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Wednesday, September 30th, 2020

Siah Hwee Ang: Could Asean displace China?

by August 10, 2016 General
"For Asia and the world economy to grow, Asean and China need to work closer together economically," says Siah Hwee Ang.

“For Asia and the world economy to grow, Asean and China need to work closer together economically,” says Siah Hwee Ang.

OPINION: The love-hate relationship between Asean countries and China became all too apparent during the recent South China Sea dispute.

In this case, political debate has finally been overshadowed by discussions of economic gains.

Political challenges often stand in the way of economic progress. But when it comes to economic growth, both Asean (Association of Southeast Asian Nations) and China are clearly the places to be.

Yet, we commonly hear of trade dependency discussions surrounding China. Asean is often touted as an alternative to trading with China.

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So, how far can we go with this option?

Asean’s economic relationship with China

Asean’s total trade has hovered just above the US$2 trillion (NZ$2.8t) mark in the last few years.

In 2015, it topped US$2.276t, with intra-Asean trade standing at US$545 billion (24 per cent) and extra-Asean trade at US$1.731t (76 per cent).

Unsurprisingly, China is Asean’s largest trading partner. China constitutes 15.2 per cent of Asean’s trade. This is followed by Japan (10.5 per cent), the European Union (10.0 per cent) and the US (9.3 per cent).

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Trade with China ran at US$346b in 2015. This figure was only US$8.9b in 1993 and US$113.3b in 2005.

At 11.3 per cent in 2015, China is Asean’s largest export market. Intra-Asean exports stood at 25.8 per cent in the same year.

As Asean’s largest import market, China is well ahead of the pack, commanding 19.5 per cent of imports in 2015. Comparatively, intra-Asean import is not far away at 21.9 per cent, and the nearest other market, Japan, only constitutes 11.4 per cent.

The Asean-China Free Trade Area (ACFTA), also known as the China-Asean Free Trade Area (CAFTA), has been in effect since January 2010.

At that time, the terms only applied to the six original members of Asean: Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand.

The remaining four countries; Vietnam, Philippines, Cambodia and Laos only came on board with the upgraded protocol in 2015.

We should expect further trade between China and Asean given the latest developments in 2015.

Relative to trade, China has been slower in bringing investment into Asean.

Given that Chinese enterprises only began conducting foreign investment about a decade ago, we can expect the pace to pick up quickly.

For example, Chinese investment in Indonesia has soared by 400 per cent year on year in the first quarter of this year, to reach US$465 million.

Expect more investments as there are significant cost advantages that some of the Asean nations have over China.

Can Asean substitute or complement China?

Based on the figures above and the trends of the last few years, it is easy to see the economies of Asean and China being tied even closer together in the next decade or so.

For Asia and the world economy to grow, Asean and China need to work closer together economically.

Several of these economies are among those that will grow by more than 5 per cent in the next few years.

By the same token, chances are high that when either Asean or China slows down, the other will experience growth declines sooner or later.

Asean and China are still good options for firms looking to do business in the area. However, one isn’t really a substitute for the other.

The choice of location will depend on which market has the necessary demand, provides the best infrastructure and support industries, and gives enough space and time for firms to settle in market.

For those firms who are already present in either market, a switch is only necessary if a previous decision does not turn out to be ideal.

Neither one market slowing down, nor being over-dependent on one of the two markets justifies a switch.

Firms that are already in both China and Asean would benefit from learning more about the dynamics within the Asean market and each Asean nation’s individual relationship with China.

Understanding the complementary dynamics is as important as understanding the differences in these markets.

Siah Hwee Ang is the BNZ chair in business in Asia at Victoria University.

 – Stuff