With Asian investments looking better to Asians, intra-Asia trade will soar
 Looking at conventional wisdom of more than a decade ago, one recalls what the then British Foreign Secretary Lord Palmerston said: "If only every Chinese would buy a nightcap, the textile mills of Lancashire would run for a century." All of which might have been true had the Chinese had any use for a nightcap, which they did not.
One recalls Palmerston's prediction, when reading a 2006 white paper, "Asia’s Trade Is Everyone’s Business" from the Australia New Zealand Banking Group (ANZ), and one gets a sense of deja vu, that we have been here before. Both Palmerston and ANZ seem to be applying perfectly logical expectations to two entirely different circumstances, of which they had no real experience. One was a matter of place, the other, a matter of time.
Things did not turn out as expected in either case, not from 1836, not from 2006. Not that history repeated itself, but there were a few rhymes to be found in both scenarios.
The saving grace of the ANZ prognostication, was that a great flow of intra-Asian investment dollars may yet flow into Asian business rather than investing in North American and European ventures as it typically did in 2006.
Back then, ANZ analysts Bruce Alter and Amy Auster wrote: "Higher growth assures rising wealth, and therefore stronger consumption within the developing world. The increased demand for raw commodities, is a sign of the demand for goods that is being created as millions of people in Asia ascend into the middle class. Within East Asia, ANZ forecasts that real GDP growth will remain above 7.5 per cent per annum."
The Australian analysts can be forgiven not seeing the 2009 global "Downturn" so while their aim was too high for a bullseye, they were still on target.
In March of this year, Morgan Stanley's Jonathan Garner, chief Asia emerging market strategist wrote of four drivers that will accelerate the next phase of the region's development:
"First, rising income and wealth. In part, the evolution we expect is already coming naturally from rising investor wealth and sophistication as economic development takes place, leading to an increased supply of savings, and associated equity and bond market issuance," said the investment banker.
There is now also a deepening trade and greater foreign direct investment, he said.
"Academic literature highlights that regional financial integration has followed pathways established through foreign direct investment and goods and services trade," said Mr Garner.
"Asia is ever more highly connected supply chains and increasingly deep intra-regional FDI links, which should facilitate greater regional capital market investment," he said.
Another accelerant is financial sector policy reform. "A focus on the financial sector across the region has seen reforms to make legal, tax and institutional frameworks more conducive to development. These include reforms to encourage savings in pensions, mutual funds and life insurance products.
"They also include exchange/regulator activity, including initiatives such as the Hong Kong-Shanghai and Hong Kong-Shenzhen A-share Connect programmes and the recently announced link-up between Bursa Malaysia and Singapore Exchange," Mr Garner said.
Most recently, China has committed to allowing foreign firms to take majority stakes in domestic financial institutions for the first time.
He also points to a number of technological developments that work to "fast-track financial development and integration, with clear examples being the move towards electronic and mobile banking and investment across China, as well as the 'Digital India' trend".
Given this, he said, the region should experience an increase in the quantum of funding from local sources and a decline in cost of equity and cost of debt premiums to global peers.
Morgan Stanley also sees Asia's equity market capitalisation doubling to US$56 trillion over the coming decade. This expansion would see Asia generate over half (56 per cent) of global market cap growth, followed by North America (US & Canada) at 29 per cent and the European Union at 11 per cent.
"Asia may be the global leader in manufacturing and trade, but it is the least financially integrated and developed of the world's major economic regions. There are more capital flows between other regions and Asia, both inbound and outbound, than flows within Asia.
"Both explaining and compounding this problem, Asia's long-term savings markets - including pension systems, insurance schemes and mutual fund complexes - are underdeveloped. Only its sovereign wealth funds, including GIC and Temasek, are large in a global context.
The situation is changing, however. Over the next 10 years, Asia will move towards the centre stage in global financial market significance, driven by accelerating regional integration and market deepening, he said, adding that this will have profound impact.
Another factor to consider is ASEAN, the Association of Southeast Asian Nations, and its impact on the intra-Asia trade. First there are the free trade initiatives in ASEAN that were spearheaded by the implementation of the ASEAN Trade in Goods Agreement (ATIGA) and the Agreement on Customs.
These agreements are supported by several sector bodies to plan and to execute free trade measures, guided by the provisions and the requirements of ATIGA and the Agreement on Customs. They form a backbone for achieving targets of the AEC Blueprint and establishing the ASEAN Economic Community by the end of 2015.
In 2009, an FTA with Australia and New Zealand was signed. It is believed that this FTA would boost combined GDP across the 12 countries by $48 billion over the period between 2000 and 2020. Bilateral trade with India crossed the $70 billion target in 2012 (target was to reach the level only by 2015).
In addition, ASEAN is currently negotiating an FTA with the European Union. Taiwan has also expressed interest in an agreement with ASEAN, but needs to overcome diplomatic objections in China.
While economic moves are promising, there has been more fruitful co-operation in security matters, said Euan Graham, director of the international security programme at Sydney's Lowy Institute, an independent, nonpartisan research house.
Several southeast Asian defence ministers were recently invited to Perth for preparatory discussions on terrorism, focusing on the potential flow-back threat to the region, as defeated Muslim insurgents leave Iraq and Syria and disperse to join Islamist guerillas in southeast Asia.
After last year's Siege in Marawi in Muslim-dominated area of Mindinao, which claims sultanate independence since before the Spanish colonised in 1565, and the defeat of Islamic State (ISIS/ISIL) guerillas there after a five-month battle with the army, there has been greater attention on the southern Philippines and ASEAN's vulnerability to serious para-military threats.
This has prompted Australia to step up its bilateral defence assistance to the Philippines, including urban warfare training, taking advantage of the Duterte administration’s positive disposition towards Australia.
"Australia’s military capacity is modest. But without great power baggage, Canberra has opportunities to be nimbler than the US as it moves to deepen defence partnerships in Southeast Asia," said Dr Graham.
ASEAN still offers a worthwhile channel for Australia to help southeast Asia counter terrorism and violent extremism.
But there are risks attached. One is that Australia’s focus on counter-terrorism could duplicate Indonesia’s recently proposed Our Eyes initiative, involving six Asean members, he said.
Australian patrol aircraft were sent to the Philippines during the Battle of Marawi to plug Filipino surveillance gaps. Australia also deployed its useful proximity to the South China Sea, to enable monitoring of China’s continuing build-up of strategic infrastructure in the Spratly Islands.
Finally, the endemic problem of duplication in Asean-led processes could potentially undermine Australia’s future counter-terrorism and maritime security capacity-building, including the trilateral Sulu Sea coordinated patrols, among Indonesia, Malaysia and the Philippines.
In light of this, Canberra does what it can to support rationalisation and peace-making efforts within ASEAN. This is one area where the Philippines was notably active during its year as ASEAN chairmanship in 2017, producing a concept paper to cut back on redundant activities.
The job of implementing these rationalisation efforts now falls to Singapore, the current chairman.
What we have in the macro-picture of the state of the intra-Asian trade and the broad expanse of Asian economics is parallel yet simultaneously countervailing forces economically as well as security threats from sources within and beyond its precincts. These have yet to be prioritised, much less addressed, in the present day despite predictions that we would live in a more certain and ordered world than we do today.
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