Europe is doing too little, too late in Southeast Asia

21 May 2024

Since European Commission President Ursula von der Leyen delivered her famous China speech in March 2023, the European Union (EU) has been engaging with China with a “de-risk – not de-couple” approach. The trilateral talks between von der Leyen, French President Emmanuel Macron, and Chinese President Xi Jinping in Paris this May are just one of several testaments in recent months, which demonstrate that Europe does not want “to cut economic, societal, political or scientific ties” with China. Although there is still much debate on what de-risking should look like in detail, and different countries may have different priorities regarding adjusting their relationships with China, economic de-risking remains a key focus. Diversifying trade, investment, and supply chains away from China constitutes a major pillar of European de-risking strategies.

Yet diversifying from China inevitably raises the question: de-risking, but where to? One obvious answer is the most economically dynamic region — ASEAN. In a recent study for Berlin-based Konrad-Adenauer-Stiftung (KAS), I examined the diversification potential of the five Emerging ASEAN countries (Indonesia, Malaysia, Philippines, Thailand and Vietnam) for European businesses. The results of the study are clear. The Emerging ASEAN are in no position to replace China as an economic partner for the EU, but they can certainly complement it — particularly in the context of European companies’ China+1 strategies.

However, China’s economic domination of Southeast Asia is increasing while Europe’s influence is waning. European companies face the risk of pseudo-diversification, whereby despite shifting their value chains out of China, the value chains remain predominantly Chinese-dominated. To secure its foothold in the door, the EU needs to act fast and decisively. Swiftly concluding trade negotiations with ASEAN countries is crucial. To this end, the EU must adopt a more pragmatic approach that takes the region’s political and economic interests into account.

Europe is ill-positioned to compete against China in the region

ASEAN is increasingly attractive to economic powers from all over the globe, with Japan, South Korea, Australia, the USA, and many others expanding their economic relations with the region. However, China remains the EU’s main economic competitor in the region. China has gained tremendous economic importance in recent years and benefits from both the ASEAN-China Free Trade Area (ACFTA) and the Regional Comprehensive Economic Partnership (RCEP), the largest free trade zone in the world. Meanwhile, the EU’s trade negotiations with the Emerging ASEAN countries have mostly stalled since the successful conclusion of negotiations with Vietnam in 2019.

Countries like Japan, South Korea, and Australia are becoming increasingly important. The EU is markedly punching below its weight in Southeast Asia and needs to fight hard to stay relevant at all.

As a result, China has become the most important economic partner for the countries in the region. In 2000, the EU’s trade volume with the Emerging ASEAN economies was more than double the amount of China’s. In 2022, however, China boasted a trade volume of USD 672 billion with the five countries, almost four times the EU’s USD 189 billion. And while the EU’s trade volume has seen sluggish growth in recent years, China’s nearly doubled in the last five years.

China is increasingly specialising in producing and exporting sophisticated industrial goods, thus directly competing (and in some cases out-competing) European industrial companies. It dominates the industrial supply chains in the Emerging ASEAN economies with an enormously high share of all intermediate goods. According to the World Bank, more than one-third of all imported intermediate goods in Indonesia originate from China. In Vietnam, the share is 29.5 per cent, 28 per cent in Thailand, 26.9 per cent in the Philippines, and even in Malaysia, it stands at a significant 17.4 per cent. In comparison, Germany, which is particularly criticised for its high dependence on China in terms of industrial integration, imports only 12.4 per cent of its intermediate goods from China.

In Vietnam’s case, The Economist recently calculated an almost 100 per cent correlation between the monthly increase in imports from China and in exports to the USA. This suggests that the increasing relocation of production from China to Vietnam, especially concerning the USA, primarily aims to circumvent the high tariffs imposed on Chinese imports in recent years. Whether a similar correlation exists in Vietnam's growing trade balance with the EU is unclear. However, the fact that Vietnam is the only country among the Emerging ASEAN economies to have concluded a free trade agreement with the EU, thus enjoying preferential access to the European market, makes such an assumption somewhat plausible. The high share of Chinese intermediate goods imports in the Emerging ASEAN economies makes it clear that establishing a production site in the region would only partially reduce dependence on China. German and European companies might still rely on a high proportion of Chinese intermediate goods in their factories in Southeast Asia. In such a case, a China+1 strategy would ultimately be little more than pseudo-diversification — diversification in terms of geography but not in terms of supply and value chains.

