In recent conversations last month with government officials, policy wonks and businesspeople from Thailand, Indonesia and Malaysia about their country’s political and strategic future, I received the distinct impression that the implications of China’s rise was at the forefront of their minds. Although only a couple of people used these words, a widespread perception is that China’s ‘economic domination’ of Southeast Asia is already happening and all but assured. Wary as they remain about China’s rise, the Middle Kingdom will be too seductive and overwhelming an economic partner for old strategic alliances and partnerships to survive in their current form into the future.
To be sure, there is disagreement about timeframes. Some believe Chinese economic (and therefore strategic dominance) in Southeast Asia could occur this decade; others point to a longer time horizon. Either way, the trends appear obvious. But are they? In reality, hard statistics about Chinese trade and investment activity in these key Southeast Asian states tell a much more uncertain story.
Let’s begin with foreign direct investment into these still developing Southeast Asian economies. It is essential if they are to reach middle-income status in the case of Thailand and Indonesia, and transcend it in the case of Malaysia.
Taking 2005 to 2011 as two years for comparison, Chinese FDI into Indonesia grew from $US57 million to $US592 million. In Malaysia, it has increased from $US56 million to $US95 million. The figures for Thailand are $US4.8 million to $US230 million respectively.
Chinese FDI is clearly becoming more important. But there are a couple of things to note. First is the fact that Chinese FDI into these countries is still small compared to other major investor countries.
Take Indonesia for starters. In 2005, Chinese FDI constituted 3.6 per cent of all FDI into the country. Despite the absolute growth in Chinese FDI, Chinese FDI in 2011 was only 1.2 per cent of all FDI into the country. In contrast, Japan was behind over 27 per cent of all FDI into Indonesia in the same year. Singapore was behind 42.8 per cent, the UK 5.8 per cent, and ASEAN (Association of South-east Asian Nation states) as a whole behind 43.3 per cent.
The absence of Chinese FDI dominance is also clear in Thailand. In 2006, the figure was a tiny US$15.8 million, compared to US$230 million in 2011 – large growth in absolute terms. But in relative terms, the story is different. In 2011, cumulative (or outstanding) Chinese FDI into Thailand was US$1.23 billion. In comparison, Japanese share of cumulative FDI was US$46.9 billion, the EU’s share US$ 25.9 billion, Singapore’s share US$24.11 billion, and America’s share US$13.4 billion. ASEAN’s share as a whole was US$27.68 billion.
To complete the trilogy, let’s take Malaysia. In 2005, Chinese FDI into the country totalled US$56.7 million, rising to US$95.1 million at the end of 2011. This represented about 0.5 per cent of all FDI into Malaysia in 2011. In comparison, Japan accounted for over 15 per cent of FDI in 2011, South Korea just under 8 per cent, the US and Singapore just under 4 per cent respectively and Saudi Arabia just over 3 per cent.
Indeed, Chinese FDI into ASEAN trade-dependent countries with relatively open economies (Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines) have generally increased by very similar levels to increases in intra-ASEAN FDI over the past decade – around 22-23 per cent per annum. This means that Chinese investment is an important component of regional investment, but by no means dominant. In fact, Japan and Singapore are far more important FDI sources for the region than China, and will remain so for the foreseeable future.
Let’s now turn to trade. Volume of trade with China by all these three Southeast Asian countries is rising rapidly. Even then, two-way trade growth between these countries on the one hand and China on the other has generally matched intra-ASEAN trade growth and growth between ASEAN countries and the other two East Asian giants (Japan and South Korea) – all growing at about 30 to 35 per cent per annum over the past decade. Once again, we need to look behind the headline figures to work out what is really going on.
One can find a powerful clue in the fact that when the consumer economies of the US. and EU stagnate, trade between China and these three ASEAN countries decline or else stagnate in absolute terms (as occurred in 2009-2010.)
