## A COOPERATIVE ADVANTAGE

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### Overview
- Southeast Asia (11 countries, combined population of more than 700 million) was a major beneficiary of the postwar rules-based multilateral order that increased trade and openness and integrated the global economy.
- The shift from rules-based multilateralism toward geoeconomics and strategic interdependence threatens the region, but Southeast Asian states are strongly motivated to find ways to manage a fracturing global economy.
- A return to the old rules-based multilateral order is unlikely; a more feasible approach is a system that is “multilateral enough,” built around aligned incentives and flexible coalitions.

### Southeast Asia’s achievements under the rules-based order
- Key broad progress indicators:
  - Per capita GDP has increased more than fivefold.
  - Total GDP has expanded eightfold.
  - Extreme poverty, measured as the fraction living on less than one international dollar a day, has fallen from more than half to one-sixteenth.
  - Life expectancy at birth rose a full decade.
  - Adult literacy increased by 20 percentage points.
- Structural advantages from the old order:
  - A level playing field, peaceful dispute resolution, and cooperation in the face of shared challenges reduced incentives for costly displays of power and enabled specialization.
  - “Factory Asia” emerged as export-oriented manufacturing clusters expanded across Southeast Asia together with Japan and Korea and—beginning in the late 1990s—China.
- International accords and their effects:
  - The 1996 Information Technology Agreement (WTO-mediated) eliminated tariffs on IT components and products, enabling Indonesia, Malaysia, the Philippines, Singapore, and Thailand to become manufacturing and assembly hubs for semiconductors, hard drives, and consumer electronics.
  - Starting in 2005, after a 10-year phaseout of advanced-economy protectionist import quotas on textiles and apparel, Cambodia, Vietnam, and Indonesia attracted considerable foreign direct investment for those industries.
- Trade statistics:
  - Trade within the Association of Southeast Asian Nations amounts to 25 percent of GDP.
  - Trade with the rest of the world fluctuates between 80 and 90 percent.
  - By contrast, trade among European Union members exceeds 60 percent of the bloc’s GDP, more than its external trade of 40 percent.

### The three cascading shocks reshaping the system
- The China shock
  - Origin: China’s 2001 entry into the WTO exposed large markets to a surge of inexpensive manufactured imports.
  - Economic character: For an importing country, the China shock is a supply shock — imports increase in quantity and quality at any given price (supply curve shifts out).
  - Distributional effects: Prices fell and quality rose, benefiting consumers but harming firms exposed to import competition; factory closures and job losses hit middle-class communities.
  - Policy implication: Instead of countering the shock with tariffs or quotas, the importing country would do better to redistribute some gains from beneficiary sectors to affected workers and communities.
  - Interaction with industrial policy: China’s state-guided industry reallocation, combined with other East Asian industrial policies (South Korea, Japan, Singapore), contributes to global imbalances and fuels concern about anticompetitive behavior.
- The US shock
  - Nature: A demand shock comprising tariffs, sanctions, export restrictions, and investment controls directed not at a single adversary but at other economies more broadly.
  - Example: Vietnam had been sending a third of its goods exports to the US and was initially hit with a 46 percent tariff (later changed to a baseline of 20 percent, with 40 percent for some products).
  - Reach: Even Singapore and South Korea, which had free trade agreements with the US, suffered tariff actions.
  - Structural shift: US trade policy has shifted toward fundamental skepticism about trade itself, using trade restrictions not simply as temporary tools but as a persistent policy posture.
- The multilateralism shock
  - System-wide effect: As the US began to repudiate the multilateral order, other advanced economies began to wield industrial policies and treat gainful interdependence as strategic leverage.
  - Outcomes: Trade morphed from productivity competition into disputes over chokepoints and balance-of-payments concerns; rules-based multilateralism was increasingly seen as a costly global public good.
  - Measured disruptions:
    - More than 70 percent of cross-border trade still follows WTO rules.
    - Disruptions to trade by individual nations have risen more than threefold since 2019.
  - Game-theoretic framing: The multilateralism shock resembles a prisoner’s dilemma or an “epic fail” outcome.

### The “multilateral enough” alternative and coalitions
- Concept:
  - “Pragmatic multilateralism”: like-minded states form coalitions to pursue particular goals even without universal consensus.
  - A successful coalition must be built around the three core principles: a level playing field, peaceful dispute resolution, and cooperation in the face of shared challenges.
  - A coalition that meets these conditions is “multilateral enough”; the global environment can remain loosely organized and flexible.
- Examples of multilateral-enough coalitions:
  - ASEAN (focused on specific challenges of its members; recently accepted Timor-Leste as a member).
  - Regional Comprehensive Economic Partnership (ASEAN plus China, Japan, and South Korea).
  - Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a more eclectic group that recently added the UK.
  - WTO’s Multi-Party Interim Appeal Arbitration Agreement:
    - Set up in 2020 to settle trade disputes after the WTO Appellate Body ceased to function.
    - Began with 16 signatories and has grown to more than twice that number across six continents.
- Geographical and institutional flexibility:
  - Coalitions can be regional or cross-regional; success depends on aligned incentives rather than binding universal rules.
  - International institutions such as the IMF can play an independent role by keeping these flexible topologies open and inclusive.

### Policy implications and recommendations for Southeast Asia
- Preserve and adapt the core principles of the old multilateral system (level playing field, peaceful dispute resolution, cooperation on shared challenges) within flexible coalitions that are “multilateral enough.”
- Favor redistribution strategies to mitigate the China shock:
  - Redistribute some gains from sectors that benefit from trade to workers and communities hurt by trade-driven supply shocks, rather than relying principally on tariffs or import quotas.
- Use coalitions and institutional mechanisms to:
  - Maintain open and inclusive platforms for dispute resolution and cooperation even as global consensus erodes.
  - Avoid ossification into competing spheres of influence by fostering flexible multilateral topologies based on aligned incentives.
- Leverage ASEAN and regional trade agreements (RCEP, CPTPP) as building blocks for maintaining economic integration and shared rules where universal multilateralism is not achievable.

*Source: “A COOPERATIVE ADVANTAGE,” Danny Quah, Finance & Development, September 2026.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/09/quah.pdf_