Rethinking Economic Integration as a Strategic Hedge

Economic integration is being viewed by ASEAN Member States (AMS) with greater urgency as a strategic response to deal with key geostrategic issues facing the region. Under an ASEAN lens, economic integration has traditionally been envisioned as a “single market and product base, a highly competitive region, with equitable economic development, and fully integrated into the global economy” — ultimately represented in the form of the ASEAN Economic Community (AEC). The developments over the past year under the Trump 2.0 US Presidency have compelled ASEAN to focus more on managing the rise of nationalism and protectionism.

In the latest State of Southeast Asia Survey 2026 (SSEA2026), most respondents (42.2 per cent) selected “accelerating regional integration among the AMS” as the way ASEAN should respond to growing global protectionism, and ahead of “deepening cooperation with like-minded partners beyond ASEAN” (30.0 per cent). This latest SSEA result markedly contrasts with SSEA2021 conducted in January 2021, at the close of the first Trump presidency. ASEAN respondents then favoured deepening cooperation with like-minded partners beyond ASEAN as the more important strategic response. Over the past five years, the tide appears to have shifted toward ASEAN (Figures 1 and 2).

Relatedly, the survey also shows strong support for strengthening ASEAN’s resilience and unity in response to US-China rivalry, suggesting that respondents increasingly view internal cohesion — including, but not limited to, economic integration — as a form of geopolitical hedging (Figure 3).

Economic integration can act as a geopolitical hedging strategy by building resilience of the bloc through broadening intra-regional demand and strengthening production networks. This could cushion the impact of rising protectionism and act as an economic bulwark against coercive pressures from the ongoing US-China geopolitical tensions. In both cases, there is a need to ramp up economic development priorities beyond technical integration, especially through the enhancement of trade facilitation measures such as improvements to customs clearance and fee transparency. Economic integration can be greatly enhanced by fostering the necessary demand and supply conditions for deeper trade and investment activities, which would bolster economic development in the region. This can be achieved through higher incomes to drive consumption capacities and increased demand for higher-value added goods, as well as the technological capabilities and productivity boosts that would enable Southeast Asian economies to participate in more sophisticated supply chains.

Currently, the ASEAN region shows weaker signs of intra-regional economic integration compared with the ASEAN+3 bloc in terms of trade complementarity, reflecting a continual reliance on Japan, China and South Korea to form value chains. Cross-country upstream and downstream activities, or backward-forward linkages, amongst the AMS also remain less established. Over a ten-year period (Table 1), export and trade intensity indices for ASEAN and its member states, which capture how strongly two countries or regions export or trade with one another compared to global trade patterns, have moderated with the ASEAN region, as opposed to a scaling-up of activities with China and the US in particular. This reinforces the proposition that trading momentum has been significantly influenced by demand-side factors such as national income levels (i.e. trade direction to higher-income countries), supply-side factors pertaining to the ability of the AMS to produce goods required by these final destination markets in the value chain, as well as value-chain dynamics influenced by trade complementarity and backward-forward linkages.

Despite the uncertainties created by volatile trade policy announcements from the US over the past year, established supply chains supported by these key fundamental drivers remain relatively intact as shown by the continued robust trade activities between the region and the US. Going ahead, downside risks to this continued positive momentum may become more apparent on account of supply chain fragilities emanating from the conflict in the Middle East spilling over to production capacities globally.

ASEAN economies tend to export higher-technology goods to Asian countries outside the ASEAN bloc. This is captured by the shares of exports to “Extra-Group – Asia” and “Intra-Group” exports within the bloc (Table 2). Differences in relative magnitude of exports outside ASEAN versus within ASEAN are instructive. “Extra-Group – Asia” countries are the main destination across the board, but this pattern is most pronounced for high-skill technology intensive goods (31.8 per cent), which require higher levels of technological capabilities. In contrast, for low-skill technology intensive goods, exports within ASEAN constitute a relatively larger share (16.9 per cent).

Thus, to achieve greater economic integration, ASEAN needs to rebalance regional trade. Its economies must grow and upgrade to be able to satisfy both demand- and supply-side drivers of value chain integration. However, there are still considerable gaps in terms of productive capacities and technological readiness amongst the AMS.

Productive capacity can be measured by indicators such as human capital, institutional capabilities, private sector dynamism as well as the extent of structural change in the economy based on the share of higher value-added activities. Amongst the AMS, Singapore shows the strongest components of productive capacity whilst lower-developed economies in the region such as Laos, Myanmar and Timor-Leste, are the weakest. The area with the widest productive capacity gap is in the area of institutions.

Given that demand is increasingly steered towards higher-technological sophistication, the relative readiness of countries to take this on — that is, the capacities of countries to use, adopt and adapt to these technologies — is also of great importance. Frontier Technology Readiness, measured by indicators including prevailing skill levels, intensity of research and development activities and presence of industry using new technologies, is a useful reference. Singapore is largely the most adept across these factors and the countries who are lacking in these respects are also the less-developed economies, namely Cambodia, Laos and Timor-Leste. Wide readiness gaps prevail in both skill levels and industrial activity.

To integrate more meaningfully, the AMS will need to strengthen productive capacities and technological readiness in order to work more seamlessly on the same page. Targeted policies by the respective AMS to strengthen institutions and improve the monitoring and enforcement of regulations, as well as provisions within ASEAN-wide mechanisms, will need to be formulated to alleviate weaknesses in domestic implementation and enforcement capacities in the region. Technological readiness can be bolstered by greater emphasis on human capital development as well as how industry players utilise knowledge and skills from training and other upskilling programmes to apply to existing and new production processes. However, these policy enhancements would require the political will and the availability of resources to achieve their objectives.

Besides domestic-centric policy drivers influencing the pace of economic integration, the SSEA2026 results show that respondents also view geopolitical pressures themselves as impediments to effective economic integration initiatives (27.5 per cent share). These pressures are seen to have potential influence on the individual AMS to look inwards and prioritise their national interests over regional interests, posing risks to the economic integration agenda. As the ASEAN Geostrategic Task Force report has stressed, a pertinent underlying principle in dealing with rising risks from geopolitical tensions is to ensure that regional interests remain top of mind and no AMS is undermined or adversely implicated in any bilateral agreements with the major powers which may be negotiated aside from the bloc.

Resisting these pressures will require more regional alignment. With more structurally resilient growth, Southeast Asia will be better positioned to hedge credibly and effectively.

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Editor’s Note:
ASEANFocus+ articles are timely critical insight pieces published by the ASEAN Studies Centre.