ASEAN’s 2025 Chair: Navigating Tricky (Economic) Shoals

Malaysia will assume the ASEAN chairmanship in 2025, at a historic turning point in the grouping’s history. The new year would also see unprecedented geopolitical flux, which will require careful steering through its tricky shoals.

The new year could be described as a landmark year on three main fronts. Firstly, 2025 marks the final year of the all-encompassing ASEAN Community Vision 2025 and the corresponding ASEAN Economic Community (AEC) Blueprint 2025, under the Community’s economic pillar. Both these plans have been in place since 2016. Beyond that, the adoption of the ASEAN Community Vision 2045 — which will set the strategic vision for the region for the next 20 years — will also take place with Malaysia at the helm of ASEAN.  Malaysia has notably been an integral part of the formation of the post-2025 vision as co-chair of the high-level task force for the ASEAN Community Vision 2045 since its establishment in 2022. To top it all off, 2025 is also expected to be fraught with immense economic uncertainties stemming from accentuated geopolitical tensions.

Under the chair’s proposed theme of inclusivity and sustainability, Malaysia has announced its intention to focus on 15 Priority Economic Deliverables (PEDs), which will strengthen regional economic integration initiatives while promoting more sustainable and inclusive growth. There will be some notable wins under Malaysia’s chairmanship. These will include the successful conclusions of several high-profile agreements such as the ASEAN-China FTA (ACFTA) Upgrade negotiations, the upgrade of the ASEAN Trade in Goods Agreement (ATIGA) as well as the Digital Economy Framework Agreement (DEFA) negotiations.

The upgraded trade agreements are apposite in the current economic landscape, which would include greater emphasis on areas such as climate change and sustainable development, as well as addressing the more effective elimination of non-tariff barriers. Meanwhile, the DEFA will form the basis of a more coordinated regional cooperation in digital economy initiatives.

In the final year of the AEC Blueprint and faced with these serious challenges, the incoming chair should prioritise pushing through impactful terms in regional economic agreements such as the trade agreement upgrades.

Malaysia has also indicated a strong inclination to enhance climate finance initiatives. The country is well-positioned to effectively lead the region in these initiatives given its well-balanced approach to trade relations and established position in the global value chain. Moreover, Malaysia has established itself as a global leader in the Green sukuk (Islamic bond) financing space, marking many global firsts in this area, including the world’s first green sukuk issuance in 2017 to finance the construction of a solar photovoltaic power plant in Sabah. Its experience in the sustainable financing area will auger well for its climate financing stewardship.

That said, there are new, more pressing challenges at ASEAN’s doorstep requiring quick and effective risk mitigation strategies. The global economy was affected by the initial tirade of tariff hikes under the Trump 1.0 administration and has since then experienced an ongoing state of volatility as the range of protectionist measures has widened. From restrictions on investments to company-specific export licence restrictions and a broadening of source countries under scrutiny, the trade landscape has evolved significantly and outside the constructs of the initial tariff tiff between the US and China.

Moreover, there have been greater uncertainties as more Southeast Asian economies are implicated in these direct protectionist measures originating from the US. For example, Malaysia, Cambodia, Vietnam and Thailand are bearing the brunt in the latest imposition of tariffs on solar panels. In this context, the original strategy used by multinationals — the China+1 strategy of diversifying manufacturing activities away from China — will no longer be sufficient in this trade landscape. It may evolve to include more ASEAN countries than the initial few which largely benefited from this trade diversification (such as Malaysia, Thailand and Vietnam) or even create the need for an ASEAN+ strategy. The greater fragmentation of global supply chains will unduly have an adverse impact on trade costs and efficiency.

In this given scenario, it is more important than ever to strengthen ASEAN’s economic integration mechanisms to work more effectively to lessen adverse impacts. In the 2024 State of Southeast Asia Survey, there is consensus on the stabilising role that ASEAN plays in the ever-volatile global economic landscape. In terms of who the region had the most confidence in to champion free trade, 29.7 per cent of respondents were the most confident in ASEAN. Additionally, 44.8 per cent of respondents also felt that the best response to mitigating risks from geopolitical trade tensions was for ASEAN to enhance its resilience and unity. Leveraging ASEAN’s own strengths is a preferred strategy among the ASEAN Member States (AMS). Moreover, making the region’s economic resolve more robust would help ASEAN enhance its relevance in these uncertain times.

In the final year of the AEC Blueprint, faced with these serious challenges, the incoming chair should prioritise pushing through impactful terms in regional economic agreements such as the trade agreement upgrades. In particular, removing trade and investment friction as much as possible (both at the border and behind the border) should be a key priority to realistically translate regional objectives to a domestic setting. The ASEAN-X concept, with an accompanying capacity-building element, could also help to move important initiatives forward that will help mitigate risks more effectively in the long term. With consensus by all the AMS, this concept allows two or more countries to proceed with liberalisation efforts without extending concessions to other countries in the grouping at the onset. This could apply to initiatives such as the regional semiconductor supply chain framework, which aims to enhance supply chain resilience and boost technological advancements.

Malaysia is uniquely positioned to leave a lasting legacy in its chairmanship year. In the economic hot seat, Malaysia should prioritise and implement key initiatives to mitigate risks in the current uncertain economic landscape. It should also seek to keep ASEAN future-ready so that the grouping can navigate choppy geopolitical waters. This will also help ASEAN’s 2026 chair, the Philippines, start the next phase of economic integration on a more solid footing.

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