Amid a new world trade order, the Asia Pacific region is emerging as a centre of growth and opportunity. Australia must double down on its regional economic ties to thrive during this great wave of industrial reconfiguration.
Key points:
- Over the next decade, the Asia Pacific region will be the epicentre of global economic growth.
- Australia's economic strategy must seek to diversify and deepen its relationships with emerging markets in the region to reduce dependence on China and enhance regional stability.
- Expanding two-way capital investment flows is vital to boosting Australia's productivity and economic performance.
Is this a watershed moment for Australia’s economic relationships in the Asia Pacific region? There’s a raft of reasons to think so. Globally, geopolitical insecurities are rising, multilateralism is declining, and established alliances are under strain. As we re-examine existing economic and security ties, our domestic economy is at an inflection point.
The 2025 federal election result provides some certainty over the next few years – and there’s much for Australia to think about. We have an ageing population, a tight labour market, and productivity that is barely keeping its head above water – and it’s been that way for more than a decade. Our nation needs a plan for long-term growth.
Against this backdrop, a profound global economic restructure is happening.
PwC’s Value in Motion research reveals that over the next decade, the global industrial system will undergo complete structural transformation. Megatrends such as climate change and technological disruption will reshape the global economy, forcing us to rethink industries, and transform business models, offerings and capabilities. This transformation will release tens of trillions of dollars into the global economy: in 2025 alone, AUD$11 trillion (USD$7.1 trillion) is expected to change hands as a direct result of industry reconfiguration.
The big news for Australia is that more than 40% of this value will come from our near neighbours in the Asia Pacific (almost $4.7 trillion) region. PwC modelling also shows the region's economy could be up to 12% bigger by 2035 if it catches an AI-fuelled productivity wave and seizes decarbonisation opportunities. There may never be a more compelling case for Australia to pivot harder and faster towards our neighbouring economies.
The task ahead is clear. We need to strategically diversify our trade and investment portfolio within the Asia Pacific region. This diversification presents an opportunity to bolster regional influence while mitigating dependence on any single partner. Yes, there’s likely to be short-term economic costs as we move away from traditional buyers of Australian exports; but the shift is necessary.
In this article, we explain why Australia needs to develop deeper economic ties across the region, including greater, more diversified capital flows and trade. First, however, we look at why the Asia Pacific region’s on the ascendency.
The size of the prize
In 2025, Asia and the Pacific region accounts for almost half of global GDP (in terms of purchasing power parity), up from approximately one third just five years ago. By 2030, Asia’s consumers are forecast to reach three billion.1 By 2040, Southeast Asia will become the world’s fourth-largest economy. Asia’s rise is not just rapid — it’s accelerating.2
There are several reasons for this. Many emerging economies such as India have undergone major economic development, shifting away from low productivity agriculture. At the same time, China has asserted its dominance in the region leveraging capital flows into near neighbours to support – and influence – their economic development. China’s transformation from low-cost, labour-intensive manufacturing to advanced, high-tech industries rests heavily on investment in infrastructure and industrial projects across Asia.
The ‘China Plus One’ strategy, for example, allows that nation to mitigate supply chain risks by offshoring manufacturing and supply chain operations to multiple destinations, including to Southeast Asia. In recent years, China has solidified its economic influence and established a dominant position in regional and global supply chains.
More recently, this trade position and the strategy that underpins it were the primary target of refreshed US tariffs, trade and foreign policies. The changing economic relationships in the Asia-Pacific region should sound warning bells in Australia: we need to compete in the region in a way we haven't before. That doesn't just mean bringing capital to the table; it means reshaping our regional economic strategy.
Asia dominating new domains of growth
The Value in Motion research shows that, in most zones of economic activity in the next decade, the Asia Pacific region punches well above its weight.
Our modelling found megatrends such as climate change, technological disruption and demographic shifts are colliding, industries are reconfiguring, and new ‘domains of growth’ are emerging. These ‘domains of growth’ are markets or value pools organised around essential human needs through ecosystems and value chains. In other words, companies will be defined not by what they produce, but by the problems they solve.
Take the domain ‘fund and insure’, for example. Organisations are now fundamentally rethinking how capital is deployed, managed and insured. Consider how Apple expanded from consumer electronics into Apple Pay (that is, contact payment solutions), Apple Wallet (all-in-one digital financial solutions), Apple Card (a digital-first credit card), and now Apple Pay Later.
