Will a stronger China spell doom for ASEAN economies?

By Jonathan Hopfner

Already hit hard by political instability and the slowdown in global markets, ASEAN countries now have a new issue to grapple with — China’s rise as an economic power and pending entry into the World Trade Organization. As China makes further moves to court foreign investment and streamline local industries, Asia’s "little dragons" are increasingly worried that the very advantages that fueled their own growth — cheap, educated labor, efficient production techniques and mass exports — will help China eclipse them completely.

More pessimistic observers are predicting that as China’s billion-strong market opens to the world, foreign manufacturers will rush en masse to establish a presence there, pulling out of traditional production bases such as Thailand and Malaysia. There are rampant concerns that the ensuing job cuts and investment losses could devastate these countries’ already fragile recoveries from the 1997 financial crisis.

There is certainly ample evidence to confirm these fears. Hong Kong, for instance, recently recorded a near record-high unemployment rate of 4.6%, largely fueled by the growing number of local firms that have shifted their operations to mainland China to cut costs. By 1999, foreign direct investment flows into China had surpassed those into all the ASEAN countries combined. While the governments of technological powerhouses like Singapore warn their citizens to tighten their belts and prepare for a recession, China is expected to post a growth rate of 7.0-7.5% this year.

Despite these trends, the views expressed by ASEAN leaders on China’s WTO accession are almost uniformly optimistic. "[China’s WTO entry] presents a tremendous opportunity, offering a large — in many cases, new — market for ASEAN exports and products of companies operating in ASEAN," Secretary-General Rodolfo C. Severino told the ASEAN forum in Guangzhou earlier this year. Indeed, ASEAN exports to China have surged from $8.9 billion in 1993 to over $32 billion in 1999, and are set to climb further as Beijing drops tariffs to comply with WTO rules.

International financial authorities have also been quick to play down the potential for a pan-ASEAN fallout. Ex-IMF deputy managing director Stanley Fischer recently called the China threat "exaggerated," claiming that each ASEAN nation has unique resources and attractions that will continue to appeal to foreign investors. Thailand, for example, can bank on its status as a tourist mecca, Brunei can build on its budding reputation as an Islamic banking center, while Singapore and Malaysia will continue — at least in the short-term — to enjoy their positions as regional purveyors of high technology.

Less talked about, but becoming increasingly apparent, is the fact that foreign companies probably won’t find China nearly as great a place to base themselves as the rest of Asia thinks. Beijing’s accession into the WTO, while it may break down some of the obstacles that have prevented foreign forces from operating there in the past, does not mean Chinese authorities will throw the country’s doors open to all and sundry. Many analysts have pointed out that China’s 1.3 billion-strong domestic market is far from a unified force -- formidable trade barriers exist even among the country’s many provinces, with the distribution of tobacco, alcohol and agricultural products severely restricted. For the foreseeable future, the country’s complex bureaucratic mechanism and prickly nationalism will likely remain firmly in place. Credit Suisse First Boston found this out recently when the Chinese government barred it from future business deals after the investment bank invited senior Taiwanese officials to two of its overseas conferences.

In addition, while few ASEAN countries are likely to be able to compete with China’s cut-rate labor costs, they will continue to win out on other fronts; international trading and marketing know-how, business and transport infrastructure, English language skills and corporate governance. While China has its size going for it, countries like Singapore and Malaysia have the virtue of experience, making them much more attractive to firms involved in top-end businesses such as banking, information technology and telecommunications.

The sense of urgency in Asia stoked by China’s economic awakening may bear further fruit for the entire region. ASEAN has doubled its efforts to conclude a free-trade pact among its members, believing that by acting as a coherent unit all Southeast Asian countries will be better poised to compete with China. Inter-ASEAN tariffs for 90 percent of member states’ products have already been slashed to 5 percent, and the ASEAN Free Trade Agreement (AFTA) is scheduled to take effect for the "older" members — Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand — in 2002.

Few would deny that the ASEAN nations have taken significant steps toward integration, but the unified front presented at regional gatherings belies a number of conflicts that simmer beneath the grouping’s surface. The stark political and economic disparities between the ASEAN founders and the organization’s newer additions — Laos, Cambodia, Myanmar and Vietnam — mean it could take years for these poorer countries to adopt the free trade pact and begin to enjoy its benefits. Malaysia and Thailand are locked in a diplomatic battle over Kuala Lumpur’s reluctance to open its automobile market according to the AFTA schedule. And Singapore is often accused of courting independent trade deals with Western powers at its ASEAN allies’ expense.

So while ASEAN has begun to shed its reputation as a body of "all talk and no action," it has further work to do before it can present itself as the unified market that so many business leaders and economists believe it must be if it is to compete effectively with China. So far, the prospect of a financially powerful middle kingdom has prompted the organization into a semblance of cohesion. ASEAN leaders must now seize this momentum and use it to build a potent regional force free of the infighting that has dogged Southeast Asia in the past.

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Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editor: Dr. Jonathan Lemco, Director and Sr. Consultant

Associate Editors: Robert Windorf, Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Keiichiro Kobayashi, Jonathan Lemco, Jonathan Hopfner, Darin Feldman, Uwe Bott

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