By Kyle Springer on 02 December 2021
South-East Asia | Economic Integration
Over the next thirty years, we will witness a significant transformation in the economic and political order in the Indo-Pacific.
Vietnam and Indonesia are leading economies in Southeast Asia. Average GDP growth in Vietnam was 7% in 2019 and 5% in Indonesia. In 2019, Vietnam had a population of 97 million people and Indonesia had a population of 274 million people.
A game-changer: The Regional Comprehensive Economic Partnership (RCEP)
RCEP is made up of 15 members - all ten ASEAN countries plus Australia, New Zealand, China, South Korea and Japan. It is the world’s largest trade agreement, accounting for 30% of global GDP and is on track to enter into force on 1 January 2022.
Why is RCEP important?
- Establishes consistent trade rules for the bloc, which constitutes 30% of global GDP
- Cleans up the “noodle bowl” problem of overlapping and duplicative trade agreements
- Will unfetter the development of regional value chains through its rules of origin provisions
- Will make it easier for Australian exporters to move their goods throughout the world’s most dynamic economic region
- Creates an incentive for RCEP members such as Vietnam and Indonesia to use Australian inputs in their industries
There are three main trends worth pointing out.
- The ‘China plus one’ strategy, in which firms with value chains in China relocate labour intensive stages of production to more cost competitive countries such as Vietnam, is boosting Vietnamese industry.
- Participation in major trade agreements in which Australia is also a part: AANZFTA, CPTPP, RCEP
- Trade diversion due to US-China Trade tension and other geoeconomic interventions.
The developing Vietnam-Australia bilateral partnership
Vietnam has seen a steady increase in its share of trade with Australia over the past ten years, reaching 15% in 2020.
New Australia-Vietnam “business champions” are emerging and Australia has launched the Australia Vietnam Enhanced Economic Engagement Strategy.
WA-Ba Ria-Vung Tau (BRVT) Memorandum of Understanding (MoU)
BRVT province is an emerging economic hub in Vietnam. Australian businesses have an established footprint in BRVT, including Austal and Interflour Group.
It is the gateway for international trade for the greater Ho Chi Minh City Metropolitan region, an area with a population of 21 million. BRVT is the fourth-most popular destination in Vietnam for foreign investment.
New developments in and around BRVT make it a competitive destination for Australian investment. Seaport infrastructure and a new international airport under construction in a neighbouring province promise to boost its international connectivity. .
The province is also the location of national LNG import infrastructure, which is likely to expand as Vietnam’s energy system is modernised.
The WA Governmen also signed a MoU with BRVT province in September 2020.
Three trends worth higlighting are listed below:
- Indonesia has made progress on improving its business environment
- It has begun to engage more proactively in regional trade architecture
- It is making significant steps to enter regional value chains
Improving Australia-Indonesia economic relations: recent steps
The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA)entered into force on 5 July 2020. IA-CEPA can prompt a shift in the way Australia and Indonesia frame their economic relations. It is hoped the bilateral trade agreement will boost overall trade relations, which have stagnated for decades.
New opportunity: Electric Vehicle Battery Value Chain
The Indonesian Government is establishing the country as a production hub for EVs and battery cells.
Indonesia’s policy changes have attracted major global players in the battery industry. In September 2021, a Korean and Indonesian consortium broke ground on an EV battery factory in West Java. Many other companies such as China’s CATL are also contemplating large investments in battery production in the country.
Australia is Indonesia’s ideal battery minerals partner; Australia accounts for 60% of world production of lithium, a mineral missing for Indonesia’s domestic resource endowment.
This is an ideal node of further trade development with Indonesia
This article was written by Policy Fellow Kyle Springer, who has also written extensively on Vietnam and Indonesia in Perth USAsia Centre reports.