Why Southeast Asia’s global trade moment has arrived

Southeast Asia is not only thriving as a manufacturing centre, it is likely to benefit hugely from China-US trade tensions, with the local banking sector set to play a crucial part in seizing the opportunity

If the ASEAN region was a single country it would be the seventhlargest economy in the world, with a combined GDP of $2.92 trillion in 2018. It is projected to rank as the fourth-largest economy by 2050, demonstrating the increasing strength of Southeast Asia’s position in the global trading ecosystem.

Recent trade conflicts could bolster this position. American tariffs on Chinese-made goods are playing a role in accelerating the shift of contract manufacturing to ASEAN countries such as Vietnam and Thailand. What’s more, China’s Belt and Road Initiative (BRI) is helping to propel intra-regional trade, improving connectivity within the region through enhanced infrastructure.

At the heart of this success are local banks – particularly their ability to facilitate local businesses’ efforts to navigate new and existing trade corridors, as well as capture growing opportunities in a rapidly evolving international trade landscape. But to continue their strong performance, they will need to deepen their collaboration with global banks, leveraging their expertise, technological innovation and reach.

Picking up the baton from China

Despite protectionist headwinds, Asia’s overall exports to the US increased by over seven percent in 2018. Both import and export markets in the region are strengthening and countries across the ASEAN are happily picking up the baton from China as a low-cost manufacturing hub, while China moves to more sophisticated forms of high-end production, as well as towards a more consumer-driven economy (a move being accelerated by those trade disputes with the US).

Such shifting dynamics mean that corporates and banks are increasingly looking to diversify their operating models. Already lower-end manufacturers are relocating from China to the ASEAN in particular. Panasonic, for example, is moving its auto stereo production from China to Thailand, and most of Samsung’s mobile phones are now made in Vietnam.

In a further boost to Vietnamese manufacturing, Chinese acoustics company GoerTek announced that its production of Apple’s AirPods will move to Vietnam – in part due to tensions between the US and China.

Even as an import economy, the ASEAN region is beginning to reflect its weight – and could well offset any “lost” US exports. The combined ASEAN population is 650 million, making it larger than the EU or NAFTA blocs. Given this, intra-regional trade remains somewhat of an untapped source of growth.

For example, intra-regional trade accounts for 50 percent of total trade in East Asia, while in Southeast Asia, the figure is just 25 percent – both significant improvements on previous decades but with a lot of potential for growth.