Trade and political tensions are quickening China’s integration with ASEAN’s economy. But even as countries in the bloc vie for Chinese trade and investment, China knows they won’t allow themselves to be locked into its embrace
The current trade war between the United States and China is causing considerable stress to businesses in the line of fire. Even after the US midterm elections next month, the tension will not go away.
Anti-China sentiment is growing in the US. Peter Navarro, one of US President Donald Trump’s top trade advisers, described “death by China”.
Manufacturers in China, both Chinese and non-Chinese, are reacting. Distribution centres for consumer products are shifting back to Hong Kong from China. Mainland electronics companies are relocating facilities to Taiwan so that final products exported to the US are not from China and therefore, subject to rules of origin, not liable to new US tariffs.
As US Customs tightens compliance with rules of origin, trade diversion from China to Southeast Asia and other countries will be followed by investment diversion. China will instead supply components to countries exporting to the US. The trade war is accelerating a process already underway, which is the relocation of lower value-added manufacturing activities from China to Southeast and South Asia, and increasingly also to Africa.
We can expect China to give greater emphasis to the Belt and Road Initiative as it girds itself for a prolonged trial of strength with the US. Chinese leaders do not want a fight with the US and are prepared to meet US demands more than halfway, but they cannot afford to be humiliated in the eyes of their own people. For decades to come, China’s growing economic, political and military weight is bound to create episodic instability in relations with the US, Europe, Russia, India and Japan.
Asean as beneficiary
As the world adjusts to a shifting geopolitical landscape, the greatest beneficiary is Asean. Asean is non-threatening to the major powers. The variable geometry of Asean enables it to adjust to regional stresses and strains by sometimes tilting in one direction, sometimes in the other. The current trade war has made Asean an attractive alternative or supplementary manufacturing base to China.
Asean is perfectly positioned. China’s growing importance as an importer is a gradual sea change that has yet to be widely noticed. It will not be many years before China becomes the biggest market in the world, not only for raw materials and food, but also for manufactured products and services. This will have profound consequences for global trade, economics and politics.
In November, Shanghai will host the first China International Import Expo. It will be on a massive scale and a signal to the world: Asean, which has a free-trade agreement with China, is becoming a major export manufacturing base not only for advanced economies but also China.
The integration of the Chinese and Asean economies is well underway. When President Xi Jinping announced the Belt and Road Initiative in Jakarta in October 2013, he expressed the hope that China’s bilateral trade with Asean would reach one trillion dollars by 2020. For this target to be reached, physical connectivity has to be improved, hence the importance of Belt and Road projects. Border procedures have to be further simplified. China-ASEAN logistics are nonetheless improving year by year, enabling a more complex division of labour. The 10 countries of Asean are seeing the benefits and vying with one another for Chinese trade and investment.
Vietnam
Vietnam has become China’s most important trading partner in Asean. This may come as a surprise to those who have only read about the tensions between the countries over their competing claims in the South China Sea. The Friendship Pass between Vietnam and China, once bitterly fought over, is now worthy of its name. Vietnam’s costs are much lower than China’s; its workers no less hardworking or intelligent. It is also skilfully exploiting its geopolitical position as a counterweight to China in the eyes of competing powers.
Before Donald Trump’s election as president, the US encouraged Vietnam to join the Trans-Pacific Partnership for precisely this reason. Institutionally, Vietnam hews close to the Chinese model. Like China, it is moving determinedly against rampant corruption. Despite similarities to China, however, Vietnam defines its own identity in contradistinction to China. Unlike the Chinese Communist Party, which has split many times in its history, the Vietnamese Communist Party, with as long a history, has never split. Vietnam is set to become an economic powerhouse in Asean.
Thailand
On the surface, Thailand’s political instability will persist. General elections in February next year will not restore the country to full democracy because the army remains dominant. Many Thais think this is a good thing. A new king is asserting a new position which will take time to clarify. Beneath the surface, however, Thai society is remarkably stable. Thailand’s economic prospects are bright. It benefits from China’s rise without having a common border with China to complicate bilateral relations. A high-speed rail link connecting Bangkok, Vientiane and Kunming is due for completion in 2021. Thailand also maintains good relations with the US, with which it still has a security alliance. Japanese companies feel the most comfortable in Thailand. Thailand’s location gives it a natural centrality in Southeast Asia.
Laos
The Mekong, once a river dividing two worlds, now connects China to Myanmar, Thailand, Laos, Cambodia and Vietnam. Between Vietnam and Thailand are Laos and Cambodia. Laos, which endured more bombing than all of Europe during the second world war, is making steady economic progress. Many bridges across the Mekong link it to Thailand.
China is building fast rail from Yunnan to Vientiane at great speed.
