The Stark Reality of the US-ASEAN Trade Role Reversal?

I was in Kuala Lumpur last week for Wharton’s latest Global Forum with some trepidation. Malaysia and all of Southeast Asia have been battered by plummeting global commodity prices and China’s volatile slowdown. Capital flight and fast-falling exchange rates – with a healthy dose of political instability thrown in – made me worry that a repeat of the devastation of 1997-1998 Asian financial crisis might be in the cards.

Far from it. 

What I learned from an impressive array of business and government leaders, many of whom are Wharton alumni, is that the economic fundamentals of Southeast Asia are much stronger today than 15 years ago, leading them to be confident the current turmoil will not divert the region from its trajectory of greater economic dynamism and global relevance.

ASEAN (the 10-country Association of South East Asian Nations) is the most important part of the world we in the West know least about. It has a young and growing population of over 600 million. The floor for annual economic growth is above 5%. Rapid adoption of technology, above all mobile, is making real the promise of hundreds of millions of middle class consumers. 

But given the anti-trade rhetoric in the current US presidential campaign, the thing that struck me most about Southeast Asia is its ever growing enthusiasm for more economic integration. This is a real reversal of roles for the US and ASEAN.

25 years ago, the US was Cheerleader in Chief for globalization. Under Bill Clinton, the US completed NAFTA and led the creation of the WTO, while trying to persuade – and sometimes forcing – recalcitrant emerging markets to open up their economies as part of the “Washington consensus” agenda. 

Today Donald Trump and Bernie Sanders don’t agree about much. But they are in vehement agreement that the US’s pro-trade agenda has wrought havoc on middle America. 

Of course, Ross Perot made a very serious independent run for the presidency in 1992 on the same grounds.  Some may recall his infamous prediction that NAFTA would  result in “the giant sucking sound” of jobs leaving America. But then the Clinton administration implemented an aggressive free trade agenda. 

Maybe the same thing will end up happening in 2017, but the anti-trade rhetoric in the primaries is striking. 

Things could not be more different in Southeast Asia. ASEAN recently completed to great fanfare the creation of its own internal ASEAN Economic Community – very much modeled on the European Economic Community out of which the European Union grew.

Building on lots of FTAs with other Asian economies, ASEAN expects to finalize later this year a Regional Comprehensive Economic Partnership (RCEP), a very ambitious free trade agreement among the ASEAN 10 (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam); the three major economies of Northeast Asia (China, Japan and South Korea); Australia and New Zealand; and the world’s largest democracy, India. 

Of course, a regional free trade agreement is perhaps the last element standing in the Obama administration’s purported “pivot” to Asia: the Trans Pacific Partnership (TPP). But note 3 things about the 12-country TPP:

1. It does not include the two biggest RCEP members – China, the world’s biggest trading nation and second biggest economy, and India, whose growth and population are poised to outstrip China.

2. The Obama administration has become increasingly clear that TPP is about establishing American economic “rules of the road” for the Asia-Pacific region. This is more geopolitics (economic containment of China, according to Henry Kissinger) than pro free trade.

3. TPP has not yet been ratified by Congress and faces impossible odds of success in this election year. After the intensity of the anti-trade sentiment this year, ratifying TPP in 2017 will remain a very tall order. 

Put it all together and the US-Asia role reversal, amid serious economic dislocation and political instability on trade, is stark. Led by ASEAN, all of Asia is now converted to the view that more economic openness is the path to a more prosperous future, at the very same time as many Americans are blaming their economic woes on free trade. I hope the next American president can bridge this damaging gap in the global economy. 

Geoffrey Garrett is Dean, Reliance Professor of Management and Private Enterprise, and Professor of Management at the Wharton School of the University of Pennsylvania. Follow Geoff on Twitter. 

For additional perspectives on the region visit Knowledge@Wharton’s ASEAN coverage.