more prepared. It is also far more resilient than it was, over the last, seven, eight years.
It's not just, the US China trade war, which started during Trump 1.0 during its first administration, but we also went through the pandemic the last couple years. And even during Donald Trump's first administration, he pulled out of the TPP, the Trans-Pacific Partnership Agreement, which is part of his first campaign promise in his first election.
And yet, some of the remaining members of TPP, particularly Japan and Australia were able to salvage that and, you know, we now have a new trade agreement, like it's called CPTPP, Comprehensive Progressive Trans-Pacific Agreement.
We also know that, during that period of time, we have another large regional trade agreement called RCEP, the Regional Comprehensive Economic Partnership Agreement. And that includes ASEAN, all ASEAN member states plus its major trading partners, including, China, Japan, Korea, Australia, and New Zealand.
So what I'm saying is that during that period of time, there was actually greater trade integration, particularly at the regional level among member countries, despite the fact that we did see growing trade tensions between US and China.
David Austin: Okay, you mentioned trade, and I know trade is on a lot of people's minds, specifically tariffs. President-elect Trump threatened to raise tariffs on Chinese goods by up to 60%, and 10% to 20% on all other imported goods coming into the US. What do you think the economic impact will be on Southeast Asian nations, and which countries have the most to lose?
Dr Denis Hew: I think there will be quite a significant impact. It's a little early right now to see how significant it will be. We know that the last couple of years, there's been what they call the China Plus One strategy where a lot of multinationals are now diversifying some of their risks away from China.
And some of the major beneficiaries have been Southeast Asian countries like Vietnam, Malaysia, Thailand. So, in a way, these are the more open economies that have benefited will be perhaps the most impacted, by the increase in tariffs, not just with China, but for other countries as well.
And, I think if you look at the numbers, most recent numbers right now, the US has a trade deficit with; I think the largest, of course is China, but two is Mexico, three is the European Union, and then four is Vietnam, right. I think it's close to a hundred billion US dollars.
So I think what I'm saying is that Southeast Asian countries are not immune to any of these concerns of rising trade hikes that he is going to impose on China and the rest of the world.
The other important thing to note is that it's going to disrupt supply chains again, because a lot of our global supply chains are linked with US and China, so with these increase in tariffs that's going to be imposed, it's going to disrupt supply chains again, and that's going to have an impact on many of the countries in Southeast Asia, particularly in semiconductors, consumer electronics.
So that's going to have an impact. I think you've seen some numbers, private economies are looking at it in terms of how it's going to shave off GDP growth next year by these increase in tariffs some as much as, you know, 1%, but it's a little too early to tell what's the worst-case scenario, to be honest.
David Austin: Okay. What about just general implications on free trade around the world and regionally? Is this going to maybe have knock on effects that we're not thinking about?
Dr Denis Hew: Yes, it is.
So you're seeing a kind of an undoing of decades of trade liberalisation policies that have been implemented by the US and that's going to have an impact on many countries around the world.
If you look at it in terms of free trade, the US average tariffs now is about 3%. I think there's a recent Moody's report that says that effective tariff rates may go up as much as 19%, if he's going to increase tariffs across the board, right?
What we're worried about is that there's going to be an increase in trade barriers and different kinds of non-tariff barriers as well, because of what's happening in the next couple of years.
There's definitely going to be, in my personal view, another US China trade war. This time, perhaps it's going to be far more intense, and that's also going to divide member countries at the WTO. We know that the World Trade Organization did not have a very successful Ministerial Conference earlier this year.
There are a lot of things that are literally stuck, including its dispute settlement mechanism, which is pretty important to get going if you're going to have trade disputes and it's kind of stuck at the appellate body, then, you know, where do you go, right? And the biggest losers, if you're going to see that trend towards greater trade protectionism, is particularly the less developed countries.
So a lot of the more open, more developed countries, even in Southeast Asia, are moving towards different kinds of free trade agreements or even partnership agreements. The most recent one is the, what we call DEPA, the Digital Economy Partnership but what about the less developed countries and the poorer countries, they may not have that kind of opportunities to have that kind of free trade agreements.
