Key Takeaways

Association of Southeast Asian Nations (ASEAN) economies must strengthen their positions in global value chains (GVCs) to bolster resilience against new challenges including future pandemics, geopolitical instability, and climate change, according to an Asian Development Bank report launched on 30 March at the Southeast Asia Development Symposium (SEADS) 2023 in Bali, Indonesia.

The report ASEAN and Global Value Chains: Locking in Resilience and Sustainability surveys the challenges and opportunities facing GVCs—the cross-border networks that separate production stages from concept to consumption—in Southeast Asia as countries seek to build greater resilience and promote sustainable and green development.

Lead author and ADB Principal Economist for the Southeast Asia Regional Department James Villafuerte discusses the consequences of a business-as-usual scenario and what steps ASEAN needs to take to propel its GVCs towards net zero and decarbonization.

Dalat Hasfarm, Viet Nam
Dalat Hasfarm is a subsidiary of Hasfarm Holdings Limited, Southeast Asia’s largest flower-growing and exporting company. In 2016, it received a $20 million ADB loan to support its expansion in Viet Nam and other Asian markets.

The new publication underscores the importance for ASEAN governments to act swiftly to decarbonize the subregion’s GVCs. Why the urgency? What consequences await the subregion in a business-as-usual scenario?

  The ASEAN region has become one of the most important regional hubs for GVCs thanks to the success of member countries in developing a strong manufacturing and export base; generating more and better-quality jobs; promoting innovation and technology; spreading knowledge; and reducing poverty.

Just like the rest of the world, ASEAN member countries now face the fallout resulting from the current unpredictable geopolitical environment and continuing post-COVID-19 pandemic challenges. We’ve identified six mega-challenges confronting internationally shared production networks and value chains, which if ignored could upend ASEAN participation in GVCs, the benefits its economies enjoy, and efforts to develop long-term resilience against new shocks.

The first risk involves difficulty in accessing resources, intermediate inputs, and commodities needed for backward and forward GVC linkages. The second is a shortage of new skills required along value chain segments. The third involves constraints in accessing sufficient, reasonably priced energy owing to rising demand for resources, geopolitical disruptions, and country commitments under the Paris Agreement. The fourth risk is barriers to global and regional market access stemming from unilateral policies affecting trade and investment (including possible carbon taxes). Fifth is the tendency to disregard multilateral trading rules in favor of discretionary, power-based rules that create further fragmentation. And sixth the risk of interruptions in financial flows, rising prices, and issues with debt financing.

If the region maintains a business-as-usual approach given these challenges, GVC trade will continue to decline.

A syringe manufacturing company in Phnom Penh
A syringe manufacturing company in Phnom Penh, Cambodia.

How can the subregion address these risks?

The best way to reduce these risks is to make GVCs more resilient to shocks, maintain an open trade and investment environment, strengthen regional cooperation across ASEAN and with other sub-regions, and transform firms participating in GVCs to become more green and to use greater technology as their workers shift to higher value added. This will promote more inclusive growth aligned with their net-zero emission commitments.

Post-pandemic, businesses also need to focus on how to move forward resiliently while promoting and transitioning to clean energy for their production and trade. They also should think of accounting for emissions produced while their products are consumed or disposed of.

  The more agile the business sector, the faster the economic and trade recovery. Firms that adequately assess the risks associated with operations and invest in contingency plans do best. Diversifying GVCs rather than minimizing cost should be the key goal. Despite the cost implications and profit impact, those that have alternative supply sources and delivery routes—as well as contingency plans across the business—benefit. It boils down to business readiness aided by proper incentives, to complement or replace, if necessary, the “just-in-time” cost minimization model with the “just-in-case” risk exposure optimization model.

ASEAN policy makers also play a crucial role in helping their countries build resilience to external shocks by promoting a conducive business environment to maintain stable macroeconomic fundamentals, minimizing trade and labor disruption by fostering a transparent, clear, and fair regulatory environment, and being sensitive to the need for wider and more flexible financial and social protection.

