Is Mahathir's regional rejig the best bet to deal with the trade war?

Is the regional rejig proposed by Malaysian Premier Mahathir Mohamad the way to go for Asean?

Asean is at crossroads in the wake of a trade war started by the US. The risk is it could have a boomerang effect on Southeast Asia.

The tussle is biting into China’s exports to the US, raising the prospect of a spillover effect. This may affect countries that have deep economic ties with Beijing. The question is whether or not the countries in Southeast Asia need to be wary of the trade war.

China’s exports to the US from January to May fell to $187 billion, from $205 billion in 2017.

The $18 billion lost has a political effect on China. It shows that Mr Trump’s aggressive battle against Beijing is working in the favour of the US. It also means it could affect countries like Malaysia, a major trading partner to China.

In 2017, Malaysia’s trade with China increased by 20.6 percent to 290.6 billion yuan. Exports to China rose by 28 percent to more than 126 billion yuan. Imports grew by 15.5 percent, reaching 164.5 billion yuan.

In Beijing, the country’s leadership took note of the dip in their export earnings. Though the country’s total exports are still on the rise, it is wary of the external threats. With this new threat to economic growth, Beijing is forced to step in to ensure economic stability.

Political and economic experts believe the current trade war could also influence our region. They are saying the American tirade against the World Trade Organisation (WTO) may result in a shift in trade flows.

The flow is against the US, which has registered trade deficits with many nations. For example, the US has a trade deficit with Asean, but this has not dampened Mr Trump’s interest in the region.

Instead, investment between the US and Asean is flowing well. Asean is the fourth largest trading partner of the United States. But with $234 billion in two-way trade, Asean may need to tread with care.

In April, the US Trade Representative’s Office said it was reviewing the eligibility of Indonesia for the Generalized System of Preferences (GSP).

The panicked Indonesians are lobbying the Americans for fear of losing the benefits of the reduced tariffs on about $2 billion worth of exports to the United States.

This is one example where the US could impose its will and draw Asean members out of their cosy union to bow under pressure.

The Mahathir principle

But what are the options Asean member states have besides the Asean+ forums? There is, of course, the Apec forum. But it is not delivering the way it should according to its vast potential, experts say.

Its member states will have to decide whether the Trans-Pacific Partnership 11 or the Regional Comprehensive Economic Partnership (RCEP) and the East Asian Economic Caucus (EAEC) are the way to go in the wake of a potential spillover of the trade war.

Experts are now debating whether Mr Mahathir’s move to balance the country’s foreign policy by bringing both Japan and China to its side is the answer to the growing regional instability.

There are 16 countries in the RCEP. The group includes Japan, China, South Korea and the ten Asean countries. It is similar in nature to the recently revived idea of an East Asia Economic Caucus (EAEC). Mr Mahathir proposed the idea after his recent trip to Japan.

The question is: What is the difference between the RCEP and the EAEC? Also, why do we need so many economic forums in this region?

According to some experts, the RCEP may not be what Asean is looking for with a trade war on the horizon. Despite Japan cosying up to the idea, the RCEP is seen as a China-led push for a trade pact in which Beijing will have a dominant role.

Experts say the EAEC might be the right solution instead. The EAEC looks more likely to be a trade pact where Asean will have an edge over the Chinese, though it is still too early to pronounce on the new multinational pact.

Explosive trade war

Nevertheless, there is also the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP 11). This broad base economic and investment pact could be the answer if the US were to rejoin it without conditions.

Otherwise, the US may be the dominant force and with Mr Trump’s bullying tactics, the trade pact may not serve the interests of Asean. It may challenge its centrality and unity, given the fact that only a few Asean members are in the pact.

In this early stage in the budding trade war, the Asean remains exposed to an explosive situation with an erratic Mr Trump on the loose.

Is it better for Asean to develop more regional trade alliances or to rely on the US against the rising Chinese giant? Many say the US cannot be trusted. Others argue the US is the only country that could salvage Asean against the Chinese. They say Asean could do without another ploy from Beijing given that it has now virtually conquered the South China Sea.

Some are pointing out that Japan is a softer power, less aggressive than China and the US and that Asean should converge towards a better relation with the Japanese instead. Japan is a full-fledged member of the TPP11 and is trying to play a bigger role in the RCEP.

With the growing dependence on multinational groupings in Asia, it is sensible that Asean will have to consolidate itself further in order to redress its shaky unity and centrality.

Many believe Asean should pursue the EAEC, a block that will bring China, Japan, Australia and Asean together. It may also be expanded to get India and other major Asian players on board.

There are better prospects for trade expansion with regional alliances. Whether it is the TPP11, RCEP or the EAEC, the solution for Asean rests in its unity and centrality. To preserve these, the member nations have to deal with external influences with caution.

This article written by Kazi Mahmood first appeared in The Khmer Times