Last week set off an impressive demonstration of Asia’s regional leadership dedicated to cooperation, free trade and economic welfare.

It all started with the summit of ASEAN (Association of Southeast Asian Nations) in Kuala Lumpur, Malaysia, October 25-28, 2025, where the organization welcomed East Timor as its new member, and where Thailand and Cambodia signed a “Joint Declaration” to stop hostilities and pave the way to a permanent peace accord and a resolution of border disputes.

East Timor is a tiny country of 1.4 million people and a GDP of about $2 billion. That was a Portuguese colony for more than four centuries and, subsequently, a contested Indonesian territory that acquired independence in 2002. That small country -- with a young population – struggling with poverty and high unemployment has now joined a community of 680 million people and an economy of nearly $4 trillion.

ASEAN intends to strengthen its economic integration and to increase its intra-regional trade. The summit in Malaysia’s capital also focused on promoting digital economy, energy transition and the supply chain stability. External trade relations have also been discussed with U.S. and its large Asian neighbors.

China driving regional economic growth

As expected, most of the trade issues revolved around strong economic relations with China, ASEAN’s by far the largest trade partner.

In the first nine months of this year, the total ASEAN-China bilateral trade came in at $780 billion, accounting for 17% of China’s foreign trade transactions. That was double the trade volume China did with the U.S. and nearly 30% more than Beijing’s trade business with the E.U.

Recent upgrading of China’s free trade agreement with ASEAN will consolidate and boost this strong regional economy, driven by steady and sustained economic growth and relatively good neighborly relations.

This year, ASEAN’s economy is forecast to increase 4.5%. Similar growth dynamics are likely next year because external trade tensions will orient more business toward the regional free-trade area. If needed, ASEAN’s sound fundamentals will also allow fiscal and monetary support to keep economic activity in the upper part of the 4-5% range.

And then there is trade with China whose economy firmly remains on a 5% growth path. Beijing’s fiscal policy has become strongly expansionary with subsidized trade-in programs of digital devices and home appliances, increasing spending on public health and childcare, and rising pension benefits.

These are unprecedented fiscal measures to stimulate domestic demand, investments and service sector activities.

An easy monetary policy is financing all that, with plenty of room for further easing to stimulate demand at a time when China’s current consumer prices are falling at an annual rate of 0.4%.

ASEAN-China is a strong segment of world economy

Under those circumstances, there is no excess demand, and there should be no fear that a stronger credit expansion would destabilize the economy that grew 5.2% in the first nine months of this year. In fact, that rate of growth is quite within the range of China’s noninflationary growth potential.

China, therefore, will continue to expand East Asian trade markets. And that is a crucially important contribution to economic growth of Southeast Asian economies.

Growth contributions of Japan and South Korea – which with China make up ASEAN plus 3 group -- will be much smaller.

Japan’s economy is expected to grow around 1% this year. Unfortunately, an inflation rate of 2.9% in September indicates that the economy is operating considerably above its physical limits to noninflationary growth. Interest rates, therefore, must be raised to restore price stability by striking a much better balance between demand and supply in labor and product markets.

And that will be a major downward adjustment toward Japan’s potential growth rate of 0.4%. As a result, Japan’s ASEAN trade partners can expect that Japanese businesses will have to export to ride out the impending recession of domestic demand.

South Korea is in a better position, but its weak domestic demand this year does not bode well for its Asian trade partners. Things could change though as easing monetary policy and rising real incomes rev up household consumption and investments in the months ahead. Most probably, a revival of import demand can be expected in the first half of next year.

The best outcome for ASEAN economies would be a closer trade relationship among China, Japan and South Korea. That could speed up Japan’s economic adjustment and the recovery of Korean domestic demand, making the ASEAN plus 3 a new powerhouse of world economy.

Sadly, such an economic policy coordination is unlikely to happen. Japan and South Korea cannot get over the Japanese colonial rule from 1910 to 1945 and the history of Tokyo’s war crimes. China fought the Japanese occupation from 1931 to 1945, with millions of Chinese casualties and still unresolved Japan’s possessions of Chinese territory.

For all that, Japan offered regrets but no formal apology. And in its latest defense report of last July, Japan considered China its biggest strategic challenge.

As a result of all that, ASEAN plus 3 will essentially remain an increasingly strong ASEAN-China free-trade area.