Can ASEAN afford the costs of going green given that the subregion’s economies and finances are still reeling from the effects of the COVID-19 pandemic and more recently the consequences brought about by Russia’s invasion of Ukraine?

According to the report, the estimated investment cost needed for ASEAN economies to meet their Nationally-Determined-Contributions (NDCs) under the Paris Agreement is $50.1 billion a year. The total cost, however, for the subregion if the NDCs are not met is six times that amount or $306 billion (this estimate is based on the social cost of carbon estimated at $185 per metric ton of carbon dioxide equivalent (MtCO2e), with ASEAN emissions at 1651.89 MtCO2e in 2020). By achieving the NDC targets, ASEAN could save $256 billion in potential social costs, five times the estimated GDP losses in a year.

In effect, the benefits far outweigh the cost of going green for the subregion. Asia, including ASEAN, emits more greenhouse gas (GHG) during production than other economies of similar size in the world. In terms of consumption, advanced economies remain on top. The reason Asia produces so much carbon emissions is its role as “factory of the world.” It has used its comparative advantages in global production and trade, reorganized around GVCs, to minimize overall costs related to production, transport, information, regulation, and other policies.

The traditional view is that increasing trade and deepening GVC linkages boost emissions and damage the environment. And in most cases, it does. However, it is still possible to say that trade, investment, and GVCs can be climate-smart as they consist of, for example, promoting trade in environment-friendly goods and services; digitalization of trade and transport procedures; and increasing investment in renewable energy. If left exclusively to market forces, it won’t happen automatically. But if incorporated into comprehensive policy packages that offer the right incentives to get the private sector on board, trade and investments in value chains can be done with a lesser effect on emissions.

  • Working together

    As poorer countries become more integrated with the economies of their richer neighbours, they can move up the value chain and boost growth.

  • Integrated solutions

    Asia and the Pacific is stronger and more resilient when it works collectively to address challenges such as climate change, pandemics, and financial shocks.

What are the benefits of greening ASEAN’s GVCs and are they enough to outweigh the financial costs of the transformation?

The recent surge in energy and commodity prices and the planned 2026 implementation of the Carbon Border Adjustment Mechanism – a carbon tariff on carbon intensive products such as cement and some electricity imported by the European Union – have made decarbonization of GVCs more urgent. ASEAN policy makers and businesses must act.

By investing in renewables and rolling out complementary polices that hasten their adoption and deployment, ASEAN economies can meet their NDC targets while cutting down their dependence on fossil fuels. As the capital cost of renewable technologies is expected to decline as they mature, the social costs saved become much bigger.

  In the best-case scenario, policies that promote decarbonization also strengthen ASEAN GVCs’ long-term competitiveness and resilience. This involves a careful balancing act between maximizing potential benefits of ASEAN GVCs and regional value chains while minimizing the risks and costs of decarbonization including the social costs from job displacement—as some producers and businesses close their shops—as economies go green.

Recent geopolitical tensions and the string of external shocks since the COVID-19 outbreak continue to complicate economic decision-making in ASEAN. If these tensions persist, they could lead to further fragmented trade and contribute to more expensive energy and raw materials. These will raise trade costs further, limiting ASEAN’s benefits from its participation in global production networks.

But as the new normal evolves, it will also bring new opportunities for the region. ASEAN will need to reskill and upskill its labor force and raise its technological capabilities to exploit such opportunities. Importantly, building a sustainable, inclusive, and green economy will make ASEAN GVCs more competitive, improving its position in the international production network.

Moving forward, ASEAN should also continue to strengthen intraregional and sub-regional cooperation to protect itself from heightened geopolitical and economic risks. Keeping borders open for trade and investment is the only proven way for firms to promote diversification and substitution of products, services, and build wider partnerships for more resilient global value chains. Diversified value chains are a much more powerful source of resilience than one heavily concentrated in a single location.