Free trade agreements
Regional cooperation can buffer global value chains against uncertainty
Published 30 July 2024
Regional cooperation is vital to offsetting the effects of policy uncertainty stemming from global shocks and strategic alliances across the Indo-Pacific. ASEAN and regional free trade agreements should seek to complement firms’ global value chain integration strategies as these chains become even more important to ensuring sustainable growth in East Asia in the coming years.
Global value chains have featured as a development strategy in most emerging economies in the 21st century. But economic and political shocks now hinder their growth at both the regional and global level.
According to the World Bank, the growth of global value chains peaked in 2007 and dwindled after the onset of the 2007–8 global financial crisis. Post-global financial crisis, global trade growth has been subdued, a trend exacerbated by the onset of the Covid-19 pandemic. These global shocks are associated with inherent economic policy uncertainty. This has resulted in a ‘wait-and-watch’ problem for firms, where firm uncertainty induces inactivity and reduces their level of investment.
Economic policy uncertainty is becoming more apparent with strategic alliances driven by the United States and Europe such as the Indo-Pacific Economic Framework for Prosperity. These alliances represent attempts to isolate the technological and global value chain related activities of China and contain technological change in East Asia. The brewing uncertainty fueled by strategic alliances is creating investment uncertainty around the potential for offshoring, nearshoring, and friendshoring.
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Strategic alliances directly weaken the market-based and rules-based trading activities that drive global value chain efficiency and deepen regional integration. Decoupling affects both the backward and forward linkages of global value chain related activities and increases the vulnerability of both supply chains and domestic firm activities. The effects of this policy uncertainty are likely to be felt more by countries that are positioned higher up in the value chain compared to those lower down in regional and global value chains. The implications of strategic alliances will be more salient for countries like Indonesia, Malaysia, the Philippines, Thailand, Singapore, and Vietnam as a result.
The behavior of firms in response to uncertainty can also alter the landscape of global value chain -related activities in East Asia. Economic policy uncertainty is higher in global value chains than for other trade due to the interdependence of intermediate trade and interlinkages in global value chain activities.
This has a direct impact on the investment decisions of firms and can cause firms to choose to postpone their investments. A 2024 Jeffrey Cheah Institute paper on the impact of economic policy uncertainty on global value chain integration for Indian manufacturing firms showed that global value chain resilience and participation are dependent on firms’ ability to withstand economic shocks. That study also highlights that the entry and exit of firms from global value chain activities are likely to be affected by the uncertainties associated with global trade.
The key to mitigating economic policy uncertainty is to make global value chains more resilient to shocks and improve rules-based and market-based trade in the region.
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This makes it important to maintain an open trade and investment environment and strengthen regional economic cooperation. The Association of Southeast Asian Nations (ASEAN) can play an important role in maintaining strengthening rules-based and market-based trading arrangements in the region and ensuring a foundation for sustainable growth and development. But there has been a growing tendency to disregard multilateral trading rules in favor of discretionary and bilateral arrangements that are likely to deepen regional fragmentation. Strategic alliances might weaken the regional integration commitments of ASEAN and East Asian member countries.
The Regional Comprehensive Economic Partnership (RCEP)—the ASEAN-centered multilateral free trade agreement that is the largest free trade agreement in the world—is expected to provide the new rules-based institutional framework to ensure sustainable economic development in the East Asian region.
RCEP is a ‘living’ agreement and the RCEP Joint Committee has the potential to create a wider regional integration agenda to address pressing issues such as the environment, climate change, skills development, green transformation and the development of digital and smart urban centers. The built-in institutional features within the RCEP agreement—Chapter 18—that include ministerial meetings serviced by a joint committee could be used for the progressive liberalization of regional and global trade and to address issues beyond trade and investment.
Cutting-edge firms participating in global value chains often have to participate in both manufacturing and service-related activities. The ability of domestic firms to understand and unbundle their production structure will be critical to creating more agile and resilient firms in the region.
There is also need for regional cooperation to support the structural transformation of firms in digital and green technologies to increase the efficiency of their value-added activities and participation in global value chains. It is critical for firms in the global value chain to understand the upstream and downstream emissions of their activities so that they can improve their energy efficiency.
Cultivating a more flexible and agile skilled labor force in the region through upskilling and reskilling is necessary to unbundle workers’ skills and enhance productivity and mobility. Regional economic cooperation increases the technical and vocational skills of vulnerable workers at a time when critical skills are important for mitigating the effects of decoupling that may result from strategic alliances in the region. This is the most pressing challenge for the region, as the weakness of the labor force increases its vulnerability to regional and global economic policy uncertainties.
ASEAN should focus on both economic and social protection of vulnerable groups in the region. The vulnerability of workers is likely to increase with greater economic policy uncertainty.
This article is part of the Hinrich Foundation sponsored Vol.16 No.2 April–June 2024 issue of the East Asia Forum Quarterly. To read similar articles, download the magazine:
Regional cooperation is vital to offsetting the effects of policy uncertainty stemming from global shocks and strategic alliances across the region. RCEP and ASEAN should seek to complement firms’ global value chain integration strategies as these chains become even more important to ensuring sustainable growth in East Asia in the coming years.
© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).
Author
Shandre Mugan Thangavelu
Professor Shandre is the Head of the Jeffrey Cheah Institute on Southeast Asia at Sunway University. He is also the Trade Advisor to the Minister of Commerce in Cambodia's Ministry of Commerce.
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