As a domain, ‘fund and insure’ will be worth an estimated USD$17 trillion globally by 2035, and almost one third of this value (USD$5.14 trillion) will be created in the Asia Pacific region. This is comparable with the US (USD$5.54 trillion), and more than Western Europe (USD$3.34 trillion) and the UK (USD$0.75 trillion) combined.
Australia is in prime position to compete in the region’s ‘fund and insure’ domain. In addition to our long-standing advantages when investing in the Asia Pacific region (think proximity, shared times zones, and cultural overlap); we have a vast pool of superannuation funds seeking long-term investment opportunities (Australia is soon to be ranked second in the world for retirement savings). Plus, we have a fast-growing private credit ecosystem (worth approximately AUD$40 billion) emerging among asset managers, banks and insurers.
Looking ahead, expect to see novel approaches to risk, valuation and portfolio management from institutions in capital markets, as well as private equity and principal investors.
Overcoming capital shallowing
More than a decade ago, PwC research found only 9% of surveyed Australian businesses operated in Asia, and 65% had no intention of changing their stance. Fast-forward to 2025 and the region is now the trade hub of the world, and yet Australia’s economic relations with it remains relatively unchanged.
During this period, Australia was held back by capital shallowing. Falling capital-to-labour ratios worsened Australia’s already-poor labour productivity and hurt living standards. In fact, Bank of International Settlements research estimates roughly half of all productivity growth slowdown in advanced economies in the 2010s can be attributed to capital shallowing and chronic investment weakness.3
The best way to reverse this trend is to promote better two-way Foreign Direct Investment (FDI) between Australia and our Asia Pacific neighbours. But to date, Australia’s capital investment in Asia is underwhelming. While we’ve long been alive to opportunities for trade flows, our capital investment in the region has been woefully low, and Asia currently comprises around only 16% of Australia’s capital connections.
Our level of investment is failing to keep pace with growth in the region (even as we’ve doubled the value of our investments into major Asian economies from AUD$221 bn to AUD$442 bn over the past decade). Nor does it stack up when compared with other outbound investments.
Australia’s investment in Southeast Asia, for example, accounts for only 3% of our total outbound investment (2022), compared with 29% headed for the US, and 23% to the UK. Our investment in the whole ASEAN region is less than our investment in New Zealand. Nor has this investment been consistent. FDI to Southeast Asia fell off a cliff from 2019-21, reflecting widespread divestments across mining, banking and aviation at the time, and it has never fully recovered.
The underinvestment goes both ways, and inbound investment from the Asia Pacific remains a major stumbling block for Australia. It’s clear that we need to forge deep and lasting relationships with our neighbours in Asia, starting with increased capital investment flows in both directions.
Strengthening Australia’s regional influence
Now’s the time to reshape our regional economic strategy.
We have a network of 18 free trade agreements to give us preferential access to fast-growing Asian markets, and yet our two-way trade remains dominated by China (~30%), making us vulnerable to shifts in Chinese demand.4 By directing greater FDI into infrastructure, technology and energy partnerships in countries such as Indonesia, Vietnam and the Philippines, we diversify our trading relationships and spread our risk while reinforcing regional stability.
Certainly, the demand is there. Many parts of the Asia Pacific region need infrastructure developments such as public transport, water and waste sanitation systems, which Australia’s well-placed to provide. From financing electric buses and wind farms in Vietnam, to sourcing submarine internet cables in the Coral Sea, to establishing digital cash programming in Fiji, there’s enormous opportunities for Australia’s businesses to invest in infrastructure development and capacity building.
Importantly, increasing FDI flows to and from theregion promotes deeper partnerships and more enduring relationships. It gives us ‘skin in the game’. By focusing on capacity building, co-investing and co-financing development projects, we can create new export pathways and bolster economic resilience, while lifting living standards right across the region.
Right now, China is leading the domain creation league table in the region. In electric vehicles (EVs), for instance, China controls much of the global supply chain for lithium-ion batteries (a key component of EVs), as well as most of the mining and refining processes for the critical minerals required for these batteries. Now that China has expanded into designing and manufacturing EVs, they’re dominating the global EV market.
Bringing our neighbours nearer
What does this mean for Australia? We need to rethink our economic relationships in the Asia Pacific region and seek to capture value in new and innovative ways.
Forging deep and lasting relationships with our near neighbours means increasing capital investment flows in both directions, and cementing Australia’s role as a committed and long-term partner in the region’s economic development. Underinvestment, on the other hand, could see us become increasingly isolated as other global players dictate the terms of economic and geopolitical engagement.
Authors
Value in Motion
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