Huge regional foreign investment potential amid trade tensions

VIENTIANE (Vientiane Times/ANN) - Asean nations, including Laos, have the potential to attract foreign direct investment (FDI) into the region despite global uncertainty surrounding the prolonged US-China trade tensions. 

International economists say multinational firms are looking to relocate their production bases to avoid being affected by ongoing trade disputes.

Speaking at the Food, Beverage and Agribusiness Forum 2019 in Vientiane last week, ANZ’s Head of Asia Research Khoon Goh said trade tensions would lead to supply chain rearrangement by multinational companies.

Mr Goh said the supply chain relocation would benefit Asean member countries. “The composition of US imports from Asia has changed due to rerouting/relocation,” he said.

For instance, he said, Vietnam is benefiting from FDI inflow into the region. Vietnam exports to the US have grown by 40 percent since the trade dispute first started.

In Laos, there is no official report on how many multinational corporations have relocated their factories here. However, over the past six years, FDI inflows into Laos averaged 7.1 percent of Gross Domestic Product (GDP), the second highest in the region.

Mr Goh is optimistic about continuing economic growth in Laos despite the country experiencing low foreign currency reserves. The economy is projected to grow at 6.5 percent this year and in 2020.

Apart from a high percentage working-age population, Laos can take advantage of transport linkages (such as the Laos-China railway) and Generalised System of Preferences (GSP) trade exemptions from over 50 nations around the world.

Over the last two years, international FDI has not grown as anticipated due to global uncertainties, but FDI into the Asean region has bucked that trend.

“Globally a lot of firms are struggling and worrying, but they are willing to put more capital into Asean because they are confident in the growth of the region. If more FDI flows into the region, this means more opportunity for economic development,” he said.

Mr Goh said global uncertainty was near a record high with the rise of US-China trade tensions on top of the list.

“The US-China trade war is not really about trade. It is about strategic competition, technology dominance and containing China’s economic rise,” he said. “Overall, the trade war makes everyone worse off. There’s no doubt about it.”

Over the past 10-15 years, Asean has tried to be less dependent on exports to drive economic activity and rely more on domestic consumption by promoting intra-Asean trade. However, the region’s dependence on exports remains. For instance, real GDP growth has been dragged down by weak exports, mainly as a result of the 2008 global financial crisis, the Asia trade recession in 2015-2017, and the US-China trade tensions this year.

Some Asean governments have increased their spending on infrastructure, such as Indonesia and Thailand. Central banks in the region are also actively supporting growth. They have cut interest rates to help their economies, with regional exchange rates becoming more flexible as a result.

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