Uncovering ASEAN Private Sector Sentiments on Their Choice of Strategic Economic Partner

The ASEAN region has been a hotbed of economic activity, drawing significant attention from developed economies for trade and investment opportunities. China remains ASEAN’s key trade partner, representing 18.8 per cent of total trade (US$722 billion) for the region in 2022, with the U.S. representing a more moderate 10.9 per cent share at US$420 billion (Figure 1).

Figure 1. Value of ASEAN’s External Trade Activities

That said, foreign direct investment (FDI) inflows from the U.S. into ASEAN outpaced those coming in from China, at US$37 billion versus US$16 billion in 2022 respectively (Figure 2).

 Figure 2. Value of FDI Flows into ASEAN

Given the ongoing push and pull in the region caused by the China-U.S. trade rift, ASEAN countries continue to strategically balance their delicate relationships with these two big economies. Using insights derived from the responses from private sector respondents in the latest ISEAS – Yusof Ishak Institute State of Southeast Asia Survey 2024, some interesting perspectives are uncovered. These may help to explain regional firms’ sentiments about ongoing geopolitical and geoeconomic tensions, and what preferences the firms may have in terms of strategic economic partnerships going forward.

Caught up in the crossfire of U.S.-China trade tensions, private sector stakeholder sentiments continue to show a strong preference to err on the conservative side. A larger proportion of respondents opted to indicate a neutral stance of not picking sides (31.4 per cent) compared to a year ago (26.5 per cent) (Figure 3).

Figure 3. Private Sector Players’ Preferences for a Neutral Stance Have Grown

Moreover, comparing the percentage difference between the share of responses from the private sector to the overall ASEAN weighted average, there is a slight skew in preference towards the option of not siding with either major power (Figure 4).

Figure 4. Firms Lean Slightly More Towards the Neutral Option

The private sector’s reluctance to rock the boat is also revealed by the sentiments surrounding the Indo-Pacific Framework for Prosperity (IPEF). When examining the reasons for negative sentiments on the IPEF, private sector respondents lean towards the notion that the IPEF could worsen U.S.-China competition, with responses for this option at 5 percentage points above the ASEAN weighted average (28.4%). There is a more marginal gravitation towards the view of potentially complicating relationships with China for individual ASEAN Member States (AMS), with private sector responses at 1.4 percentage points above that of the ASEAN weighted average of 15.0% (Figure 5).

Figure 5. Impacts on Relationships with China Add to Firms’ Apprehension Towards IPEF

Even for respondents who are unsure about the impact and effectiveness of the IPEF, the main reason cited is the concern about China’s potential countermoves in the face of a more established IPEF (25.5 per cent of responses; Figure 6). This is consistent with general fears concerning potential trade tension escalation.

Figure 6. Potential Counter-actions by China Contribute to Firms’ Uncertainty about IPEF

The question is whether ASEAN’s private sector shows any underlying preferences. For a question in the 2024 Survey about strategic alignment choice between China and the U.S., the two countries are on a relatively even keel with China marginally taking respondents’ top preference at 50.5 per cent compared to the US at 49.5 per cent. That said, a look at the gap between private sector preferences (at 35.5 per cent) and the overall ASEAN weighted average (at 32.6 per cent) shows that firms are more welcoming of China’s growing economic influence than of the U.S. (Figure 7). China’s dominant position as the most influential economic power in the region has remained steadfast (cited by 58.2 per cent of private sector respondents this year). This has been bolstered by its unwavering economic engagement with the region, which has culminated in the formation of a robust trade value chain and infrastructural developments.

…The choice of strategic economic partner for ASEAN’s private sector may come down to what would be the best choice for ASEAN countries to further their economic interests, rather than a binary choice between China or the U.S. With this in mind, the private sector’s perceived choice can be dynamic in nature, helping to explain why the sentiments towards China and the U.S. in terms of their perceived economic dominance may fluctuate from year to year.

Figure 7. Firms Less Worried about China’s Growing Economic Influence

Another de-risking strategy employed by ASEAN economies is to seek third-party strategic partners. Pursuing more initiatives away from the centre of the tensions could be viewed as a good middle ground, especially when firms remain wary of showing any one-sided preferences. The EU still comes out tops in this respect (the choice of 37.6 per cent of respondents) as shown in Figure 8. Moreover, the aspects that draw ASEAN’s private sector firms to the EU as a preferred strategic partner have grown stronger. Some 31.7 per cent of respondents cited the bloc as a responsible stakeholder that respected international law, compared to 24.4 per cent in the 2023 survey.

Figure 8. Southeast Asian Firms Prefer the EU as Third-Party Strategic Partner

What is more, 30.8 per cent of them consider the EU favourably, given its vast economic resources and strong political will to provide global leadership (2023’s figure was 17.0 per cent) (Figure 9). Of late, ASEAN countries have been actively pursuing higher levels of economic engagement with the EU and vice versa. Amongst these developments are the prospect of Malaysia and the EU restarting FTA talks which were paused in 2012, and Thailand and the EU pushing ahead to sign an FTA in 2025.

Figure 9. ASEAN’s Sustained High Regard for the EU as Responsible Stakeholder

Japan as a preferred third-party strategic partner (after the EU) is also highly regarded in these two aspects. Some 35.3 per cent of private sector respondents are confident in Japan as a responsible stakeholder that champions international law; 32.2 per cent cite its ability to provide global leadership on account of its vast economic resources and strong political will as being a major trust factor. The Comprehensive Strategic Partnership (CSP) established between ASEAN and Japan in 2023 marked a firmer commitment by both sides to build upon the strong foundation on issues of political, security and economic cooperation, connectivity, as well as socio-cultural matters.

The U.S. faces an uphill battle in crafting a stronger value proposition for firms in the region. Apart from grappling with private sector anxieties over IPEF’s potential impacts on the region’s relations with China, there are signs of firms becoming more comfortable with China’s growing economic power. Not only will the quest for ASEAN businesses’ hearts and minds be fraught with growing Chinese influence but the U.S. will also have to contend with other potential strategic partners such as the EU and Japan.

That said, there is still a glimmer of hope for the U.S. in ASEAN, as the proportion of private sector stakeholders who view the former as the most influential economic power in Southeast Asia held and even slightly improved this year at 13.4 per cent versus just 10.0 per cent in 2023. ASEAN’s private sector also views the IPEF more highly as a signal of stronger U.S. economic commitment to the region, compared to the ASEAN weighted average (beating it by 8.4 percentage points).

Whilst the U.S. has continued to leverage its offer of high standards in economic governance and the promotion of competition, these propositions may face difficulties against the pledge of more economical offerings promoted by China. With that, the choice of strategic economic partner for ASEAN’s private sector may come down to what would be the best choice for ASEAN countries to further their economic interests, rather than a binary choice between China and the U.S. With this in mind, the private sector’s perceived choice can be dynamic in nature, helping to explain why the sentiments towards China and the U.S. in terms of their perceived economic dominance may fluctuate from year to year. In the current trade and investment landscape, firms in the ASEAN region can be expected to continue to roll with the punches but nonetheless will continue to seek opportunities to protect their best interests by figuring out how to work with all major economic powers.

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