Expansion of Economic Exchange Between ASEAN and China

【Article】

Expansion of Economic Exchange Between ASEAN and China

Nisit P

O

Yasuhide

Introduction

The Association of Southeast Asian Nations (ASEAN) is the largest and oldest organization of its kind in Asia, formed on August 1967. Establishing regional cooperation in the fields of security, sociocultural and economic integration was the primary reason for launching an international coalition. Even though the majority of the member states have had experience with political and economic unification, each country has a strong tendency to maintain its own stability and respect to not interfere in the affairs of each ASEAN country.

The ASEAN countries have embarked upon the next step of economic development, which will also ultimately bring the Southeast Asian peoples closer. For facilitating the ASEAN Community, they have strengthened the ASEAN Economic Community (AEC) which is based on 4 economic pillars: ① a single market and production base, ② a competitive economic region, ③ equitable economic development, and ④ integration with the global economy. That means the establishment of the ASEAN Economic Community on December 2015 was a major milestone for the ASEAN community.

In ASEAN, Activity of AEC (ASEAN Economic Community) that aims at single market and competitive economic region has deepened. On the other hand, ASEAN is bordered by China, so there is a need to harmonize for both sides to secure of originality of the ASEAN economy and cooperate with Chinese economy, as Chinese economic power increases. The purpose of this article is to analyze the expanding presence of China's economy in ASEAN and to consider the directionality of economic development in ASEAN Economic Community’s future. In this analysis, we take the viewpoint of changes in the movement of the Japanese company in ASEAN and China.

1. Expansion of trade between China and ASEAN

（1）Expansion of trade between China and ASEAN

In ASEAN, trade with China has spread rapidly after 2000. In 2000, ASEAN had much export to the United States and Japan. But in 2015, ASEAN had much trade （both export and import）

with East Asia including China. In 1980, the major trade partners of ASEAN were Japan (share 25.9%), ASEAN (15.9％ ), China (1.6％ ). In 2016, major trade partners of ASEAN were ASEAN itself (23.3%), next China16.4％ , and then JAPAN 9.0%. The quantity of trade with Japan did not decrease, but the quantity of trade with China suddenly increased, and as a result, Japanese share decreased.

ASEAN countries and China are good neighbors connected by mountains and waters, and good partners that engage in close cooperation for mutual benefits. Since the establishment of dialogue relations in 1991, ASEAN-China political trust has deepened, people-to-people exchanges intensified and practical cooperation has borne fruitful results. In 1996, both sides established the ASEAN-China Full Dialogue Partnership. In 1997, both sides reached ASEAN- China 21st Century-Oriented Partnership of Good Neighborliness and Mutual Trust. In 2003, the bilateral relation was upgraded into a Strategic Partnership. In 2018, the 15th anniversary of ASEAN-China Strategic Partnership was celebrated.

The momentum in bilateral cooperation is notable. China has been ASEAN’s largest trade partner after 2010 during these past ten years, while ASEAN has been China’s third largest trade partner after 2010. According to the statistics released by the Chinese side, ASEAN-China trade volume reached 452.2 billion US dollars in 2016 with a year-on-year increase of 14.8%.

Trade with Thailand and China has spread, too. According to the data of Thailand’s top 10 trading partners in 2016, in the export off-the-wall trading partners, US ranking is number one and China is number two and Japan is number three, respectively. As for import trading partners, China’s ranking is number one, Japan is number two and US is number three. By the amount of import and export which is called trade value, China is the biggest trading partner to Thailand. The trade between Thailand and China grows year by year. The export from Thailand to China has increased, too. As a result, in total percentage China is number one. It reflects that import from China is more prosperous.

Products of Chinese companies are used in Thailand by many people and has lead to improvement in the convenience of the life. Chinese brands Oppo, Huawei and Lenovo are famous as communications equipment. Haier and Hisense are populer household electrical appliances. MG and Sunlong are Chinese automobile brands.

（2）Expansion of investment between China and ASEAN

In the ASEAN economy investment from China has a big presence. Volumes on the China outward direct investment flows starts from 265 in 2007 to 1583 in 2017 (the unit of volume is a hundred million US dollars, in total). That means amount of flow from China. The flow of investment in ASEAN from China became nearly 15 times in these ten years. In 2017, regional composition of China’s outward foreign direct investment, the portion of ASAEAN, is approximately 10%. In Thailand, many Chinese companies run their factories. In recent years investment in Vietnam and Malaysia has increased.

（3）Increase of service-related transactions

The economic exchange between ASEAN economy and China economy grows. In economic exchange, a field of trade and investment of products is a big presence, but the field of service becomes an important element. In the trade structure of ASEAN, merchandise was 78%, services was 22% in 2016. In trade of ASEAN, the ratio of service has increased.

