If 2020 was an unpredictable year for the Asia Pacific region, 2021 will likely see the region divided by the fallout of COVID-19, alongside ASPAC becoming a playing field for competition between global powers. The risks defined in Eurasia Group’s Top Risks 2021 report may be playing out at a global level, but deep impacts will be felt in the ASPAC region.
Flashpoint 1: US President #46 and US-China dynamic
Eurasia Group’s Top Risks #1 and #4 will reshape the ASPAC diplomatic (and therefore business) landscape
Eurasia Group suggests that the change in US administration may impact the process of engagement with China, but ultimately not the end (competitive) outcome. Bilateral relations and strategic diplomacy in the ASPAC region will refocus on vaccine distribution, climate action and trade; Japan and India will be important stakeholders in the US’ refreshed diplomatic campaign. China is likely to continue to support Southeast Asian partners through commercial and infrastructure projects. ASPAC nations will need to manage their relationships with the US and China, and those caught between economic and security relationships could end up pincered in the middle.
From a business lens, supply chain disruption caused by tariffs levied between major global economies will trickle down to other nations. Big business operating in the region have already been hit through trade spats in previous years – one US conglomerate previously estimated that tariffs on China imports would grow costs from US$300 million to US$400 million. Although trade dislocation can open up opportunities for countries and companies in the region, suppliers of component parts in Southeast Asia may experience increasing costs of international trade and reduced market size and access, particularly in strategic sectors (agriculture, healthcare, technology and climate).
Flashpoint 2: Long COVID
Eurasia Group’s Top Risk #2 may result in reinforced socioeconomic inequalities
COVID-19 will likely continue to cast a shadow over the ASPAC region in 2021, from both health and socioeconomic perspectives. Vaccination is not going to be a silver bullet; a legacy will be left in debt and societal inequality. Significant variation can be expected across ASPAC, as a ‘K’ shaped recovery means that some countries emerge better than others. A divide is already visible in economic growth statistics – with the IMF indicating that Asia’s ‘advanced economies’ contracted by an average of 4.2% in 2020, versus -1.7% in emerging economies and -7.5% for Pacific Nations. Growth projections for 2021 vary significantly, from ongoing recession in a number of smaller nations, to strong growth reaching 8.8% in India, for example.
The same applies for individuals within those nations. Disproportionate impacts upon gender, employment sectors, age groups and minorities will deepen social divides. Service-based industries and manufacturing have been particularly badly hit, and comprise 80% of the region’s SME community. Northeast Asian countries have tended to offer citizens extensive supports, however Southeast Asian nations lag behind in this respect. The pandemic is estimated to have driven an additional 140 million people in the region into poverty. With elections looming in the Philippines, Taiwan and other Asian nations, and food security underpinning political mandates, these social divides have the potential to reshape the region’s political systems.
Public debt will likely also saddle ASPAC nations for years to come. Eventually, corporations and taxpayers will have to pay the price. Tax increases have already been touted in Singapore and Australia for GST and land taxes in order to pay for COVID-19 responses. Some regional economies entered the pandemic with high levels of public debt – Vietnam, India and Cambodia reaching 189%, 126% and 116% respectively, whilst China and Japan are known to have some of the world’s highest debt ratios (both public and private) at over 250%. This debt will continue to rise in 2021 as governments spend to stimulate economies in COVID-induced recessions. Foreign corporates are also likely to foot the bill, as more politically acceptable targets of tax increase. However, this will have implications on Foreign Direct Investment (FDI) and associated knowledge transfer benefits. The economic crisis will be here to stay, even if public health improves as hoped.
Flashpoint 3: Climate – Net Zero meets G-Zero
Eurasia Group’s Top Risk #3 will drive a modern resource grab
2021 is expected to be a year where climate commitments become commercial reality. Major economies across the ASPAC region have now signed up to zero emissions targets by 2050 – including China, Japan and South Korea. Transitioning to a low carbon economy however, comes at a price. In Australia, the cost of tackling emissions is estimated at A$3.6 billion, though producing a net benefit of A$16.2 billion. Businesses and consumers must adapt to changing regulation and integrate carbon neutral technologies into supply chains, each of these coming at a CAPEX and ongoing OPEX cost.
The energy transition may also result in competition, with major economies seeking to gain advantages in new green supply chains. Mineral resources such as lithium, cobalt and graphite, with demand that is expected to grow by 500% by 2050, are crucial. The World Bank estimates that 3 billion tons of minerals will be required for renewable energy infrastructures. ASPAC nations, particularly China and Australia, are well placed given existing reserves, though regional players reliant on importing resources from a single nation will need to factor this into procurement strategies. Similarly, over-reliance on individual resources that are hotly demanded by competitor nations also experiencing an energy transition, will present additional risk.
Flashpoint 4: Data and the Cyber Tipping Point
Eurasia Group’s Top Risks #5 and #6 will take regional competition online
Of the 12 countries with the most data flowing in and out of their virtual borders, five are located in the Asia Pacific (China, India, Singapore, Vietnam, Japan). Information is powerful - used to shape elections, form commercial decisions, and monitor trends in society. Data is now a matter of national security, which has seen legislative controls placed upon the cybersphere across ASPAC. Malaysia and Singapore have led by implementing the Data Protection Act and Personal Data Protection Act in 2010 and 2012 respectively, and all 10 ASEAN nations now operate some form of data and privacy regulation. These regulations have compliance costs for local businesses and will also form divides between who is seen as a responsible party for holding sensitive information, and who is not. Trust will be crucial.
Greater volumes of data also means the potential for greater levels of cyber security threat. Crucial infrastructures such as power and defense networks are increasingly operated online, raising potential severity of impact. In December 2020, for example, the Malaysian Armed Forces was the target of a mass attack on its data center. ASPAC societies and organizations may be particularly vulnerable. 55.1% of Asia’s total population had access to the internet in 2020 - with 2.7 billion mobile device users expected to grow by a further 663 million by 2025. That leaves a lot of targets. It will become more important than ever to protect data and cyber security at organizational and national levels.
The organizations in ASPAC that succeed in 2021 will likely be those that proactively manage these challenges; building geopolitical risk into a central component of the organizational strategy. Read KPMG’s Top Risks 2021: Bottom Line for Business report to find out more.
With thanks to Daniel Ginger, KPMG Australia, for supporting research.