The Pan-Asia Indicator


A 10-minute snapshot view of all the Asian economies – including Afghanistan, Bangladesh, Bhutan, Cambodia, China, Hong Kong, India, Indonesia, Japan, Laos, Malaysia, Maldives, Mongolia, Myanmar, Nepal, North Korea, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Includes a breakdown of all major trade agreements.

Sept. 24 – Chris Devonshire-Ellis, founding partner of Dezan Shira & Associates, has spent close to 30 years in Asia, and as head of the practice (now one of Asia’s leading foreign direct investment firms) travels extensively around the region looking at where the new opportunities for foreign investments lie. Here is his annual quick round up concerning Asian nations and their immediate opportunities and problems.

Despite the war weary images displayed across the globe, Afghanistan is making some headway in attracting foreign investment. Mining companies are here and infrastructure development is being spearheaded by both India and China. Yet for obvious reasons, the country remains on the outskirts of FDI – only serious operators experienced in operating in dangerous zones need apply. Many of the daily commodities needed in cities such as Kabul are trucked in from Xinjiang Province, Northern India, Pakistan and Eastern Iran.

Primary Agreements:
Afghanistan has no double taxation agreements (DTAs) in place but is a member of the South Asia Association for Regional Cooperation which affords some double tax relief through its agreements with the South Asian Free Trade Area.

Labor intensive industry is moving to Bangladesh from China and to some extent India as their domestic costs rise. Chaotic infrastructure and lax labor laws mean strong operational due diligence needs to be part of any investment plan, yet good work ethic and low wages continue to attract those used to the region and familiar with operating in difficult markets. Bangladesh is strategically sited close to both China and India, and may yet develop as an important production hub, especially in textiles. Much depends upon how much infrastructure into the country China is prepared to provide in upgrading port and related facilities, and how much India is prepared to do on its part on reuniting Bangladeshi trade with West Bengal.

Primary Agreements:
Bangladesh has a free trade agreement (FTA) with India and is also signatory to the Asia-Pacific Free Trade Agreement which includes its trade relations with China, in addition to the South Asian Free Trade Area and the South Asia Association for Regional Cooperation.

Bhutan is mainly reliant on its tourism industry, agriculture and hydroelectricity. It is a major supplier of electricity to India. The economy has been performing well recently, and the nation remains a stable (if small) player in regional economics.

Primary Agreements:
Bhutan is a member of the South Asian Free Trade Area and the South Asia Association for Regional Cooperation.

Essentially a small Vietnam, Cambodia is becoming popular again with some foreign investors who can find their way through a communist-style bureaucratic system. Cheap labor attracts, and the country is politically close to China, whose own businesses are also investing in factory production destined for the Chinese consumer market. The one main port at Sihanoukville is being upgraded – again with Chinese investment. Lax investment laws and corruption are barriers, but Asian-savvy investors can find a way through the maze, with cheap labor being the primary draw, along with ASEAN’s free trade agreement with China allowing duty free export into China on thousands of products. The United States, interestingly, remains their largest export partner.

Primary Agreements:
Cambodia has no double tax agreements at present, but is part of the Association of Southeast Asia Nations – see the full list of all ASEAN agreements here.

China is currently in a transitional stage from being an export driven economy to a consumer economy, and there remains doubt as to how far much-needed reforms to continue the pace of change will reach. Reform measures and new policies are traditionally unveiled at the Communist Party Plenum to be held this November, and this should provide some clues. New President Xi Jinping has had nearly a year to settle in during a leadership change process that has been far from smooth, and has seen China ramp up military threats and increase territorial tensions. Will these now subside and be replaced by a new era of reforms, or is the China economic miracle fading in the face of inter-party politics at the expense of trade?

Serious questions remain about the sustainability of China’s ability to maintain its growth rates and opportunities. If China can’t get its economy beyond 6 percent growth, social problems will surface, and history has shown a Chinese government under internal pressure clamps down on external relations and becomes more insular and militarily aggressive. It’s a trap that Xi desperately needs to avoid.

