ASEAN members should brace for multiple shocks

In the eyes of many people in the Asia-Pacific region, we are currently in the midst of some tangled economic forces: China's export surge, trade tensions between the United States and China, the Israel-US conflict with Iran, and the artificial intelligence boom.

Businesses in the region are responding fast, looking for new ways to organize production as supply chains reconfigure.

Meanwhile, the disruption in the Strait of Hormuz is not yet resolved.

The blocked shipments include crude oil to fuel the refineries, petrochemicals to feed the industrial plants and fertilizers to supply farms in Southeast Asia. This has meant regional countries have had to reassess their energy vulnerability.

Initially, the economic forecasts were very worrying: an energy crisis, low farm yields, industrial shortages and price inflation, all forecast to hinder world growth.

However, so far the economic shock has been reasonably well managed through a mix of market interventions and astute business decisions. It has helped that China has developed much cheaper energy technologies and managed to reduce its own oil consumption.

Releases from Japanese reserves, new feedstocks for refineries in Malaysia and the Republic of Korea and increased US exports have all helped the region manage the energy price and supply shock far better than it did the 1979 oil shock.

But growth in the region has slowed, fuel subsidy policies are being reviewed and rising carbon prices are incentivizing more emissions reductions. Although the global recession that was forecast has not materialized, the lesson for the region is to urgently build energy resilience with new technologies and new sources of supply.

In Southeast Asia there are developments like the ASEAN Power Grid, and proposals to connect energy infrastructure through initiatives such as the Indonesia-Singapore-Malaysia gas pipeline, the Lao-Thai-Malaysian-Singaporean electricity transmission system, the proposed submarine electricity cabling and the interest in offshore wind turbines.

At the same time, AI data centers are proliferating throughout the region. This tech shock differs from previous technology waves because agentic models are developing so fast. There is a race to build huge data centers.

There is so much that we do not yet know. Will we see AI continue to make such vast strides? How will it be used by industry, governments and people? What new products and services might it deliver? Will we really see the productivity growth that has been promised? And how will governments address the white-collar job displacement that is already underway?

There are more questions to ask about data centers. Will they continue to be built at such a large scale, and, if so, how will the demand for energy and water be met? Will they be located near energy generation or near factories and cities? How will industrial processing be priced? How can data be protected? Will the data centers be owned by big tech firms or by industrial operators?

Southeast Asian businesses are watching how China deals with AI and data centers, seeking answers to these questions.

Currently, it seems the development pace of Chinese AI models is some months behind the US, but the new models are being developed more cheaply.

Can China achieve the same scale of production and innovation that it achieved with green technology, to deliver cheaper AI and more energy-efficient data centers? What about the availability of renewable energy, the land necessary for data centers and expanding the capacity of transmission lines for electricity and fiber optic cables for data?

One big question is whether China will become a major hub for the region's data processing, or whether other countries will want their own. Would a strong regulatory regime be sufficient to guarantee data sovereignty? Will Asian users convert to either US or Chinese technology stacks, or will they aim for a dual ecosystem?

ASEAN will no doubt be looking for homegrown capability based on open-source Chinese models, but they will still need infrastructure, semiconductors, technical standards and ongoing engineering support. Singaporean AI models have adopted Alibaba's architecture; Chinese semiconductor fabrication plants are being built in Malaysia and elsewhere.

ASEAN businesses do not want to be caught up in a US-China digital trade war, but they cannot afford to wait.

The author is former governor of the Reserve Bank of New Zealand, former executive director of the APEC secretariat and a professor at Victoria University of Wellington. This article represents his own views.

The views do not necessarily reflect those of China Daily.

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