China’s emergence and its impact on ASEAN

Many analysts claim that China is the future of Asia and of the world. This can be seen from the statistical data of China’s economic growth, China’s defense budget, China’s demographic data and in its participation in regional and global cooperation, such as economic cooperation with the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC). In a regional context, China and the ASEAN countries have agreed to establish the free trade zone of China and ASEAN (ASEAN-China Free Trade Area, ACFTA) which started in January this year China’s participation in world economic forums shows that China has become the engine of the world economy. China had US$1.8 trillion of foreign exchange reserves in 2008 and is the third-largest exporting country in the world, with a volume of $3.24 trillion. China is the largest exporting country in Asia. This fact places China in an important position and gives it and important role in the world economy.

The rise of China is not going to happen without impacting on the world and particularly on the 10-member Association of Southeast Asian Nations (ASEAN). This region may be among the most affected by China’s economic emergence.

How will China’s growing economy affect the ASEAN countries? Two of the ways in which China’s emergence is affecting the economies in ASEAN are in the production of similar but cheaper export products and the ability of China to attract more foreign domestic investment (FDI) than any of the countries in the ASEAN.

The sheer size of China’s domestic market has an indirect effect on the economies in the ASEAN. China, with its 1.3 billion people, compared to the whole of the ASEAN population of around 500 million, will attract investors and businesses who want to locate or relocate their businesses to China to benefit from its huge domestic market.

China’s domestic market and its economy are larger than those in the whole of the ASEAN region. The smaller nature of the domestic consumer markets of these countries makes them dependent on exports to boost their economies. With 1.3 billion people, China affords an abundant supply of cheap labor, which will lead to a low-cost economy. Currently, China produces the same goods for the global marketplace at a cheaper cost than most of the ASEAN countries.

As a result, most of the countries in Southeast Asia have lost their market share to China. This is what is most feared with the full implementation of the ACFTA in 2010, especially in those countries that have similar goods and markets globally.  It is feared that China could flood their markets with the same goods at cheaper prices, and thus they will lose their market share, losing their jobs and their competitiveness.

Another impact of an emerging China on the ASEAN countries is its ability to pull more foreign direct investment (FDI) than any of the countries in ASEAN. China attracted $92.4 billion worth of foreign direct investment in 2008, a 23.6 percent increase from 2007 while ASEAN countries attracted $60.17 billion in 2008, a decrease from $69.48 billion in 2007 due to the global economic crisis.
But the rise of China will not only have a negative impact on the countries in the region but also a positive one, but mostly in the long term. As China continues to grow economically, it will serve as a huge market for exports from the ASEAN countries.Most countries in Southeast Asia tend to see the Chinese market as an important avenue to increase exports, particularly of agricultural products such as rice, rubber, sugar and palm oil.

Another important reason why an emerging China is beneficial to the ASEAN is that the Chinese market will serve as an alternative and a cushion for ASEAN countries.For example, when the US market had negative growth due to its financial crisis in 2007, China still recorded high economic growth.

One of the main reasons for accelerating the ASEAN-China economic integration is to take advantage of China’s emergence and its huge domestic market. The full establishment of the ACFTA this year will help ASEAN and China benefit from each other. China’s economy lacks natural resources while ASEAN countries have an abundance of natural resources.This lack of natural resources on the part of China could have a tremendous impact on their growth and development efforts in long run. As a further advantage of the ACFTA, ASEAN countries can benefit from an increasing number of Chinese tourists due to the rise of a Chinese middle class.

The existence of a huge ethnic Chinese population in the ASEAN countries can be leverage to take advantage of China’s emergence. The Diaspora Chinese (David N. Abdulai, 2007) can be guidance and contacts for the Chinese to invest in the ASEAN region and this will attract China’s attention to concentrate more on ASEAN countries.

Indonesia is one of the ASEAN countries that can benefit from China’s emergence through the implementation of the ACFTA. China can become one of the targets of Indonesia’s exports. However, if Indonesia does not prepare itself for the full implementation of the ACFTA, it only will negatively affect its domestic market. China’s cheaper products will flood the Indonesian market and, in the end, extinguish domestic industries. In 2008, imported products from China took over 70 percent of the domestic market share, which was previously controlled by domestic enterprises. 

Written by Ali Rama