Primary Agreements:
China’s agreement with ASEAN has far reaching implications as to where production will be based to service the new Chinese consumer – it can be accessed here. Of note also is the proposed Regional Comprehensive Economic Partnership. If these come to active fruition, China should continue its path towards increased trade relations (provided reforms are put in place). China’s unique status in Asia as being a major gateway into Central Asia and into the “Stan” nations and beyond to Iran and Eurasia via its membership within the Shanghai Cooperation Organization also offers an alternative source of trade development.

Hong-Kong-25Hong Kong
Hong Kong retains much trade autonomy and relations with countries worldwide, and is still a preferred stepping stone for many MNCs as a base from which to access the mainland China market. Yet its position in terms of its absolute usefulness as a gateway to China is gradually being whittled away. It has lost much of its previous influence as a base from which to reach out to Asia to Singapore, and is increasingly being marginalized to now solely a China play.

A gradual eroding of professional and living standards, coupled with increasing competition from Shenzhen and Shanghai are seeing Hong Kong lose its preeminent position in Asia. It remains an important port and service center for China, yet Beijing needs to be careful it does not position Hong Kong too far towards China and instead allows the territory to continue functioning as an international hub. It is in danger of losing its global appeal and usefulness as a transparent low-tax jurisdiction. The next 10 years will be crucial to ascertain which path Hong Kong will take.

Primary Agreements:
Hong Kong has a somewhat unique status in that many (but not all) of mainland China’s agreements apply, yet it also maintains its own independent free trade and double tax agreements with many countries. Its Closer Economic Partnership Agreement with China remains one of Hong Kong’s principal assets.

India, like China, is struggling with political and economic reforms. Yet the demographics suggest the nation is on the brink of a renewed era of productive competitiveness. It has the human resources to succeed. Whether or not – in the world’s largest democracy and with a multitude of vested interests and voices to be heard – long lasting reforms can be enacted to exploit the opportunity on its doorstep remains to be seen.

An election next year muddies the waters and delays required actions. If it gets it right, India can be the new darling of foreign investment for the next 20 years. Clues to look at are the passing of the much debated tax bill, which will reduce taxes considerably and spark an investment wave. If not, India will remain the bridesmaid, but never the bride, and will miss out on the greatest opportunity in its independent history to truly assert itself as a global trade and manufacturing dynamo. It needs to act within the next three-four years or remain behind. If it does get its act together, India has the potential to outperform China.

Primary Agreements:
Many of India’s DTAs (such as with the United States) are out-dated and need to be renewed. A proposed free trade deal with the European Union has been postponed yet again, and the country needs to act on these opportunities instead of constantly negotiating. That said, the India agreement with ASEAN is key, as is its agreement with Singapore as a trade hub to permit access onwards through the China-ASEAN DTA to Chinese markets. India also reaches out to the smaller Asian nations through the South Asia Free Trade Agreement which reduces tariffs to zero amongst participating nations as well as the South Asia Association for Regional Cooperation.

Indonesia, with a population of a quarter of a billion, is one of Asia’s largest countries and possesses a wealth of mineral and related commodities. A well educated population, rising middle class and a relatively benign government are making the country an investment hotspot, both with entities elsewhere in Asia, and those from close by Australia.

With the Jakarta-Singapore airline route the fastest growing in the world, the country is poised to provide high levels of sustainable economic growth and returns for the next decade and beyond. Infrastructure weaknesses exist, but are being dealt with. However, away from Jakarta, which is reasonably predictable, the rule of law outside the capital city can become a strange mix of 19th Century Dutch civil law, Muslim Shariah, and local tribal elders making decisions. That said, the country appears to be on a sound footing and is a good bet for investment and development as both a production and consumer base for foreign investors.

Primary Agreements:
An active member of ASEAN, the ASEAN agreements apply – as do Indonesia’s many DTAs and BITs which can be accessed here.

Japan has had a few years of upsets with the recent earthquake, tsunamis and nuclear power issues, coupled with the need for reform in its pensions system and a rapidly aging population. Prime Minister Shinzo Abe seems to be getting to grips with the economic policies needed to lift the nation out of the doldrums, while the recent awarding of the 2020 Olympics to Tokyo will provide a much needed feel-good factor and domestic stimulus. With its businesses looking beyond China (where they are feeling unwelcome) and deeper into Asia for expansion opportunities, Japanese MNCs are becoming more adventurous. If economic reforms can match the Japanese expansion into Asia, the country should power past its problems and regain growth traction.

