The world's attitude towards globalization is reversing. Some parts of the world are becoming more protectionist and less open. But for Asia, globalization is still a growing force.
In the U.S., protectionist attitudes are thriving and Fortress America is increasingly becoming a reality. If Donald Trump wins the upcoming election and becomes president of the U.S., it could mean the end of trade deals like NAFTA and the Trans-Pacific Partnership (TPP).
Even if Hilary Clinton wins, there will likely be some similar protectionist measures put in place (although, one hopes, not so extreme). The U.S. has been moving in the direction of protectionism for some time.
The situation is no better in Europe. Britain's vote to leave the European Union signals a shift away from integration with the rest of Europe. Much of the rest of Europe has seen a rise in right-wing nationalist parties. Open trade and globalization are being associated with terrorism and the refugee crisis. All of this is putting pressure on the unity of the EU.
I've previously discussed the damaging effects that antiglobalization likely will have on Asia. But Asian economies are not about to be victims of this shift in attitudes. Asia is building its regional and global ties, which will decrease the negative effects of the changing world scene. Most importantly, trade agreements are helping to unite the region. A prime example of this is the ASEAN Economic Community (AEC).
Opportunities in Asia
The purpose of the AEC is to promote economic, cultural and political cooperation between countries in the ASEAN (Association of Southeast Asian Nations). The agreement has four pillars: creating an economically competitive region; ensuring fair economic development; creating a single market; and bringing ASEAN into the global economy. And it has avoided the biggest pitfall the EU has faced -- there are no plans for a common currency in ASEAN.
Integration within ASEAN has so far been gradual. ASEAN was first established in 1967 with only five nations: Indonesia, Malaysia, Singapore, Thailand and the Philippines. Over time, five other nations joined: Brunei (in 1984), Vietnam (in 1995), Laos and Myanmar (in 1997) and Cambodia (in 1999). (Note that China is not a member.)
ASEAN leaders agreed to promote economic and political cooperation in 1997. By 2003, those leaders began setting up the AEC.
In 2007, after 40 years of ASEAN cooperation, the AEC Blueprint 2015 was finally created. This document set up the framework for the AEC, which was officially launched on the last day of 2015.
Tremendous Growth in Trade
The AEC Blueprint 2015 has certainly done its job. Nearly all trade tariffs between member nations were removed by the establishment of the AFTA (ASEAN Free Trade Area) agreement. Goods, services, capital, investment and labor all move with much greater freedom between member nations.
During the first phase of AEC's development -- between 2007 and 2014 -- ASEAN's GDP reached $2.57 trillion, nearly double what it was previously. Overall trade in the region has increased by 56% to nearly $1 trillion.
Foreign direct investment (FDI) in ASEAN has also skyrocketed, with 11% of the world's total FDI inflows in 2014, making it one of the fastest growing recipients of FDI.
ASEAN's integration has also strengthened the region's ties with its major trading partners.
Take the U.S.-ASEAN Connect, for example. It was announced shortly after the launch of the AEC. According to the U.S. government, the U.S.-ASEAN Connect allows the U.S. "to support ASEAN's continued integration, including the success of the ASEAN Economic Community, and increased U.S.-ASEAN trade and investment."
Bigger Goals Lie Ahead
Given the success of the first phase, the AEC is ambitious. AEC Blueprint 2025 has even bigger steps in mind. It plans to create a single unified market for both consumers and businesses by removing more trade barriers and making the region's financial sector more united.
A major goal for the 2025 project is financial integration. For example, the larger, well-regulated banks in the region will gain access to other ASEAN markets through the ASEAN Banking Integration Framework (ABIF). This would allow banks that service domestic corporations to follow their clients' expansion within the region. ABIF should result in more investment opportunities and promote business growth.
ASEAN's insurance market is also imitating the ABIF by working towards more integration -- as is the region's bond market, which will boost liquidity and transparency.
Strengthening financial markets in the region is also a high priority. In 2012, the ASEAN Trading Link (ATL) was established to encourage the free flow of capital. The three largest ASEAN stock exchanges (Thailand, Malaysia and Singapore) now have one point of entry. This allows portfolio investors to access various Southeast Asian stock markets using only one portal. The link will be expanded to include other ASEAN stock markets as well.
The Remaining Obstacles
Of course, there are still many hurdles. The biggest issue facing ASEAN is the region's diverse politics. The political systems in ASEAN nations are very different and lack cohesion. Differences between Vietnam's communist government, Thailand's military regime and Myanmar's new democracy make for political disunity. Cooperation becomes a lot more challenging in these circumstances. Some governments may resist certain efforts towards integration.
Another major challenge is the large gap between the most developed and the least developed ASEAN economies. Look at Singapore and Cambodia.
Singapore has an annual GDP per capita of around $85,000, the highest in the region. Meanwhile, Cambodia's is less than $3,500, the lowest in the region. And Myanmar's economy is still quite fragile as economic sanctions remain in place. The large differences between the 10 members will make it difficult to find common ground on many objectives and concerns.
How Can Investors Benefit?
There are around 625 million people in ASEAN countries. Its GDP is $2.43 trillion, which makes it the sixth largest economy in the world. Additionally, it is one of the fastest growing regions in the world.
Estimates are that the AEC could boost economic growth by 7.1% between 2015 and 2025, according to a joint study by the International Labor Organization and the Asian Development Bank. In that time, it could also generate 14 million more jobs.
But, development takes time. The AEC has only been in effect for nine months. It will be a challenging task to overcome the economic and political hurdles between member nations. But big opportunities await patient investors in ASEAN.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.