ASEAN Economic Community in Uncertain Times: Can the Indonesian Chair Lead in a Challenging World?

The post-COVID world looks very different in 2023 from just a year ago, as the world’s second-largest economy, China, reopened. The Russia-Ukraine war that started in February 2022, resulted in the food, energy, and cost-of-living crises, along with increasing and intensifying climate-related events, and provided a glimpse of today’s post-COVID polycrisis world. 

Geopolitics is increasingly shaping global economic governance, far beyond simple tariff wars. Policy-driven fragmentation will lead to a new noodle bowl — this time not of free trade agreements (FTAs) but of supply chain governance, leading to inefficiencies and higher producer and consumer costs, at least in the short term. Currently, the multilateral trading system is ill-equipped to respond.

This is not good news for ASEAN, whose economies have been growing, albeit unevenly, by participating in international production sharing. The region is not big enough to undo this trend, but — along with other middle powers — can influence its trajectory enough to avoid hitting the iceberg. 

Accounting for 36% of ASEAN’s gross domestic product (GDP) and 41% of its population, Indonesia is the natural leader of ASEAN. After a successful G20 presidency, Indonesia is now in charge of steering ASEAN through another challenging year. Its chairmanship year coincides with the finalisation of the core elements of the ASEAN Post-2025 Vision and the acceleration of the Post-2025 visioning process — a momentous task for the Chair. 

Indonesia’s Chairmanship theme of ASEAN Matters: Epicentrum of Growth puts the ASEAN Economic Community (AEC) at its centre. ASEAN sceptics implied that the theme is a diversion from ASEAN’s political issues that are unlikely to be resolved, whilst ASEAN’s relatively robust growth is a given, but this view seems myopic. The AEC’s growth prospect is indeed guaranteed by ASEAN’s continued relevance, internally and externally. However, recovery and growth prospects may be at risk of being stunted by geopolitical power struggles, if multilateral rules are being disregarded, and ASEAN matters little more than as proxies.

Under the AEC, Indonesia’s Chairmanship will be pursued under three strategic thrusts: (1) rebuilding regional growth, connectivity, and new competitiveness, (2) accelerating inclusive digital economy transformation and participation, and (3) promoting sustainable economic growth for a resilient future. With 16 priority economic deliverables to focus on, in addition to hundreds of AEC annual action lines, a few impactful ones are worth elaborating on.

First, on digitalisation, all eyes will be on the highly anticipated Digital Economy Framework Agreement (DEFA), the natural next step in ASEAN’s digital agenda. The 2021 Bandar Seri Begawan Roadmap, which aims to leverage digital transformation to accelerate the region’s COVID-19 recovery, stipulates that a study be conducted by 2023 to examine areas that can be included in a framework to accelerate ASEAN digital integration prior to the commencement of ASEAN DEFA negotiations by 2025. Indonesia wants to accelerate this conservative timeline by having a Leaders’ Statement on the development of ASEAN DEFA and the early commencement of negotiations as its deliverable, hopefully along with clear parameters to guide negotiations towards its timely conclusion, in time for ASEAN’s Post-2025 Vision. 

Consistent with its G20 priorities, energy security will also feature strongly in Indonesia’s ASEAN Chairmanship, including work on the financing aspect of a just and inclusive transition. On the infrastructure side, Indonesia will seek to expand the ASEAN Power Grid and Trans-ASEAN Gas Pipeline to meet the region’s rising energy demands efficiently. An ASEAN declaration on sustainable energy security through interconnectivity is also expected.

In addition, the Chairmanship is keen to make strides toward a regional electric vehicle (EV) ecosystem. ASEAN members are at different baselines for EV industries. A broader perspective of the EV ecosystem, including batteries, components, R&D, transition, and waste management, will make the vision more practicable. The potential is immense. The region’s EV market is expected to more than quintuple to US$2.7 billion in just six years from 2021 to 2027. But this deliverable will involve work in the long haul. As Chair, Indonesia should identify the milestones for this year and set the scope and mechanism for future cooperation.

Alongside the Chairmanship priorities, ASEAN is progressing to develop a strategy for carbon neutrality. Manifold current initiatives in finance, circular economy, and other sectoral cooperation may benefit from a holistic vision and strategy, which needs the support of all ASEAN members and relevant sectors. To do so, it will need to recognise the different members’ starting points, in terms of levels of commitment, capacity, and resource endowments to deliver value to individual members and the region alike. 

Another Indonesian Chairmanship deliverable will be on food security, continuing its G20 presidency priorities. Majority of the ASEAN members are food importers. Food price inflation is observed across ASEAN, though lower than in other regions. Food security is multidimensional and needs to be addressed along the value chains, from research and development, efficient input markets, sustainable commodity diversification, agricultural practices, supply chain and logistics, crisis response, to trade policy. The agriculture sector needs to address this through dialogue and coordination with the trade, finance, investment, transport, digital, and science and technology sectors.

Curbing inflation and ensuring financial stability will be important for ASEAN economic recovery. Indonesia will seek to strengthen the Chiang Mai Initiative Multilateralization by enhancing its operational readiness and deepening global collaboration. We can expect deliverables relating to payment connectivity, including QR code interoperability, and the promotion of local currency transactions to strengthen the region’s financial stability. In line with its G20 achievements, Indonesia will promote transition finance to support sustainable finance and the green economy, mainstreaming of digital finance into ASEAN banking integration, as well as digital financial literacy and inclusion (including by enhancing digital financial services). 

As initiator and Chair of the Regional Comprehensive Economic Partnership (RCEP), Indonesia will seek to secure key RCEP milestones this year. These could include establishing an interim RCEP Secretariat in Jakarta as a support unit within the ASEAN Secretariat and promoting the implementation and utilisation of the RCEP at the national level.  

Additionally, Indonesia will also seek to spearhead the completion and signing of the protocol to upgrade the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA), as well as to ensure progress in the FTA upgrade with China and FTA review with India.

Therefore, amidst high expectations around Indonesia’s ASEAN Chairmanship, there will be a few high-impact deliverables that serve as the foundation for a post-polycrisis AEC. 

Discussions on the implication of geopolitically-driven decoupling on AEC should, however, be intensified. Some ASEAN countries are keen to seize the opportunity from global supply chain restructuring — a valid but incomplete optimism. If global decoupling leads to a higher-cost economy and a weakened rules-based global economic architecture, the region will be at a disadvantage. It is in ASEAN’s interest to build its economic resilience by upholding open and inclusive multilateralism, including jointly with other countries sharing the same values.

ASEAN and its individual members should also be more strategic and coordinated in their engagement in parallel frameworks. More proactive approach to World Trade Organization (WTO) reform is one avenue, particularly on its rulemaking function. Another is the Indo-Pacific Economic Framework (IPEF). The seven IPEF-participating ASEAN countries could coordinate their negotiating positions, including with other participating middle power countries as appropriate. ASEAN should also seek to clarify IPEF’s position vis-à-vis ASEAN-US economic cooperation. 

As this year’s Chair, Indonesia has the chance to elevate ASEAN’s economic agenda to the next level. It must not only ensure that ASEAN matters, but that ASEAN leads and empowers.  

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Editor’s Note:
This is an adapted version of an article from ASEANFocus Issue 1/2023 published in March 2023. Download the full issue here.