Primary Agreements:
Japan is a proposed member of the RCEP as well as the TPP agreement. These could further shape the destiny of Asia-Pacific trade and, if concluded, will see Japan as a major partner in this. Japan also has a comprehensive economic partnership agreements with ASEAN and a significant double tax treaty with India – where it has made considerable advances already into a number of key industries such as automotive.

Landlocked Laos is still very much a junior partner of ASEAN, although the country is attracting some foreign investment in labor intensive industries, mainly from China and Thailand-based companies looking to manufacture for their own consumer markets. Infrastructure remains difficult, as does transportation – the border with China is mountainous terrain. Thailand remains the dominant trade partner.

Primary Agreements:
Laos is a member of ASEAN so the multilateral ASEAN agreements apply, however the country does have its own DTAs with China, Malaysia and Thailand, and a window into the EU through Italy. These agreements can be viewed here.

Malaysia is booming as an Asian tiger and has been very active in developing its own free trade areas and economic zones. Generally excellent infrastructure coupled with government commitments to continue to upgrade and develop the nation is seeing the country well-positioned to take advantage of its status as a major player within ASEAN. While wages are creeping up, the country remains competitive and is attracting numerous foreign investors manufacturing both for export globally as well as for the ASEAN region as a whole (and the China and India markets). Malaysia is also resource rich and continues to attract mining and related industries. It remains very much an attractive destination for foreign manufacturers looking to produce for intra-Asian and international markets.

Primary Agreements:
Malaysia is a primary player in ASEAN and the ASEAN multilateral agreements apply. The country has also entered into a free trade agreement with India and numerous other DTAs with a wide range of countries internationally, including with China, the United States and many European nations – these can all be viewed here.

The Maldives economy is almost purely reliant on tourism, and it has become a primary destination for middle class Chinese nationals. The country enjoys “preferred destination” status with the Chinese Ministry of Tourism. The nation’s tourism infrastructure is well developed and includes some of the most exclusive resorts in the world.

Primary Agreements:
The Maldives is a member of the South Asian Free Trade Area and the South Asia Association for Regional Cooperation. The tax benefits of the former are vital to the Maldives economy as nearly all resources need to be shipped in.

Much has been written about Mongolia, yet corruption and political in-fighting appear to have diluted the country’s chances of rapid development. Financial and banking scandals loom, and flip-flopping over mining investment regulations have not helped. The country remains alluring, yet in practice is a big ticket investment destination and not one for SMEs. If it can develop processing facilities rather than just selling extracted raw minerals, then its future may be brighter, but for now the government and politicians are missing a once in a lifetime opportunity.

Primary Agreements:
Mongolia is currently negotiating FTAs with Japan and South Korea. Both remain primary investors in infrastructure development in the country.

In a similar story to Mongolia, much has been made of the new Myanmar and the democratic status the country purportedly enjoys. Yet little has been developed here since the end of World War II. Even Mongolia’s infrastructure is more advanced. Consequently although romantic and alluring, the country as an investment destination, like Mongolia, remains that for big ticket investors in mining and infrastructure. It is not for the faint of heart and is 10 years away at least for being an investment destination of much opportunity for smaller companies.

Primary Agreements:
Myanmar is a member of ASEAN and the ASEAN FTAs apply. Other than that, the country has important DTAs with India, Malaysia, Singapore, Vietnam and Thailand, all of which have the potential to boost intra-Asian trade. The country also has access to the EU via a DTA with the United Kingdom, the only Western country thus far to have this status. These agreements can all be accessed here.

Nepal has been getting politically closer to China than India in recent years, encouraged by the infrastructure that China has injected into Tibet. This includes rail and road connections which open up the Tibetan and Chinese markets to Nepalese goods. The country is also a major tourist destination. Some Chinese-invested light manufacturing has been appearing in Kathmandu as a result of the need to service the Tibet markets, while many agricultural products are still primarily exported to India.

Primary Agreements:
Nepal is a member of the South Asian Free Trade Area and the South Asia Association for Regional Cooperation.

