Professor David Shambaugh of the George Washington University and Ms. Sittie Butocan of the Bangko Sentral ng Pilipinas shared their insights on Southeast Asia’s political and economic outlook, respectively, at the Institute’s Mabini Dialogue Series held on 16 February 2017 at the Carlos P. Romulo Library. Professor Aileen SP Baviera of the UP Asian Center served as discussant.

US position in Southeast Asia grew stronger

Dr. Shambaugh described the relationship between the US and China today as becoming increasingly competitive in securing their positions in Southeast Asia. He discussed the comparative strengths and weaknesses of the positions of these major powers.

He tagged the US as a “quiet strength,” while arguing that the superpower’s greatest strengths are found in the cultural, commercial, and security realms. The US has implemented several people-to-people linkages with ASEAN. Almost 55,000 ASEAN nationals currently attend American universities and more than 60,000 ASEAN youth have been engaged in the Young Southeast Asian Leaders Initiative since its launch in 2013.

In the commercial realm, US trade with ASEAN amounts to USD 225 billion. Its investments in ASEAN reached almost USD 226 billion, greater than investments from Japan, China, and European Union (EU) combined. The US provides four times more aid to Southeast Asia than China, and has a total official development assistance budget of USD 38 billion.

Military security ties, a very important element of the American footprint in Southeast Asia, has strengthened over time. Dr. Shambaugh claimed that the US secures a very strong position in Southeast Asia despite showing “relative inattention” towards the region during the Obama administration. The US has maintained a strong relationship with Thailand even with its condemnation of the Thai coup in 2014. The two nations continue to engage in joint military exercises, an indication of the strength of US-Thai alliance.

The US has also kept strong ties with the Philippines. The Enhanced Defense Cooperation Agreement was signed in 2015 to increase joint military exchanges. The US also improved its security relations with other Southeast Asian countries (Vietnam, Indonesia, Malaysia, and Singapore) except with Laos, Cambodia, and Myanmar.

Dr. Shambaugh is hoping that the Trump administration builds on the strong US position in the region that it has inherited from the previous administrations. Unfortunately, there are several weaknesses that pose a challenge to US position in Southeast Asia. He pointed out distance, viewpoint on democracy, human rights, and governance, lack of understanding of the ASEAN way, and lack of government funds for foreign direct investment to Southeast Asia.

China’s embrace

The relationship between China and Southeast Asia is relatively uneven. Dr. Shambaugh observed that there is no overarching description as to how countries in Southeast Asia behave towards China. Following the 1997 Asian financial crisis, China was a “good neighbor” to countries in Southeast Asia, using what is known as charm offensive. By 2009, China’s charm offensive turned increasingly assertive towards not only Southeast Asia but also Northeast Asia, EU, Australia, and the US. Skepticism toward China has spread across many countries in Southeast Asia ever since.

Money and geographic proximity are said to be China’s sources of strength in securing a stronger position in Southeast Asia. Money is China’s strongest tool, and it is expected to drive its economic footprint in the region. Huge amounts of liquidity are available for foreign investment. In 2014, China’s total trade with ASEAN reached USD 480 billion, bigger than that of the US.

However, China’s geographic proximity to Southeast Asia also has its drawbacks: competing claims in the South China Sea; China’s disregard of the Arbitration Tribunal’s ruling on the South China Sea case filed by the Philippines; episodes of diplomatic manipulation; lack of ability in providing security and defense to countries in Southeast Asia; and historical suspicions surrounding its ancient tribute system and use of ethnic communities known as “third fronts.”

Its geographic proximity to Southeast Asia is a double-edged sword for China, which sees Southeast Asia as its natural sphere of influence. Taking out the US in the picture is the only way for China to restore the natural state of affairs, otherwise known as tribute system. Only Cambodia has fallen back to a tribute-like relationship with China, according to Dr. Shambaugh.

Further, China’s rejection of The Hague’s Permanent Court of Arbitration ruling is not very encouraging. He observed China’s attempt to sow discord among ASEAN member-states. China has been using Laos and Cambodia to bid on its behalf over issues it disapproves of. In a larger context, China has a tendency to overwhelm smaller countries with its economic might.

