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Rising protectionist economic sentiment and climate change are challenges Asia must tackle if it is to promote prosperity and maintain stability, said Deputy Prime Minister Lawrence Wong at the 28th Nikkei Forum on the Future of Asia conference in Japan on May 25.

In a wide-ranging speech in Tokyo, Wong spoke about how Asia can navigate such challenges to fulfil the promise of the "Asian century."

Economic 'de-risking' embodies risk

Following his remarks on competition and rising tension between China and the U.S., Wong also identified rising protectionism as a big challenge in his speech.

Around the world, countries are increasingly prioritising domestic and national security considerations. While previously talk of trade was win-win, "zero-sum competition" is becoming normalised across domains like trade, finance and critical technology.

Global businesses are reacting accordingly, on-shoring or near-shoring their supply chains and re-organising themselves to account for geopolitical risks. This trend undermines the multilateral trading system and the global economy.

Wong elaborated on the risk of de-risking:

"We understand why countries and companies would like to de-risk or diversify. No one wants to be overly reliant on a single supplier for raw materials, key components, or technology.

But it is hard to see how de-risking, at its current ambition and scale, can be strictly confined to just a few 'strategic' areas without affecting broader economic interactions."

If taken too far, de-risking prompts reactions and "unintended consequences". Over time, the global economy will end up more fragmented and decoupled.

During the last three decades of globalisation, investors allocated capital based on business considerations. This benefited Asian countries immensely, economies were built around such investments and millions were lifted out of poverty, Wong said.

However, this has recently changed and global Foreign Direct Investment flows are becoming more concentrated among countries that are geopolitically aligned.

"A fragmented global economy will split the world into competing regional blocs. There will be less trade, less investments, and less diffusion of ideas – critical ingredients which helped our economies to advance.

All this will make it harder for the developing countries of Asia to converge with the advanced world."

Asean working to maintaining open economic cooperation

Bucking against the trend, Asean will work to maintain more open economic cooperation by engaging partners outside Asia such as the U.S., UK and the European Union, which have longstanding historical ties and substantial investments across the region.

Asean will also forge ties with new partners in Africa, the Middle East and Latin America.

Facilitating these efforts are Asean's economic arrangements. It initiated the Regional Comprehensive Economic Partnership (RCEP). With its member countries constituting about 30 per cent of the global economy, it is the world's largest free trade agreement.

Asean also welcomes other economic cooperation mechanisms, with Wong citing the CPTPP, the China-led Belt and Road Initiative, and the U.S.-led Indo-Pacific Economic Framework.

Wong said there are different members in these groups, not every country are members, and it is not necessary for them to be so. However, these agreements collectively form a "dense mesh of cooperation and interdependence" between the region and its external partners.

"This gives all of our partners concrete stakes in Asia's peace and prosperity," Wong said, which makes for a more stable and balanced region.

Strengthen multilateral institutions

But while these efforts gather pace, existing multilateral institutions should also be strengthened, boosting the rules-based order for economic development.

Wong, who is also Singapore's Finance Minister, named the World Trade Organization (WTO) as one such key institution.

While bilateral and regional agreements reached outside the auspices of the WTO can be helpful, "second-best" solutions, they are "poor substitutes" for a well-functioning, rules-based global trading system.

It can effectively deal with issues like tariffs, intellectual property and dispute settlements. But in order to restore the WTO's effectiveness, the Appellate Body must function properly, Wong said.

"Otherwise, if every country takes the view that it will be its own judge of when national security considerations override multilateral rules, then we will end up with a system where “might is right” and the law of the jungle prevails."

Reform first, not replace

Wong addressed calls for Asia to develop its own regional mechanisms instead of relying solely on global institutions.

While he acknowledged that over the years, regional development banks like the ADB and AIIB and the regional currency swap arrangement (Chiang Mai Initiative) have been established, he said they cannot substitute for resilient global institutions.

The global institutions, Wong said, remain key to fostering cooperation in the global arena and diversifying risks.

He also elaborated on the need to revitalise international financial architecture like the World Bank and the IMF, as the Bretton Woods Institutions formed in the wake of World War 2 were not designed to deal with the challenges of the modern day.

"So our efforts in Asia must complement the wider reforms to strengthen the global economic order," Wong said.

Climate change is a brewing global crisis

Wong named climate change as another significant challenge, calling it a "brewing global crisis" with "grave, long-term consequences for humanity."

Rising occurrences of disasters like floods and droughts that threaten millions around the world will only intensify with time.

Asia is the "key battleground" for the fight against climate change, with it producing about half of the world's greenhouse gas emissions stemming from power generation from fossil fuels like coal. If the world is to succeed in its climate goals, Asia needs to transition to cleaner sources of power.

It will be difficult, as millions of Asians still do not have access to electricity and clean water. Substantial investments in green and transition projects will be needed, with the scale measured in the trillions every year over the next few decades, not billions.

As governments alone will not be able to finance such investments, the public sector must work with private sector funding, with a fair sharing of risks.

Asean and Singapore's efforts

Asean is taking steps to address this, establishing an Asean Taxonomy for Sustainable Finance, recognising energy-transition efforts like retiring coal-fired power plants.

The Asian Development Bank is also working with some Southeast Asian countries to pilot an Energy Transition Mechanism.

On our part, as a financial centre, Singapore is scaling up financing for such projects, and exploring how to provide catalytic and concessionary capital together with other partners.

Aside from finance, Singapore is also working to make the regional energy system more resilient, with a pathfinder power integration project and signing MOUs on cross-border energy trade.

These steps, Wong said, are the "building blocks" towards an Asean Power Grid, which can link areas of high production capacity to those with high demand.

Japan can help

Wong also described how Japan can assist in these efforts. He cited a recent survey by the ISEAS-Yusof Ishak Institute, which shows that Japan is the most trusted major power in Southeast Asia.

As Japan is a leader in green technology, it can facilitate green projects and sustainability financing. It can also bring like-minded parties together with its Asia Zero Emissions Community Initiative.

Wong said that Japan has further scope to strengthen economic and infrastructure cooperation with Southeast Asia, and Singapore will do its part to facilitate Japan's efforts in such areas.

"We can be a springboard for Japanese companies, big and small, to serve the wider region. Both our countries enjoy close longstanding ties, and we are stepping up collaboration substantially across many areas," Wong said.

Wong also highlighted Japan Prime Minister Fumio Kishida's Free and Open Indo-Pacific Plan as a sign that Japan is keen to play a more active role in the region, and hoped that Japan will continue to build on the momentum of its recent engagements with countries in the region.

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Top image from MCI.