Slow Growth, Protectionism and Asia-Eurasia

As the OECD points out in its recent Economic Outlook, the global economy is caught in a low-growth trap (around 3% per annum) for the last five years. This fueled the support for political populism in major economies, exemplified by the UK referendum to leave the EU and the election of Donald Trump for president of the USA, whose promises include trade protectionist measures (e.g., rejection of major trade agreements such as TPP, TTIP and CETA). Such kind of populism would be a major threat to global economy in the coming years.

Empirical studies reveal that supporters of populism in major economies are those who are hit the hardest by globalization and low growth, i.e., those with low levels of income, education and job security .With growing demand from such voters in major economies, we might see a further rise of trade protectionism in major economies, which will paint the prospects of global economy even darker.

This is a gloomy scenario particularly for Asia where major economies rely heavily on foreign demand, although the regional economy is expected to grow steadily in the short term (5.4% in 2016 and 5.3% in 2017, according to IMF). This makes efforts for regional economic integration, such as RCEP, ever more important. With 57.1% of the region’s total trade done intraregionally (ADB, 2016), further economic integration will most likely brighten the region’s medium-to-long term growth prospects.

For the Eurasian region, the current trends in major economies reinforce the importance of diversification away from relying on commodities and remittances from Russia. Even though the recent downfall in the region’s economy is expected to end next year (EDB, 2016), its main cause-low prices of primary commodities-and the rebalancing of the Chinese economy keep the medium-to-long term prospects weak. As the IMF suggests, structural reforms to diversify away from reliance on commodities and remittances” are required to lift the region’s growth prospects. Doing so will also prevent the kind of anger among the most vulnerables and the “left-behinds” that drove Brexit and Mr. Trump’s election victory from growing in the region.

In this regard, bilateral FTA between EAEU and ASEAN would be mutually beneficial for both sides. However, there are many difficulties to conclude the FTA. First of all, there is no leading country in ASEAN in terms of negotiation structure (ASEAN decision is based on ‘Consensus’). Second, different levels of economic development is a barrier factor. Russia is the one dominating country in the EAEU. ASEAN consists of countries with various level of economic development, from least developed economies (such as Lao PDR and Myanmar) to developed economy (such as Singapore). These different levels would lead to various positions with regard to trade liberalization among its own, as well as between EAEU and ASEAN. Third, diversities in cultural, historical and religious background would be a barrier. Lastly, relatively low level of trade liberalization is another difficulty.

In order to strengthen the economic cooperation it is needed to deepen the regional value chain. That is, it is needed to combined natural resources and/ or materials in EAEU with production capacity and/or labor force in ASEAN.

Jae-Young Lee is Vice President of the KIEP

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.