So we're seeing overall greater trade fragmentation that might happen in around the world, and I think that's something to be worried about.
I did mention earlier that Southeast Asia is becoming more resilient, and one of the ways to mitigate some of these risk is actually to diversify your trades, build up trade linkages with other emerging markets. I did mention RCEP, one of the largest free trade agreements, but also other types of trade linkages with other emerging new markets to look at, whether it could be in Latin America, it could be in Africa.
And I think some of the Southeast Asian countries are already doing that, right? Whether it's at the bilateral level or maybe at the minilateral, a couple of Southeast Asian countries are trying to build that linkages with Latin America; Mercosur is an example, it's one of the customs union in Latin America.
So looking for diversifying your markets and find new ways to ensure that your trade flows will continue, will be something that will provide some kind of buffer.
David Austin: So just to follow up on that a little bit, so in general you feel that the kind of resilience, you expect things to be a little bit, maybe better for Trump 2.0 as far as the response here in Southeast Asia?
Dr Denis Hew: Well, in a way, you know what's coming, right? What I'm saying is over the last, years, they've put in place different kinds of trade arrangements and different kinds of forms of economic resilience.
Strengthening your supply chains, looking at other suppliers; a lot of these things have been done not just because of the trade war, but also because of the pandemic, right? There's been a lot of work being done on strengthening and making sure supply chains are more resilient. It's not all doom and gloom.
David Austin: Okay, well that's good to hear. I want to follow up on another item you mentioned; the China Plus One strategy, that a lot of multinationals are taking to reduce the risk involved with relying solely on China for supply chains. How effective has this strategy been and what will a Trump administration mean for its wider uptake?
Dr Denis Hew: So, in many ways, the China Plus One strategy happened mainly because of the supply chain disruptions we saw during the pandemic; it was a black swan event. A lot of multinationals were not really prepared to see disruptions because of the lockdowns, and that had significant implications on how the final products were going to be made. There were long delays as we know that.
So, it made a lot of sense for multinationals with extensive supply chains to move some of the operations, some of their manufacturing operations away from China, not entirely.
And of course countries in Southeast Asia, which have pretty well-established infrastructure in place, were the major beneficiary. For example, Intel, some of the big semiconductor companies, have been in Malaysia for a long time, decades. I mean, I think Intel has been in Malaysia for 50 years.
So the infrastructure is there, so it was quite easy for them to diversify some of the risks, and I think in that sense, in terms of strategy, it made a lot of sense. What we are worried about is that with Trump 2.0, there's going to be a lot of more pressure on multinationals to move more of their operations, not just away from China, but to the US; what they call reshoring or onshoring.
From an economist point of view, that leads to a lot of trade distortions or trade diversion, right, or a larger proportion of the operations to the US. And which may not necessarily be the most efficient suppliers of whatever parts and components to make the final product. Whether it's your mobile phones, your laptops, your automobiles. So there's a lot of implications too on the region, because if you're going to have that kind of quite significant trade in this region, it's going to have an impact on foreign direct investments in the region, it's going to have an impact on jobs. So jobs that were here will be moving away from here to the US. So there's a lot of concerns that may happen.
I think the China Plus One strategy did work for a time and I think what's worrying is that China Plus One strategy will not really apply very well under Trump 2.0. It's not going to be that kind of strategy that would help to mitigate the kind of risk that we saw in the pandemic.
David Austin: To what extent do you think reshoring or onshoring will happen and what are some of the unforeseen consequences?
Dr Denis Hew: I think it depends on the industry, because, in certain kinds of industries, including electronics, automobiles, these supply chains have been built over decades, like 20, 30 years. So you can't just say, hey, I want, I don't know, 50, 70% of that supply chain to move to the US.
I think it's not so easy and I think multinationals, I'm pretty sure US companies would be advising the economic advisors, whether it's the Commerce Department or the US STR, that some of these things are really not realistic.
One, it defies the business logic of having supply chains, but two, operational costs, manufacturing costs will go up. It's going to have an impact on US companies, but it's also going to have an impact on US consumers too because, I mean, companies ultimately have to make money. So a lot of this additional cost because of onshore activities will eventually be passed on to the consumer. So, prices will start to go up for different things, right?
