The ASEAN region is among the fastest-growing and most open regions in the world. As a bloc, the region is the eighth-largest economy in the world with a combined GDP of around US$2.4 trillion. Merchandise trade is about 104 percent of GDP. The most open economy is Singapore, with trade of goods and services accounting for about 360 percent of GDP and Myanmar at the other end at 30 percent of GDP. But with the opening-up of Myanmar, we should see the country’s trade rising in the years to come.

ASEAN presents an attractive setting for global manufacturers. Favorable demographics, business cost levels, supportive government policies and generally stable regional politics provide an attractive environment for investors. There are areas that can be improved, such as infrastructure in varying conditions; but with the increase in wage costs in China over the last few years, more labor-intensive industries have shifted to ASEAN. This trend is likely to continue.

 Investors find varying manufacturing capability across ASEAN. There are the low-cost producers including CLMV (Cambodia, Laos, Myanmar and Vietnam), and Indonesia. The Philippines, Malaysia and Thailand have expertise in mixed manufacturing and electronics. Singapore has very high value-add manufacturing expertise and strong intellectual property rights protection.

But to better capitalize on its manufacturing capability, ASEAN needs to integrate better. It is not just a matter of infrastructure linkages.

Imagine a manufacturing company looking to situate its operation processes across ASEAN. A single framework of investment regulations would make it a lot easier for such a company to carry out its ASEAN strategy.

 ASEAN-China trade corridor

Classifying ASEAN as a single bloc, we think that the ASEAN-China trade corridor will stand out over the next few decades. The two economic blocs already account for a significant portion of global GDP (ASEAN: 3 percent and China: 13 percent), world trade and population. Back in 2000, the ASEAN-China trade corridor was US$67.2 billion, 70 percent of the intra-ASEAN trade corridor. In 2013, the trade corridor was US$491 billion, more than seven times that of 2000 and 166 billion that of that intra-ASEAN trade corridor. With economic growth likely to continue at a faster pace than the rest of the world, trade growth will likely follow suit.

In addition, the ASEAN-China trade corridor is set to benefit directly and indirectly from rising emerging market trade. Global trade performance in recent years has been characterized by the growing importance of emerging markets. The rise in the South-South and North-South trade corridors has been accompanied by a decline in North-North trade. Asia is at the center of this change, accounting for about 40 percent of the total increase in trade growth since 2000.

Within the Asia trade mosaic, we find that the growth in the ASEAN-China trade corridor stands out. ASEAN-China trade has been characterised by strong China export growth to ASEAN in recent years (20.8 percent annually on average in 2011-2013, compared to ASEAN-China exports of 10.5 percent). This is much stronger than ASEAN or China’s exports to the more developed economies, such as the United States, Europe and Japan.

ASEAN’s trade deficit with China

ASEAN’s trade deficit with China has been increasing. While ASEAN’s exports to China have increased, import growth from China was much stronger. ASEAN registered a trade deficit (export balances between ASEAN and China) of US$27.7 billion in 2013. This is a reversal from the US$25.8 billion surplus in 2010.

The largest increase in imports from China was seen in Vietnam and Malaysia, where there is a significant increase in consumer goods imports. With ASEAN’s trade surplus with the world similarly falling over the last few years, this suggests that there is more end demand within ASEAN itself.

A few possible trends stand out for the trade corridor ahead. ASEAN and China cooperation is likely to deepen. ASEAN and China already have free trade agreements, and the planned RCEP agreement is likely to deepen these links further.

Instead of competing for FDI, it is likely that China will be an important FDI investor and vice versa. Malaysia has reported this year that investment from China is rising. FDI is expected to exceed 3.15 billion Malaysian ringgit (US$867 million) this year, up from 2.8 billion Malaysian ringgit last year, according to local sources. As ASEAN and China economies develop, there will be rising demand for intermediate goods and increased capability to export higher-value added goods. Supply chains within the trade corridor will develop, as goods are increasingly “made in the world.” Rising wealth in Asia is likely to create more demand for consumer goods.

While Japanese FDI flows to the Chinese mainland have been larger than those to the ASEAN in the past decade, the cumulative Japanese FDI stock in ASEAN remains higher than in China, according to the Asian Development Bank. The latest data suggested that Japan’s FDI flows have already shifted more in favor of the ASEAN and away from China since 2013.

ASEAN will likely experience stronger export growth to China compared to import growth from China in the coming years. We think that ASEAN’s trade deficit could narrow and become a surplus by 2020. A main theme for China’s companies this year has been to shift peripheral operations out of China, due to rising costs and labor shortages. At the same time, ASEAN economies, particularly Indonesia and the Philippines, could continue to register positive labor-force growth in the coming years. This could shift some of the productive capability from China to ASEAN. Manufacturing capability is deepening in Vietnam and other parts of the Mekong Delta Region, and the Philippines. The emergence of Myanmar and Cambodia as low-cost manufacturing destinations could generate more steam by 2020. The deepening middle class in China may also boost China imports from ASEAN.

ASEAN to boost global export role

ASEAN is the fourth-largest exporter in the world after China, the US and Germany. ASEAN’s exports to the world have stayed at around 6-7 percent of global exports since 2000. ASEAN is in a strong position to increase its global export role, given cost advantages and favorable labor dynamics. ASEAN’s median age (weighted by population) is 27 years old (projection in 2015). This is five years younger than China’s median age. In addition, the rise in the labor force in ASEAN from 2015 to 2020 is about 21 million, of which Indonesia contributes 10 million, Philippines 6 million and CLMV close to 4 million.

While China remains an attractive investment destination, with its established infrastructure, a large domestic market, and a skilled labor force, it should move up the value chain in the manufacturing process in the years to come. ASEAN can fill the gap in the labor intensive export product space.