Southeast Asian leaders who converged earlier this month on the picturesque South Korean island of Jeju to mark the 20th anniversary of formal ties between ASEAN and South Korea no doubt had their lighter moments, appreciating the landscape, unique customs and rich maritime cuisine of the tropical volcanic island.
Despite the escalated tensions brought on by North Korea’s nuclear and military threat, South Korean President Lee Myung-bak and ASEAN leaders took the time to engage in extensive negotiations whose outcome will go a long way in reshaping Asia. The evolving ASEAN-South Korea partnership is but one of the numerous alignments through which Asian economies are cementing business, political and cultural ties. This is altering the geopolitical landscape of one of the world’s most dynamic regions.
This trend must be encouraged. The global economic turmoil can not be an excuse to retreat behind protectionism. Indeed, continuing to pursue bilateral and regional trade agreements and stronger financial partnerships will make Asia better prepared to gain from the global economic rebound when it comes.
Increased trade and investments within the region have the potential to generate millions of jobs, boosting purchasing power across Asia. That will help alleviate one of the world’s biggest imbalances — that of Asia’s under-consumption which has made the region’s economies excessively dependent on exports to the West.
In that sense, economies such as South Korea and ASEAN hold the key to help resolve one of the world’s most enduring economic challenges.
Asian countries began in earnest to bond together in the aftermath of the 1997 to 1998 Asian financial crisis when economies and currencies across the region collapsed in unison as capital fled on worries about high current account deficits and excessive foreign currency borrowings by local companies. The regional nature of the crisis gave Asian policy makers a sense of togetherness.
Since then Asian economies, led by China, have built up more than US$4 trillion in foreign exchange reserves, generated huge trade surpluses, largely against the US and Europe, increased trade among themselves and amassed vast public, household and corporate savings, giving the region enormous clout in the international community. The G20 meeting in London in April formally marked the arrival on the world stage of emerging economies, especially those from Asia — China, India, South Korea and Indonesia.
The G20 meeting was a milestone in the shifting balance of power from the West to the East as members of the G7 block of developed nations agreed to share decision making powers on a wide range of global economic and financial issues with the developing world. South Korea is at the forefront of this shift, with the country set to assume the chair of the G20 next year.
In many ways, the South Korea-ASEAN partnership epitomizes the evolving dynamics that is turning Asia into a global economic powerhouse. South Korea, a nation of almost 50 million people, GDP close to US$1 trillion and annual per capita income of US$22,000, has an economic and technological heft beyond what is afforded to the country because of its geographical and demographic size. It is the only Asian member of the prosperous group of OECD nations, besides Japan.
ASEAN, on the other hand, is a developing economic group of 10 Southeast Asian nations with more than half a billion people, US$1.3 trillion in GDP and annual per capita income of US$2,300. In a couple of decades, almost 300 million of ASEAN’s estimated 700 million people are likely to be a part of Asia’s emerging middle class, making it as vibrant a market as that offered by China or India. South Korea, like Japan and Taiwan, has the capital, skill sets and some of the most innovative technologies the world can offer to tackle humanity’s common problems — environmental degradation, climate change, poverty, illiteracy, digital divide and the lack of adequate healthcare.
In financial services, the lessons South Korea learnt from the 1997 financial crisis has brought greater sophistication, transparency and depth to its capital markets.
The developing nations of ASEAN are in need of this capital, advanced technology, skill sets and financial expertise.
In return, ASEAN offers South Korea its expanding marketplace, which has the potential to replace consumers in West who are tightening their purse strings in the aftermath of the economic crisis.
The synergies make ASEAN and South Korea a perfect fit as economic and political partners. Not surprisingly, then, businesses on both sides of the spectrum have seized the opportunity and boosted trade and investments over the past decade.
South Korean powerhouses Samsung, Hyundai and LG have made deep inroads into Southeast Asia, as elsewhere in Asia, investing in plants and dealership networks, creating thousands of jobs and developing local technical and commercial skills. South Korea’s shipping giants Hanjin and Hyundai Merchant Marine have set up regional operational headquarters while its electronics multinationals, Samsung and LG, have established regional treasury hubs in Singapore.