North-Korea-25North Korea
Despite all the somewhat predictable rhetoric and the need for a new young leader to assert himself, the only way to ensure the survival of North Korea as a regime is for it to open up, at least partially, to foreign trade and investment. The country in fact already provides finishing services in the textiles industry for an increasing number of well-known brand names – under the textiles quota system products with a “Made in China” label can have a percentage of that work conducted in the DPRK.

A surprising number of Western businesses already conduct business there, and Russia, China, Japan and South Korea retain trade and commercial facilities in the country, although the South Korean ones often suffer from political grandstanding. If the younger Kim can be assured of his domestic unchallenged superiority over the North Korean military, he may start to relax his thus-far aggressive rhetoric. Incredible as it seems, this man may one day be applauded at the UN if he has the will to do so (he was educated in Switzerland) and can get the re-positioning of the country right without facing challenges. For him, it is literally a matter of daily life and death until he can wrest complete control. If he survives we may yet see a more open DPRK, albeit under slowly introduced reforms. Both China and Russia would prefer to see this, and keep the prospect of reunification at bay.

Foreign investment into Pakistan remains largely a Middle East play, as investors from the West remain hesitant due to the political problems and terrorism. China however is also a major investor and has a controlling interest in the large Gwadar Port, giving China access to the Indian Ocean and oil supplies from Iran. The Pakistani economy remains agricultural based although there is a growing and highly professional IT sector. Much remains to be done to stabilize the country however, yet some signs, such as improving relations with India show some recent positive moves in the right direction. Some outsourcing of IT services to Pakistan from Europe is also taking place.

Primary Agreements:
Pakistan is a member of the South Asian Free Trade Area and the South Asia Association for Regional Cooperation. The country also has numerous DTAs in place, including with China and several European countries. These can be viewed here.

The Philippines is currently the fastest growing business process outsourcing recipient of international trade, due to its improving infrastructure, common use of English language, and low operational overheads. That said, hidden costs of doing business do have a habit of manifesting themselves, and the country remains in Typhoon Alley – meaning preparation for brown outs and occasional related problems. Factories, for example, would be well advised to maintain generator back ups (as in all emerging economies). However the country is also seeing an upswing in FDI and light industry as well as services are moving into this market.

With the government committed to infrastructure improvements and a largely well educated workforce, the Philippines is poised to enjoy the next two decades at high growth rates and as a destination for both global export manufacturing and services, as well as being a service and manufacturing hub for the rest of Asia.

Primary Agreements:
The Philippines is a member of ASEAN and as such the multilateral ASEAN treaties apply. Meanwhile, the country has an extensive portfolio of DTAs and other treaties with numerous countries internationally, including China, India, the United States and several European nations. These can be viewed here.

Singapore is the de facto services and financial hub for Asia, and is specifically attractive as a low tax cost center for businesses reaching out into ASEAN and beyond. The country imposes no tax on dividends realized externally from its territory, while its role within ASEAN makes it a magnet for multinational corporations seeking to manufacture throughout the ASEAN bloc. Singapore is also the world’s largest port in terms of shipping volume, while its stock exchange and high ranking in corporate compliance standards and transparency of business routinely make it one of the easiest and most attractive destinations for business worldwide. As a destination to reach out into the rest of Asia, Singapore’s status is second to none.

Primary Agreements:
Singapore is a member of ASEAN and takes advantage of the multilateral ASEAN treaties that exist. It also has close to 100 applicable double tax agreements worldwide in its own right, and a free trade agreement with the United States. A similar agreement with the EU is about to be ratified. Singapore’s DTAs, FTAs and BITs can be viewed here.

South-Korea-25South Korea
South Korea remains a difficult destination for foreign investors, as protectionism and a unionized workforce tend to make life awkward for investors into the country. That said, the economy has been relatively stable, if unspectacular, in performance. The nation meanwhile has seen its MNCs reach out elsewhere into Asia, and South Korean companies have been busy investing throughout the region with considerable success. Moves to include South Korea into the proposed TPP agreement however may well liberalize the domestic market to foreign investment should negotiations prove fruitful.

Primary Agreements:
South Korea has free trade agreements with both the United States and the EU.

Sri-Lanka-25Sri Lanka
Since the end of its Civil War, Sri Lanka’s economy has developed in leaps and bounds, with much needed infrastructure – much of it from China BOT projects – being put in place across the country. While the current president may have a disdain for true democracy, and the Western media harp on about war crimes, the truth is a strong leader is needed to lift the country out of poverty and back into relative prosperity at this point in its redevelopment.