ASEAN’s role in US-China rivalry

Southeast Asia has a long history of trying to balance external powers. It has maintained neutrality and territorial integrity even in instances of external aggression. Dealing with the US and China in competition is not a new challenge for the region. The question remains open as to how Southeast Asia will keep these two major powers from bickering.

Dr. Shambaugh pointed out that with China’s increasing economic role in the region, countries in Southeast Asia must insulate themselves from the major power’s dominance. Diversification or maintaining economic ties with Japan, South Korea, New Zealand, India, the US, and other major partners is their best defense against the risk of Finlandization or getting co-opted by China.

Dr. Baviera mulled the possible implications of the emerging regional arrangements in Southeast Asia and Northeast Asia on US foreign policy. She observed China becoming increasingly aggressive and Japan becoming proactive in security matters. She asked how the US will re-imagine its strategic interest in the region.

The Trump administration has pulled out the US from the Trans-Pacific Partnership Agreement. Dr. Baviera believes that the move is worrisome as it will weaken the rebalance strategy of the US in the region. She also pointed out that Trump’s Muslim prejudice may create some distance not only from states with dominant Muslim population but also from states with anti-American worldview.

Dr. Baviera said that US efforts in pursuing bilateral security relations with countries in Southeast Asia got China’s attention. China seems to have turned making new security allies and partners in the region a priority. At the same time, it has put in a great deal of attention on the One Belt, One Road initiative, which Dr. Baviera believes will help expand its relative strength in the region.

Resilience is key to ASEAN’s continuing growth

Ms. Butocan said that ASEAN has grown in the period 2012 to 2016 despite the slowdown of its exports to the US, Japan, China, and EU. Regional growth was heavily supported by high domestic demand and low inflation. Intra-regional trade has offset weak extra-regional demand.

Foreign exchange reserves allowed ASEAN economies to better manage exchange rate movements. The build-up of international reserves provided a buffer for external volatilities. The banking system in the region has been stable, well-capitalized, and profitable. Banks in Indonesia, Malaysia, the Philippines, Singapore, and Thailand posted more than 10 percent year-on-year profitability from 2010 to 2015.

The ability of the ASEAN-5 to absorb risks into their financial systems is also strong. The ASEAN-5 has recorded remarkable capital adequacy ratios above 8 percent, the minimum standard set by the Bank of International Settlements.

The 2017 projections of the International Monetary Fund (IMF) showed 4.9 percent growth rate for ASEAN-5. The Philippines is expected to grow fastest at 6.7 percent, ahead of Indonesia (5.3 percent), Malaysia (4.6 percent), Thailand (3.3 percent), and Singapore (2.2 percent). Ms. Butocan pointed out risks to growth prospects of ASEAN this year, which include sluggish global growth, sluggish global trade and the risks around future trade and investment protectionism, cooling local property markets, and weak labor productivity. The Philippines, in particular, will possibly be affected by global political uncertainties (i.e. Brexit and Trumpnomics), the looming US Fed rate hikes, China’s economic rebalancing, and local risks such as severe weather disturbances and infrastructure gaps.

Fostering greater ASEAN integration

An integrated market is seen to bring about several impacts to ASEAN member-economies. Ms. Butocan identified the contagion effect as the primary source of risk for ASEAN member-economies. She claimed that the benefits derived from the regional integration outweigh this risk.

ASEAN currently has around USD 2.4 trillion combined regional output and a total population of 613 million people. It can tap this huge market for consumption and employment and use it as a bargaining chip to pursue free trade deals with dialogue partners like India, China, Japan, Australia, and New Zealand. Ms. Butocan stressed the need for ASEAN to diversify the economies of its members to advance regional integration.

The Philippine economy is argued to be robust enough to address the challenges related to ASEAN integration. Ms. Butocan said that the Philippines has sustained a durable growth momentum and built strong macroeconomic fundamentals over time. There is a need to adopt a gradual and sequenced approach to both domestic level of development and what market infrastructures can reasonably bear before fully integrating its market with the rest of the region. The Philippines also has to implement sound and consistent monetary and banking policies.