What does this indicate? Even after decades of rapid regional growth, it is often missed that the domestic consumption markets of the US and EU are over $US11 trillion each, compared to a Chinese domestic consumption market of under $US3 trillion respectively. After all, the genuine consumer class in China — consumers with the buying power of middle classes in middle- and high-income countries — number less than 100 million.
Moreover, booming trade with China merely reflects the fact that regional and Western export manufacturers have largely outsourced many stages of production to the ASEAN 3 (ASEAN China, South Korea and Japan) countries and have done so since the 1990s. This is clear from figures indicating that America’s deficit in manufactured goods is almost entirely with Asia, while almost all of America’s trade deficit with China is in processing trade (in contrast to ordinary trade, where the product is solely produced in the one country before being exported.)
The recent difference — particularly since early this century — is that China’s rise has caused many firms to relocate export-orientated manufacturing processes from countries such as Thailand and Malaysia to China’s Pearl River Delta region. This is reflected in the fact that around two-thirds of America’s trade deficit is with China, and much of the remaining third with the other ASEAN 3 economies such as Japan, South Korea and Malaysia.
For example, the US had a significant trade deficit of $US14 billion in 2011 with Thailand, on bilateral volume of $US40 billion. Indeed, the Chinese Ministry of Commerce has indicated that foreign enterprises account for over half of China’s exports and imports, with the lion-share of FDI traditionally going into the export-manufacturing sector. More than 55 per cent of export-manufacturing growth in China is driven by the activities of foreign firms.
Regarding the ASEAN 3 economies as a whole, the evidence is that over two-thirds of the value of exports from the region eventually end up in the EU and US markets, rising from about half in 2006.
It is clear that export-manufacturers view the ASEAN 3 region as a vast production chain with little discrimination as to where they locate production processes beyond commercial motivations of cost and reliability. This is important because such a trade structure gives Beijing far less capacity to use trade for political or strategic purposes than is often assumed. If Beijing were to prevent Thai or Malaysia firms, for example, from exporting components to China for assembly, this would merely harm its own export-manufacturing sector (which employs around 10 per cent of the workforce or approximately 75 million people) with deleterious consequences for local export-manufacturing employment, export-orientated FDI, and any resulting technology transfer that might occur. ASEAN firms would simply relocate part of the production process elsewhere. Given the complexity of intra-firm trade in the production process, it would be extremely difficult for Beijing to quarantine any fallout to just Thai or Malaysian manufacturing firms, as these firms are likely to be in partnership with other multi-national-corporations in the production process.
American and European consumers remain far more important to the bottom line of Southeast Asian manufacturing firms than the Chinese consumer and will be so for quite some time – even if the potential of the latter generate the headlines.
But there is a further corollary to this intra-Asia trade structure for export manufacturing. Since China is not the epicentre of net consumer demand in the region or the world, Indonesian, Malaysian and Thai export manufacturing firms are instead competing with Chinese firms (and each other) for a larger share of the processing trade pie. Indeed, the raft of regional free-trade-agreements have generally made processing trade easier between all these countries, while all major ASEAN countries are at the same time complaining that Beijing places artificial barriers against accessing the Chinese consumer.
The point is that the increase in trade volumes between China and major ASEAN countries is largely due to processing trade which is ‘double-counted’ as it enters and leaves the country. Besides, rising trade with China could well exacerbate economic tension with China’s major regional trading partners. For example, traditionally important domestic sectors such as Malaysian and Thai electronic and machinery component manufacturers and Indonesian textile and garment manufacturers see trade with China as a major threat rather than a blessing.
Asia is a far messier and complex economic place than many believe, especially those who spruik the inevitability of a China-dominated Asian Century. The numbers bear that out. With days of double-digit growth behind it and domestic consumer failing to carry its weight, the future perception of China’s economic footprint in the region is likely to glide back to land and travel closer to its actual impact.
Dr John Lee is the Michael Hintze Fellow and adjunct associate professor at the Centre for International Security Studies, Sydney University. He is also a non-resident senior scholar at the Hudson Institute in Washington DC and a director of the Kokoda Foundation in Canberra.