South Korean construction companies Samsung, Hyundai and Daewoo regularly bid for large infrastructure contracts across the region. Meanwhile, the South Korean government has used more than US$700 million in economic aid over the past decade to help alleviate poverty, build institutions and impart technical training in Southeast Asia as part of its goal to close the wide development gap between the relatively well-off ASEAN members and the less-developed members of the group.
Conversely, Southeast Asia’s leading resource companies have forged partnerships with South Korean counterparts and gained share in one of Asia’s biggest markets for basic materials. Indonesia’s Pertamina, for instance, is one of the biggest providers of natural gas to the South Korean market, making it one of the country’s leading sources of energy.
The remarkable growth in business ties have been captured in recent data. Trade between the two sides have expanded 11 fold over the past two decades to US$90.2 billion last year, with South Korean exports to ASEAN having a slight edge.
President Lee said at the Jeju summit he expects bilateral trade to surge to US$150 billion by 2015. ASEAN’s six largest economies — Indonesia, Thailand, Malaysia, Singapore, the Philippines and Vietnam — currently account for 90 percent of this trade. South Korea’s trade with these six economies has more than tripled since 1999.
South Korea’s biggest trading partners in ASEAN are Singapore (US$30 billion last year) and Malaysia (US$15 billion), but trade with Vietnam and Thailand are catching up. The growth in trade has been so rapid in recent years that ASEAN is now South Korea’s third-largest trading partner, after the EU and China, surpassing the US and Japan. Meanwhile, South Korea is ASEAN’s fifth-largest trading partner.
The partnership has evolved from trade links to investments. South Korea’s direct investments in the rest of Asia have multiplied five-fold over the past 10 years, amounting to US$10.8 billion last year.
The ASEAN region was the second-largest recipient of these investments, with Vietnam emerging as one of the largest beneficiaries because of its low cost base and skilled workforce.
Trade and investment flows will get a fillip as South Korea moves to implement the free-trade agreement (FTA) it signed with ASEAN for goods trade in 2006 and for trade in services in 2007. The aim is for tariff to fall to zero for most products by next year for South Korea’s trade with Singapore, Thailand, Brunei, Malaysia, Indonesia and Philippines.
The two sides this month also signed an agreement on investments, completing four years of FTA negotiations. South Korea is by no means alone in engaging with ASEAN. It is in fact competing with the other major economic powers of Asia — notably Japan, China and Taiwan — to establish manufacturing bases and distribution networks across Southeast Asia, thus leveraging on the region’s bountiful natural and human resources.
Indeed, the establishment of the South Korea-ASEAN FTA is in line with a flurry of activities in bilateral and regional FTAs following the stalemate of WTO’s Doha Round of talks. Besides the agreement with South Korea, ASEAN has also established bilateral FTAs with China, India and Japan.
On top of these FTAs, the expansion of the Chiang Mai initiative — originally a network of bilateral currency swap line agreements, and now a US$120 billion multilateral framework involving ASEAN, China, South Korea and Japan — is another sign of the commitment of major Asian economic powers towards achieving greater financial cooperation and stability in the region. South Korea is expected to contribute US$19 billion out of the US$120 billion pool.
The positive message coming out from this is that South Korea and other Asian governments still see considerable value and importance of free trade and capital flows despite the ongoing economic downturn.
Indeed, Asia is setting the pace for the rapidly changing world order and South Korea and the ASEAN region, in many ways, are catalysts of this change. Both are reaching out beyond their borders, trying to capitalize on each other’s strengths, to benefit from Asia’s redoubtable economic prospects in the coming decades.
Leaders assembled in Jeju reiterated their resolve to push this course. Business people and diplomats attending the meet had the rising tide of South Korean investments across Asia on the top of their minds.
Ray Ferguson is Standard Chartered Bank’s regional chief executive officer for Southeast Asia.
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