OREANDA-NEWS. September 05, 2013. The potential of many Southeast Asian countries has been overshadowed by China’s role as Asia’s economic powerhouse. Europe is focused on China but the vast trade opportunities with Southeast Asia have been largely overlooked.

The 10 members of the Association of Southeast Asian Nations (ASEAN) account for 600 million people with a combined GDP of USD2.1 trillion, solid growth, low manufacturing costs and a rising middle class.

Southeast Asia enjoys healthy trade volumes with China, while regional trade has also grown. This has been helped by ASEAN, which was formed in 1967 to accelerate economic growth and develop free-trade agreements between member countries. The ASEAN Economic Community, which will start at the end of 2015, should further boost trade by introducing zero tariffs on all goods between Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Europe though has failed to fully capitalise on business opportunities in the region. There has been some progress: the EU recently concluded a free-trade deal with Singapore and is currently in negotiation with Thailand.

Although Singapore and Thailand have well-established business ties with Europe, other members of ASEAN such as Vietnam and Malaysia have yet to emulate their success. In many instances Western companies have identified China as a preferred option when setting up manufacturing facilities. But this is beginning to change as Southeast Asian markets become more accessible and increasingly competitive on costs.

China is shifting away from low-value, labour-intensive industries such as textiles to higher value-added manufacturing such as industrial machinery and information and communications technology. This has created opportunities for China’s neighbours, especially Indonesia and Vietnam, with their large working populations and lower wage costs, to fill the void. ASEAN has embraced the opportunity to create the sort of low-cost, high-volume manufacturing that ignited China’s economic boom 30 years ago.

Demographics also play a key role in ASEAN’s economic growth prospects. With growing disposable incomes and increased urbanisation, ASEAN trade is expected to rise sharply over the next decade. Indonesia alone has a population of 242 million, of which 165 million are people of working age. This is attractive for multinational companies who want low-cost labour and a dynamic domestic market with a rising urban middle class.

Vietnam has a population of 89 million but should reach the 100 million mark by the mid-2020s, with the average age in the country just 27. Vietnam has been able to grow its textiles sector rapidly in recent years, helped by its competitive wages: clothing and footwear manufacturing is forecast to make up around a fifth of the growth in Vietnam’s exports from 2013 to 2015, according to the latest report by HSBC Global Connections. The workforce is young, well-educated, industrious and keen for economic development.

Whereas Vietnam is now a leading manufacturer of footwear, the Philippines is strong on outsourcing, particularly in IT services, while Malaysia and Indonesia offer foodstuffs and natural resources.

Healthy trade with China is important to ASEAN countries. ASEAN trade with China grew from USD7.4 billion in 1990 to more than USD290 billion in 2011. But intra-ASEAN trade is also important and on the rise. Intra-regional trade in Vietnam is forecast to grow by more than 15 per cent a year to 2020 with Indonesia and Malaysia fast-growing export partners.

The rising spending power of ASEAN countries and the strengthening of demand in their domestic markets could help to unlock huge growth potential. However there is a risk that growth in inter-ASEAN trade could stall unless it can mobilise the finance and expertise needed to tackle serious infrastructure problems.

For example there are no comprehensive rail links between Thailand and Vietnam or viable road routes between Burma and Thailand. We estimate that Asia needs USD11 trillion to fund crucial infrastructure development including upgrading roads and railways to handle more goods. ASEAN member nations are struggling to fund such major projects themselves and this is where finance from Europe could play a crucial role. The Philippines, Indonesia, Vietnam and Thailand have tried to promote public-private partnerships but the current rate of investment is unlikely to be sufficient.

There is potential for this to increase. The onus is now on Europe and ASEAN to increase dialogue and make the most of a significant, long-term and mutually beneficial business opportunity.