How the coronavirus may change the geopolitics of Southeast Asia
- If a global recession hits, political uncertainties may be enhanced, similar to how the 1997 Asian economic crisis catalysed Suharto’s fall in Indonesia and saw the rise of Thailand’s Thaksin
- Even if the pandemic quickly subsides, the developing fourth industrial revolution could spell doom for Southeast Asia’s supply chains, fundamentally changing Asean’s strategic environment
But is this the beginning of the end, or only the end of the beginning? Will there be a second wave of infections as Chinese migrant workers return to work after an enforced absence? Or when Western systems relax uncharacteristic restrictions on individual liberties? What will happen if weak health care systems in Africa, the Middle East, India, and Indonesia are overwhelmed?
Nobody really knows.
Supply chains within China have also been disrupted and will take time to restore. Not all migrant workers have returned to work. As of mid-March, studies by J.P. Morgan and Citigroup Global Markets indicate that while economic activity is picking up steadily for large enterprises, it is still significantly below pre-coronavirus levels for SMEs. More than 90 per cent of Chinese enterprises are small and medium enterprises (SMEs) which account for 60 per cent of China’s GDP and 80 per cent of jobs.
In the worst case, sequential and mutually reinforcing contractions in China, the US and Europe, could cause a global recession. If this occurs, there will be little reason to diversify supply chains until the global economy recovers. A global recession could be prolonged. Since the 2008 financial crisis, the scope for stimulus measures by central banks of key economies has been reduced with interest rates already very low and most major economies running huge budget deficits.
Conversely, if the worst case is avoided and China’s economy bounces back quickly, there will be less immediate incentive to diversify.
In short, it is not to be taken for granted that there will be a significant effort to diversify supply chains out of China, although some diversification will certainly occur.
Southeast Asia can provide an alternative production platform. Some firms have already shifted production to avoid American tariffs and rising costs in China. But moving to Southeast Asia is not automatic. Bottlenecks in infrastructure and skilled labour need to be addressed. Regulatory frameworks in areas such as tax, labour regulations and justice systems, will have to be made more business friendly. American security concerns will need to be addressed.
China and the West have both been materially damaged by the coronavirus crisis; both will eventually recover. When the pandemic eventually ends, the relative power equation between the US and its allies and China, is unlikely to be fundamentally altered. Strategic competition – and the complexities and constraints it imposes on Southeast Asia – will continue.
That the relative power balance will not immediately change, does not mean that the pandemic will have no strategic effects.
Neither the US or China has resisted the temptation to use the pandemic to try and score petty propaganda points against each other, behaving like kindergarten kids trading insults. This only sharpens US-China tensions. But domestic considerations are paramount for both sides.
Over the medium term, the supply chain vulnerabilities and diversification, if indeed such an effort materialises in any significant way, will strengthen the hand of those in the US who advocate “decoupling” and perhaps even facilitate decoupling in certain domains. Domain-specific decoupling is already occurring to a certain extent. Southeast Asia is already confronting the dilemmas this entails.
However, interdependence between the US and China and other major economies – which has been underscored by the speed with which the virus spread to the US and Europe – makes across-the-board systemic decoupling highly improbable, unless the pandemic drags on for years or the virus mutates into a more lethal form that causes even greater panic. The consequences for Southeast Asia will then be profound.
Whole industries could well be brought home, driven by domestic political considerations of the major economies, rather than strategic, security or supply chain-risk management concerns. New calculations of interests by major powers could relegate Southeast Asia to a global backwater of interest only to contiguous or regional powers. This will fundamentally change Asean’s strategic environment.
As supply chains shrink or vanish, the development prospects of less developed Asean members may be seriously limited. Others may be snared by the middle-income trap. Asean’s project of making Southeast Asia a common production platform could become of little interest to the major economies. If supply chains bring little competitive advantage, why is a regional production platform needed?
Asean’s essential purpose is to manage the primordial diversities that divide Southeast Asia and complicate relations between its members. Regional economic cooperation has been Asean’s overarching project since 1967. If this becomes irrelevant while growth in some members stalls, what will this mean for intra-Asean bilateral relations? Whither then Asean? The region’s trajectory could take an entirely new direction. Will Southeast Asia once again be regarded as the “Balkans of Asia”?
Bilahari Kausikan is the former permanent secretary of Singapore’s Ministry of Foreign Affairs. This article was first published in the March 2020 issue of ASEANFocus, a publication of the ASEAN Studies Centre at ISEAS-Yusof Ishak Institute, Singapore.
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