ASEAN and China

Written by Anne Booth.

The Association of Southeast Asian Nations (ASEAN) was formed in 1967 as a regional grouping comprising five non-Communist governments in Southeast Asia, Indonesia, Malaysia, the Philippines and Thailand. Although the grouping did not initially have any explicit economic goals, in 1976 the five heads of state declared their intention to seek closer economic cooperation, although progress was slow over the next 15 years. In 1992, the ASEAN Free Trade Area was inaugurated; the 1990s also saw the enlargement of the group to ten members. Between 1990 and 2005, the percentage of total merchandise trade which the ASEAN states conducted with one another grew from 17 per cent to 25 per cent; from 2006 to 2016 it has fluctuated between 23 and 25 per cent. There has been a progressive reduction in tariffs over the past two decades, and it is estimated that now over 70 per cent of intra-ASEAN trade takes place at zero tariffs, although non-tariff barriers are growing.

At the turn of the millennium, the ASEAN states were conducting only about five per cent of their total merchandise trade with China. After China joined the WTO in 2001, trade analysts argued that China would pose both opportunities and threats to other economies in Asia and in other parts of the world. In the ASEAN context, the main opportunity was seen as the rapidly expanding market in China for imports of goods and services from ASEAN countries. A further opportunity was offered by China’s rapidly developing capital goods industries which could provide plant and equipment more cheaply than firms in Japan, Europe or the USA.

On the threat side, it was feared that Chinese exports of a range of labour-intensive manufactures (textiles, garments, footwear, toys, low-end electronics) would out-compete those from the ASEAN economies in the major OECD markets. When an ASEAN-China free trade agreement was first proposed by the then Chinese premier, Zhu Rongji in November 2000, there were also worries that Chinese imports would flood into the ASEAN economies, putting the local industries under pressure. These worries received some confirmation from the very rapid growth in China’s global exports between 1999 and 2003, compared with the sluggish performance in the ASEAN states over those years. Some commentators argued that given the broad similarity in trade structures and the fundamentally competitive nature of Sino-ASEAN economic relations, there were more possibilities that China and ASEAN would compete, rather than complement one another. In addition, as a result of China’s abundant supplies of cheap labour, huge investments in infrastructure and improvements in the legal and regulatory environment, ASEAN countries were worried that foreign investment would flood into China at the expense of other parts of developing Asia. Not only would new FDI be increasingly directed to China rather than to the ASEAN economies, but large multi-nationals which had established export bases in Malaysia, Thailand and Indonesia would be tempted to relocate to China to take advantage of lower production costs, better logistics and the large domestic market.

In the early years of the 21st century, there seemed to be more evidence to support the pessimists, who worried about the potential costs from China’s rise, than the optimists who stressed the opportunities. Studies using computable general equilibrium models or other quantitative techniques showed that China would continue to take market share in a number of labour-intensive products from other developing countries, including those in ASEAN. Unsurprisingly, the product categories where Chinese competition would be most fierce were textiles and garments, footwear and some electrical products.

The ASEAN countries’ trade with China grew rapidly, both in absolute terms and as a percentage of their total merchandise trade. By 2015 the ASEAN countries were conducting around 15 per cent of their total merchandise with China, although this was a smaller percentage than intra-ASEAN trade (24 per cent). The rise in China’s share of ASEAN’s import and export trade was offset by a fall in the relative share of Japan, the EU and the USA, although in absolute terms ASEAN trade with all three continued to expand. Contrary to the pessimistic predictions of the early 2000s, inflows of foreign investment to the ASEAN states have accelerated in recent years and relative to population, the ASEAN countries have been attracting more investment than China. Very little of these inflows have come from China; only about seven per cent according to the ASEAN Secretariat. Particularly in the case of Indonesia, there appear to be large disparities between investment commitments from China and actual inflows.

But in recent years, China has been running a large trade surplus with the ten ASEAN states. According to the Chinese statistics, in 2015, total trade with the ASEAN countries totalled $471.6 billion dollars, with the surplus of exports over imports amounting to $82.9 billion, or around 14 per cent of total surplus which China was running with the global economy. The 2015 figures (published in the China Statistical Yearbook, 2016) show that the largest surplus in merchandise trade was with Vietnam, where Chinese exports to Vietnam exceeded Chinese imports from Vietnam by almost $36 billion. This accounted for a significant share, almost 44 per cent, of the total Chinese surplus with the ASEAN countries in that year. China was also running a substantial surplus on merchandise trade with Singapore and Indonesia. The recent evidence indicates that there are large differences in the extent of trade with China among the ASEAN countries; total merchandise trade (imports and exports) between Malaysia and China amounted to around 100 billion dollars, compared with less than five billion dollars in Cambodia, Laos and Brunei. According to the Chinese data, the ASEAN countries as a block accounted for around twelve per cent of China’s total merchandise trade in 2015.

The issue of trade with China, and the resulting surpluses and deficits have provoked more attention in some ASEAN countries than in others. In Thailand and the Philippines, political leaders have been moving closer to China in recent years, in part because their repressive domestic policies have been attracting unfavourable attention in the western media. Their governments are encouraging closer economic relations with China, and appear to be unconcerned about the resulting deficits which are not very large, and which they attribute to normal market factors. In Indonesia there has been hostility against the Chinese minority in the country since independence; many indigenous Indonesians think that their role in business is the result of the favoured treatment they received in both the colonial era and under Suharto. This resentment has carried over into growing trade and investment links with China and is now being exploited by some political groups to their own advantage.

Anne Booth is Professor Emerita at SOAS, University of London. An expanded version can be found in Journal of Self-Governance and Management Economics 6(1), 2018
pp. 33–63 (available on line). Image credit: CC by Gunawan Kartapranata/Wikimedia Commons.