I think for certain kinds of industries, which have much shorter supply chains, it might be possible. Less complicated, less complex supply chains could be possible that there'll be more reshoring and onshoring of those activities.
I'll give you an example. I'm a Hi-Fi enthusiast; many of us like to collect Hi-Fi equipment, headphones and all that. They could be German companies, or they could be US companies, but a significant part of those is made in China. So, yes, it could be possible to move some of these operations back to the US, but cost is going to go up. So buying new headphones or a new amplifier or a new Hi-Fi set, it's going to be a lot more expensive for consumers.
David Austin: If we could just broaden the discussion a bit and talk about some of the geo-economic fragmentation that we're seeing; what are the risks associated with that? Is there anything that the region can do to prepare for these challenges?
Dr Denis Hew: Yeah, I mean, geo-economic fragmentation, it's kind of a reverse of globalisation, and the kind of global trade integration we've seen, over the last couple 20, 30 years.
And in a way it predates the trade war as well because there's been growing income inequality in this region and also globally, which has led to a lot of these anti-globalisation sentiments that's been gaining ground. Now the trade war unfortunately, has kind of exacerbated that.
Why is that bad? Because there are significant economic costs to global economic fragmentation, including segmented labour markets, it's going to have an impact on productivity, on even inflation because import costs are going to go up. Import prices were raised and it's going to cause inflation, not just in the US, but in many parts of the world.
So this is something that the IMF and a lot of economists are concerned about, that the world's going to get a lot more fragmented and that's going to have some implications on economic growth as well as income inequalities.
David Austin: Now another point that's, the Trump 2.0 administration is expected to abandon the Indo-Pacific Economic Framework, IPEF. What will this mean for US engagement in the region, and what other agreements could replace IPEF?
Dr Denis Hew: In my opinion it was dying anyway, particularly during Biden administration. IPEF was seen as a major approach by the US to engage economically with the Asia Pacific region. It has four main pillars, and I think the last pillar, or the trade pillar was supposed to be concluded last year in November, and that broke down partly because of discussions over digital trade.
It's very likely under the second Trump administration, he's going to, he's going to probably scrap whatever's left of IPEF - that's a missed opportunity.
There are other agreements out there. One, of course, is RCEP. The other of course, is CPTPP, and what's going to happen is that there's going to be increased engagement, economic engagement between many of Southeast Asian countries, with China in particular, because of RCEP, a very promising free trade agreement where it does facilitate the expansion of regional supply chains.
And of course, that also provides opportunities for other members to join RCEP as well. The Comprehensive Progressive Trans-Pacific Partnership is another large trade agreement which also involve a number of ASEAN member states, but also Japan and other major economies.
It does mean that the US will be less engaged. It's very possible that the US will be more interested in bilateral engagements with Southeast Asian countries, particularly those which it considers pretty strategic.
That includes countries like Indonesia because it's one of the largest exporters of nickel. Vietnam, because it's been starting to build its economic partnerships, where Vietnam is also a potentially large market.
So it'll be quite transactional in that sense. It'll look at countries in Southeast Asia which are important to the US and to see, well, "we might not raise your tariffs if in exchange we get something out of it."
From the ASEAN point of view, I think we need, this is the opportunity for us to really step up on economic integration among ASEAN member states, given the growing uncertainties in the trade landscape. We got different types of initiatives like the ASEAN Economic Community, which is coming up with a new strategic plan.
David Austin: Maybe you can elaborate more on the ASEAN economic community; do you think they're going to reassess now that there's a Trump 2.0 and make any different estimations on what they should be doing going forward?
Dr Denis Hew: ASEAN policymakers right now are finalising the draft for their new strategic plan post 2025, an economic strategic plan for the next 10 to 15 years. It needs to take into account of rising trade protectionism that's going to occur, likely, over the next couple of years.
But ASEAN also needs to take into account some of the emerging challenges that the region is facing. Besides rising trade protectionism are things like digitisation, AI adoption, the region's also facing increase in number of natural disasters because of climate change.