ASEAN and China are each other’s major source of tourists and key travel destinations. The number of bilateral visits between ASEAN and China approached 32 million. In summer and autumn, there are more than 2,700 flights shuttling between ASEAN countries and China each week. By the end of 2016, mutual student mobility had exceeded 200,000. China has set up 30 China-ASEAN Education and Training Centers. In addition, China has established 6 China Cultural Centers, 33 Confucius Institutes and 35 Confucius Classrooms in ASEAN countries.

ASEAN-China relations have become the most dynamic and profound relationship that ASEAN has with its dialogue partners. The population of ASEAN is approximately 600 million people.

As consumption by ASEAN spreads, it is anticipated that the tourist and foreign student visits to China will spread more and more.

2. Chinese investment trends of Japanese companies

（1）Flow of the interchange of Japanese companies in the Chinese market

The expansion of Japanese companies into the Chinese market began in earnest in the 1980s.

Despite facing many adverse conditions, the number of companies investing in China has increased to roughly 32,000 Japanese-owned companies in 2016. This number is almost half of all Japanese-owned business sites abroad.

In the late 1970s, China enacted a set of reforms that opened up its economy. At first, a Japanese the company of household appliances and steel coped with the market opening.

The success of the Japanese company which firstly invested in China became the stimulation, and, late in the 1980s, the investment of Japanese companies in the Chinese market steadily increased. The lower labor cost was a motive for the investment, too. Further opening of the Chinese economy to foreign entities in the 1990s led to an investment boom concentrated in Guangdong Province and other areas of South China. As infrastructure was built and electric power circumstance and logistic systems were developed, the production of electric, electronic, and machinery products started shifting to China. In the early 2000s, China became known as the “global factory” due to the increase in manufacturing investment from countries around the world. Meanwhile, the expansion of Chinese investment by Japanese companies can be traced to China’s entry into the WTO in 2001 and subsequent promise to liberalize trade.

While the world economy cooled from the impact of the 2008 financial crisis, China continued to grow. As a result, this led the country to transition from a global factory to a global marketplace and expand even further. Noticing this, Japanese companies increased not only their manufacturing sites but retail locations as well.

As a characteristic of investment in China of Japanese companies according to their locations, investments in the late 1980s were focused in Liaoning Province, specifically in Dalian. Around the year 1990, investments expanded to Guangdong Province and other areas in the Pearl River Delta. And a little later, the Yangtze River Delta enjoyed an investment boom centered around Shanghai.

The industry characteristic of Japanese companies with investments in China is as follows:

In 2012, 67% of Japanese companies with locations in China belonged to the manufacturing industry. Of that percentage, those related to transportation machinery were the most common at 17%, followed by general machinery at 14%, and electrical machinery at 10%. Transportation machinery increased from about 2000. On the other hand, in terms of non-manufacturing

industries, foreign businesses increased investment. After wholesale and retail, investment extends to many fields, including real estate, finance and insurance, service industries such as restaurants, and shipping and distribution industries.

While the manufacturing industry has until now taken the lead in investing in China, lately that growth has been sluggish. But then, non-manufacturing industries are seeing more investment. Even those, such as the food service industry which are not accustomed to foreign expansion, are beginning to make inroads into China. As Chinese GDP expands, middle class people pulling consumption continue increasing, and its potential as an enormous consumption marketplace is expected to increase even more. The income level in China had risen to a point that was attractive in even the global marketplace. As a result, foreign-owned sites have been under pressure of necessity to draw directionality clearly in terms of being either focused on export or focused on domestic consumption. With regard to region, foreign business locations in the Pearl River Delta were established primarily for export, while those in areas like Shanghai tended to target the Chinese domestic market.

（2）Investment shift from China to ASEAN member states

China still invited much investment. However, in recent years a new movement in which companies that had invested in China started to move their investment to ASEAN. Promising destinations for the production shift include countries such as Vietnam, Myanmar and Thailand.

There is an increase in the difference of labor cost in the background for this shift in production. China’s rising labor costs are one reason why production is shifting from there to Southeast Asia. Labor costs in China are still relatively cheap compared to developed nations, even though they have increased along with the country’s economic growth. But the shift in production began as the nominal per-capita GDP in China surpassed 10% of that found in importing countries. Those importing countries began to perceive that manufacturing costs in China were no longer so cheap, and the disparity between Chinese labor costs and those in other emerging Asian nations reached the point where it almost made sense to move production to the latter.

In addition to the labor-cost disparity between China and Southeast Asian nations, the shift was also prompted by the potential worsening of trade and investment with environmental changes around geopolitics-for instance the dispute between China and the United States, and tightening of various regulations in China. Moreover, as background to this shift, the attraction of the investment environment of ASEAN increased, for instance, the development of conducive business environments replete with electrical and transportation infrastructure in Southeast Asia, and the building-up of wide-area economic integration in the region (including China).