With ports at Jaffna, Colombo and Hambantota all being upgraded (some extensively), Sri Lanka seems on course to develop as an Asian leopard economy and is one to watch. Opportunities are there, and cheap labor, a work force prepared to work, and a government that can and will fast-track desired projects, the future seems bright. Sri Lanka hosts the annual meeting of Commonwealth Nations this coming November.

Primary Agreements:
Sri Lanka is a member of the South Asia Association for Regional Cooperation and the South Asian Free Trade Area. Sri Lanka also has a number of DTAs, including agreements with China, India, Singapore, several Asian and European nations and the United States. These can be viewed here.

Taiwan tends to remain in China’s shadow, yet has been developing a strong IT and services sector over the years. It is also a major investor in mainland China in addition to other Asian nations.

Primary Agreements:
Because of its unique political position the island is not signatory to many of the usual multinational agreements, but does maintain individually recognized trade pacts with many nations worldwide, including China, Singapore and the United States.

Thailand is wielding considerable economic influence on the smaller ASEAN nations such as Laos, Cambodia and Myanmar, and remains an important destination for light export-driven manufacturing both for domestic consumption and for export throughout Asia. Yet the health and age of the monarch remain a concern, with the country prone to political upheaval and the future of the nation bound to be intensely fought over in terms of the nation’s political makeup upon the death of the King. Assuming the country can overcome what remains a politically divided nation, the future remains bright for Thailand, yet these problems remain for the time being and are real. It remains a case of wait and see as to whether the nation can fulfill its undoubted potential as a true Asian tiger.

Primary Agreements:
Thailand is a member of ASEAN and the multilateral ASEAN treaties are applicable. The country also has an extensive double tax treaty network in place, including agreements with China, India, the United States and numerous countries throughout Europe, the Middle East and elsewhere. These can be viewed here.

Vietnam has been attracting light manufacturing from China for several years now as costs on the mainland continue to increase and Vietnam’s domestic infrastructure continues to improve. With the ASEAN-China Free Trade Agreement eliminating tariffs on thousands of products, this trend of basing manufacturing in Vietnam to service the China and global markets will continue. The only drawback remains a government not yet fully conversant with international monetary policy, although the rule of law and ease of doing business in the country is rapidly improving. New free trade and economic zones along the Vietnamese coastline will continue to develop and provide a China alternative for years to come. Should the proposed TPP agreement come into force, Vietnam is likely to emerge as a major global competitor to China in the textiles industry.

Primary Agreements:
Vietnam is a member of ASEAN and the multilateral ASEAN treaties are pertinent. Vietnam also has double tax agreements with China, India, and many other countries including multiple EU members. These can be viewed here.

Clearly, Asia is evolving fast. However, the giant economies of China and India require serious reform to enable them to get back on track and start producing the 8 percent growth rates they are undoubtedly capable of. It remains to be seen how the politically driven need for wide ranging policy changes will be carried out in these countries, and much remains uncertain at this moment in time.

The real stars of the show are the emerging economies of ASEAN, including those of Singapore as the regional hub servicing the bloc, and the economies of Indonesia, Malaysia, Philippines and Vietnam. Cambodia is set to be pulled along by these others, while Thailand – which could be another big player in the growth stakes – needs political unity to achieve its goals. Of the smaller ASEAN players such as Mynamar, much infrastructure development needs to be put into place to upgrade them – a process that will take at least a decade.

The larger developed economies of Japan and South Korea look set to emerge from the doldrums, while other nations such as Mongolia appear to be in danger of missing the boat due to endemic corruption at government level. Tiny Sri Lanka is making moves to become an Asian leopard in its own right, while to the West, China’s influence on Pakistan may yet prove to be that country’s savior.

Emerging Asia is just that, and in the words of Singapore’s Prime Minister Lee Hsien Loong last week – “It would be presumptuous to think that no Asian country will join the ranks of the developed world in the next 20-30 years.”

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates, and has spent close to 30 years in Asia. He is now based in Singapore and is responsible for the firm’s development throughout Asia.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email asia@dezshira.com, visit www.dezshira.com, or download the company brochure.

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