Ageing population, Singapore's population is aging, so is Thailand's. With an aging population, the labour force will start to shrink. So, one of the policies that need to be put in place to ensure that productivity can continue with a shrinking labour force.
Do manufacturers need to adopt much more digitisation, more robots? But there are implications to that too, because increased use of robots or different kinds of AI could lead to job displacement, and there's increased need also to look at how can we reskill workers who have been displaced in these sectors to and to move them to sectors which are growing, whether it's in the services sector or other sectors. This whole region is going through quite a significant structural transformation over the next 10, 15 years, and ASEAN policy makers really need to take that into account.
David Austin: What can ASEAN, as a economic community do to address some of those issues? Let's just choose one; the income inequality.
Dr Denis Hew: One is to address some of the labour mismatches that is, that's happening between supply and demand in the region. There is mutual recognition of different kinds of professional services, so your engineers, your doctors, your nurses, but I think that that scope of different skill sets needs to be broadened. So that it's easier for labour mobility to move between different countries, right? And that, of course, would help to raise income levels. If I'm able to find jobs in different ASEAN countries, then that has a impact on trying to address that income gap.
We know for example, there's also development gaps within the country itself, not just within ASEAN member states that also, so what I'm saying is that when ASEAN comes up with this new strategic plan to address that development gap, they need to take a much more nuanced and holistic approach in trying to address that. The concern of course is that it could lead to greater social unrest if you see a rise in unemployment, particularly youth unemployment.
David Austin: Okay. In the wake of Trump 2.0, how important will the relationship with the other big player, which is China, be to Southeast Asia and what does it need to strengthen its economic relationship?
Dr Denis Hew: I think that relationship is important, but so is the US. From the ASEAN point of view, I don't think they want to take sides. ASEAN has deep economic linkages with both US and China.
ASEAN itself has the ASEAN Outlook on the Indo-Pacific Framework, which has the buy-in from US and China. It's a great platform to bring US and China together to discuss different kinds of economic and technical cooperation with ASEAN member states, so that's one opportunity to bridge that tension between US and China.
And its relationship with China will probably strengthen over the next couple of years through different kinds of free trade agreements, but also through perhaps technical cooperation too. We know that China is a leader in many emerging technologies, including artificial intelligence.
One of the challenges that's being faced by the ASEAN region is its low productivity, particularly we call, TFP, um. Total Factor Productivity, which measures innovation and technical progress and I think China can play a bit, Chinese universities, Chinese technology will be quite useful in helping.
And I think that's happening to some extent already, there's a lot of scientific and technical exchange at the university levels. So, I think we'll see that increase in cooperation, both in terms of trade, but also in terms of science and technology happening over, over the next couple of years.
That would help in making sure that the region becomes far more resilient as well.
David Austin: Do you have any predictions where you think we'll be in four years at the end of this Trump administration?
Dr Denis Hew: I like to be optimistic, in the sense that I like to think that ASEAN would come out stronger. Given that it's going to be a very uncertain, hostile economic environment, and we haven't even talked about geopolitics and the geo-security aspect of it could also be very uncertain.
That's one of the reasons why I think it's important for ASEAN members to be more cohesive and to work together, and ASEAN does have clout. By 2030, if they're more integrated, they are the fourth largest economy in the world, right. The big challenge is, where the pessimism comes in is that unfortunately, we are going to see a very uncertain global economy.
We'll be worried about trade protectionism, but we also be worried about, even among ASEAN member states, that national priorities will override regional ones. And they'll say, hey, I need to worry about my domestic constituents and we'll set aside all these regional plans that we have to address them, and that could be a setback in terms of the efforts for ASEAN to integrate.
So that's something that we, we need to watch out for, and it all depends on how the global economy is going to turn out over the next couple of years, but I'm still more positive.
David Austin: Very good. Well, there's so many other things I would like to ask you about, but I think this has been a great discussion and I think that is a really good ending point. So thank you so much for, for everything that you shared with us today.
Dr Denis Hew: Thanks. Thanks for having me.