The EU must deliver to stay relevant

With its state-capitalist ‘going out’ approach that combines economic diplomacy with state-owned banks and companies, China is forcefully and successfully pushing into Southeast Asian economies. To keep up with Chinese competition, European companies urgently need more political support and better access to Emerging ASEAN markets, which in turn depends on the swift conclusion of the still-open trade negotiations. While the EU signed a free trade agreement with Vietnam in 2019, negotiations with Indonesia, Malaysia, Thailand, and the Philippines, some of which have been stalled for years, have made little progress.

The main obstacle to successfully concluding negotiations is the EU's efforts to impose non-trade demands such as extensive labour and environmental standards. Countries like Indonesia reject this approach and accuse the EU of protectionism under the guise of climate protection and human rights. With the region's growing global economic appeal and relatively stagnant trade with the EU, the Emerging ASEAN countries are increasingly able and willing to walk away from trade negotiations with the EU. For the EU, this would be a significant setback, both in terms of European diversification efforts and its already declining geopolitical influence in the region. The EU needs the ASEAN states to achieve its ambitious goals in multiple areas, including global climate protection, reforming multilateral trade rules, and protecting free trade routes. Failure of its trade negotiations would further fuel the region's dependence on China.

The EU should no longer overload trade negotiations with non-trade demands. The EU has other, better-suited instruments to support social development and climate protection in Southeast Asia. The most important instrument is undoubtedly the Global Gateway Initiative, through which the EU plans to invest EUR 10 billion in green transformation and sustainable connectivity in ASEAN countries over the next few years. While these plans are generally welcomed in the region, many experts and officials voice their doubts in private talks about whether the EU will fully deliver, given its famous insistence on its infamous ‘Conditionalities’. Thus, the EU should refrain from burdening potential Global Gateway investment projects in ASEAN countries with excessive conditions, too. Because China with its Belt and Road Initiative, as well as countries like Japan, South Korea and the United Arab Emirates (UAE) are ready to partner with Southeast Asia for investments while acting much more pragmatically.

It is also essential for the European Commission and Member States’ governments to provide even stronger support to European companies in their diversification efforts in Southeast Asia. For instance, the introduction of special conditions by the German government in October 2023 for taking over investment guarantees in countries with high diversification potential was a step in the right direction. However, here too, it is crucial that the various instruments of foreign trade promotion are not overloaded with requirements regarding non-economic objectives. This would not only unnecessarily complicate and delay companies' diversification efforts but also entail a competitive disadvantage compared to non-European companies not subject to such requirements. Moreover, political support for the engagement of European companies in the Emerging ASEAN economies should be expanded. The relatively low number of high-ranking political visits from the EU to the ASEAN countries should be significantly improved. As with similar visits to China and India, high-level political delegations from Europe and its Member States to the region should be accompanied by high-level business delegations from representatives of European companies.

Europe needs to deliver if it is to stay relevant in the ASEAN region. The gap between how the EU sees itself and how it is perceived in the region is widening. In Brussels, senior EU officials still believe that the EU simply needs to run faster than China to succeed. But this is wishful thinking. Considering its political and economic influence in the region, China has long outcompeted Europe. According to The State of Southeast Asia 2024 survey, the EU is still the preferred “third party” to hedge against the US-China rivalry in the region, but its influence is decreasing. Countries like Japan, South Korea, and Australia are becoming increasingly important. The EU is markedly punching below its weight in Southeast Asia and needs to fight hard to stay relevant at all.

Vague promises of more trade and investments in the future are certainly not enough. The EU must deliver on these promises and prove to the region that their interests really matter. With a whole bunch of regional and bilateral trade agreements, as well as a growing number of economic partners lining up to meet the region’s political and economic interests, many ASEAN countries are increasingly able and willing to go on without Europe. For now, the EU is doing too little, too late to stay strategically relevant in the region and to really tap the diversification potential of the Emerging ASEAN economies.

DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.

Author biography

Dr Denis Suarsana is the Country Director for Indonesia and Timor-Leste for the Konrad Adenauer Foundation (KAS) in Jakarta. Before joining KAS in 2022, he was the Deputy Director for Strategy at the German Employers’ Association (BDA) in Berlin. Earlier in his career, he worked as Policy Advisor at the German Foreign Ministry and as Research Associate in economics at European University Viadrina. Image credit: European Union.