Australia’s Southeast Asia Strategy Faces Challenge of ‘Buy-in’

The government has signalled it is committed to deepening Australia’s economic relations with Southeast Asia. But will it find the resources needed to ensure Corporate Australia and the region’s governments embrace the strategy?

The overwhelming sentiment outside of Australian officialdom, is that the government’s Invested: Australia’s Southeast Asia Economic Strategy to 2040 report launched in September is “nothing we don’t already know”.

That Corporate Australia’s ties and presence in its closest regional neighbour has been underwhelming is a long-standing fact. That ASEAN markets present a crucial opportunity not just for growth, but for diversification (de-risking, supply chain resilience, China+1, pick your buzzword) in the face of geopolitical tensions - in which Canberra has played no small part - is no great discovery either.

That part of the problem is a general conservatism among Australian business leaders and reluctance to step outside their comfort zone is perhaps less publicly known, but still widely acknowledged within policy and business circles.

But this is not to say that 10 months of rigorous fact-finding were a waste of time. The leadership of Special Envoy for Southeast Asia Nicholas Moore - the former Macquarie chief executive instrumental in building its footprint across Asia Pacific - gave the 208-page report plenty of street cred and the implied message from Canberra that it was listening to the private sector.

Thus, the “Moore Report”, as it is being increasingly referred to, is an important acknowledgement by the government of “everything we already know”. It cannot, now, fail to act in the region where Australia’s “economic future lies”, as Prime Minister Anthony Albanese described it at the document’s unveiling in Jakarta.

But this and future administrations will have their work cut out to ensure the necessary buy-in both domestically and from ASEAN’s “10.5” members (Timor-Leste is on its way to completing the roadmap for full membership after its application was accepted in principle last year).

Australia has had a long period of recession-free prosperity, stretching back to the late 90s. In that time, investment ties with others in the Anglosphere have been sticky, coupled with a strong preference for developed markets. The top three destinations for Australian capital are the United States, United Kingdom and New Zealand and, other than tax haven Cayman Islands, the rest of the top 10 are developed markets, with Singapore the only country in Southeast Asia.

These are rich nations that spend big on both infrastructure and general consumption and are regarded as having low “country risk”, nowadays a seemingly catch-all phrase to denote fears of political instability, nationalist protectionism, corruption and economic crisis.

In contrast, Southeast Asia presents a much less attractive “risk-reward ratio”, another umbrella term dished out by suits instead of admitting to a fear of going beyond the status quo consensus and quite possibly to outright bias.

This is not to lay the blame squarely on the shoulders of directors and C-suite executives. Any shareholder, having enjoyed years of fat, is going to ask, “if it ain’t broke, why fix it?” Why risk losing your shirt in the great unknown?

The answer, of course, and the very basis for the Moore Report, is that you will lose more than just your shirt if it’s to be business as usual. One may end up being squeezed out altogether - from growth and from new supply chains.

Coming in at 11 on the list of outbound investment destinations is China, which as with many other economies, especially in the Asia Pacific, is the dominant trade partner for Australia. But diplomatic tensions and trade barriers put up by the Asian superpower in recent years have further fuelled the imperative to diversify, which became a key theme of COVID-19 era supply chain management.

China has up to now presented a huge market and opportunity, and while clearly not without risk, it is largely monolithic. ASEAN is still working towards becoming a more streamlined economic bloc, in hopes of reducing the “liability of foreignness” involved in trying to approach each individual market. Hence, the need to overcome what the Moore Report diplomatically called a “lack of awareness” of opportunities in ASEAN.

If the reluctance to invest is indeed due to ignorance, it would be a sad state of affairs for Australia, having had a long history of shared political, military and cultural links with the region. Instead of leveraging this advantage, there has been ebbing interest. Despite boasting a million-strong Southeast Asian diaspora, most Australians seem to lack curiousity about these neighbours.

For example, there has been a sharp decline in the opportunities to learn about Indonesia, a nation geographically closer than New Zealand and one of the world’s 10 biggest economies in purchasing power parity, but with less than a two percent share of Australia’s total trade. The feeling seems mutual, with a sharp dip in Southeast Asian interest in Australian tertiary education from more developed markets.

All this points to Australia’s place in the region remaining largely the same from a geostrategic and military perspective, while the economic gravity has shifted away. ASEAN has seen its share of global FDI inflows more than double to 17.3 per cent in the decade up to 2022 at a time when the region’s share of Australian investment has plummeted. The failure of Australia to keep pace, compels us to change our frame from “why should Australia invest in Southeast Asia” to “why isn’t Australia investing in Southeast Asia”.

Conversely, with ASEAN’s access to investors, financing and trade partners northwards - especially China - better than ever, it could ask, “why Australia?” Despite the Moore Report being unveiled in the capital of Indonesia, the largest member of ASEAN, it barely registered a reaction from the region’s leaders.

In this context, it is strange that calls for Corporate Australia to venture into ASEAN are often framed as encouraging boldness and courage - Moore himself has argued it is hard for Australian businesses to assess ASEAN because of a “fog” due to lack of information - when the US invests more in ASEAN than in China, Japan, Korea and India combined. Even the Germans and Dutch have a strong presence in the region, yet their investors are not viewed as swashbuckling, maverick entrepreneurs.

This is even before considering the fact that Australia is not immune to “country risk” either, as the Japanese uncharacteristically and loudly expounded on last year.

It matters little whether it is a case of the marketplace in Australia failing to recognise the ASEAN opportunity, or the geostrategic imperative outpacing corporate considerations. The Moore Report is right - Australia’s economic future lies in ASEAN because Asia’s growth makes the continent a magnet for commerce into the foreseeable future, and relying on China alone is playing with fire.

The work must begin now, and no better time than at the Australia-ASEAN Special Summit in Melbourne from Mar 4-6. Not only should there be the usual communiques with all the right language on deepening agreements on trade, investment protection and dispute settlement, there needs to be actual signposts being hammered down, guiding the exact pathway towards mutual benefit.

We know what ASEAN offers to Australia - a near-shore growth market, cost efficiencies and risk diversification - but what does Australia offer ASEAN? Once upon a time it was a wide array of expertise and technological advances, but that has narrowed to specific fields today - health, agriculture, energy transition and mining come to mind.

No doubt, there are protectionist policies that stand in the way. But therein lies the work. The deal teams on the ground aren’t being afforded a tonne of funding - less than A$100 million has been announced for three initiatives to boost Australia-ASEAN economic ties so far - but it is a productive step in bridging the awareness gap in the short term.

In the end, though, it does boil down to dollars and cents. Governments will ask what’s in it for them if they bring down trade barriers and protectionism, businesses will ask for incentives and the common man will ask for jobs.

Canberra will have to put its money where its mouth is.

Shannon Teoh is Malaysia Bureau Chief of The Straits Times, Singapore. He researched this article during a short residency with Asialink in January.