In Thailand, many multinational enterprises invest, and the effect of industrial accumulation, including the supply chain, has increased. As the manufacturing industry becomes more diversified, foreign and local investment as well as a variety of companies from core corporations to small- and medium-sized businesses will become active, strengthening the supporting layer. Supporting industries form a base for the entire manufacturing process by supplying parts and peripheral components. In addition to attracting new businesses, creating and maintaining supporting industries helps prevent outflows of manufacturers of end-use products. Alongside South China, Thailand has one of the largest concentrations of Japanese enterprises in East Asia. Particularly, the accumulation around Bangkok is big.

While the investment shift from China to ASEAN is remarkable, the Japanese-affiliated companies tend to think that ASEAN markets and China markets are separate. Head offices in Tokyo aim strongly about this separation. On the other hand, Japanese-affiliated companies in Thailand regard cooperation with Chinese companies as necessary, because in ASEAN the influence of the Chinese economy increases. In particular, Chinese companies are superior in the service industry, including IT. As for EC platform, the presence of Chinese companies is big.

3. Deepening of cooperation between ASEAN and China

When an ASEAN member state expands its production bases with development of a single ASEAN market in future, it creates new income opportunities and increases its standing as a consumption market. The development of the ASEAN economy calls for trade and investment from China. It is anticipated that investment from China will contribute to improving the technical mark of the ASEAN economy and the ease of movement and distribution in the ASEAN area.

（1）Interchange with China in the improvement of the technical aspect

ASEAN has placed great emphasis on innovation. The ASEAN Summit in 2017 issued the

“ASEAN Declaration on Innovation,” noting that ASEAN will stipulate holistic policies that foster innovation, encourage and support innovation-oriented enterprises, support Micro, Small, and Medium-sized Enterprises, and strengthen research and innovation.

Thailand is an important ASEAN country. So, it is anticipated that Thailand will pull innovation in the ASEAN economy in future. In Thailand, economic policy has succeeded in advancing the economy. Changes in policy focusing on industrial advancement are reflected in the operation of the investment encouragement law. Furthermore, the Thai government aims at shifting to become a high income country in the long run. Advancement of the industrial structure is indispensable to evade the middle income country trap and to shift to becoming

a high income country. In this regard, 10 types of industry were identified as industries that substantively stimulate growth. Further, the government has divided these into existing industry (①-⑤) such as Automotive, Electronics and future industry (⑥-⑩) such as Robotics and Aviation, and has formulated a strategy that promotes each industry. In the short and medium term, the economy of Thailand will secure robust economic growth by promoting industries ① -⑤, while the economy of Thailand is envisaged to realize rapid growth in the long term by promoting future industries of ⑥-⑩. The government plans to shift to becoming a high income country by these measures.

Both ASEAN and China have taken innovation-driven development as their priority task.

Adhering to the principle of innovative, coordinated, green, open and shared development, China is pursuing a strategy of innovation-driven development and turning itself into a country of innovators. To this end, China is promoting a national big data strategy and the Made in China 2025 Plan. China aims to advance the manufacturing industry based on the 2025 plan.

The aim until 2025 assumes “joining the group of the world’s production great powers.” By the 2025 plan, China has set 10 important fields and 23 items including next-generation information technology and new energy car. China has set a domestic proportional aim for every item.

For example, for the item of mobile communication system facilities which held the key to next-generation communication standard “5G,” it advocated a high aim of 80% in the China market by 2025. For the achievement of the aim, the government proposes measures such as finance support for the allied industry or the improvement support of the generic technology in succession.

Because China has many funds, China is eager to invest in research and development in foreign countries including ASEAN along with investment in their own country. Thailand which is the hub of semi or high skilled workers like automobiles is also able to adapt or adjust and match with the Chinese investment. In Thailand, Japanese investment still accounts for a high share, but Chinese investment is trying very hard to get into Thailand. Actually, China targets some industries, like the high value-added machinery and equipment, automobiles and parts, and electronics and parts. For the formation of Thai new industry structure, it is an important element to take in technical development of China. ASEAN-China relations are embracing broader prospects of development. In 2017, both sides celebrated the 50th anniversary of ASEAN and the ASEAN-China Year of Tourism Cooperation; in 2018, the 15th anniversary of ASEAN-China Strategic Partnership and the ASEAN-China Year of Innovation. Both sides are formulating the ASEAN-China Strategic Partnership Vision 2030 to map out a development blueprint. These efforts are a good opportunity for both sides to learn from each other and draw on each other’s strengths for common development. Deepening of cooperation contributes to

the industrial innovation of the ASEAN countries. ASEAN has entered the second 50 years of its development and is committed to building a higher level for the ASEAN Community. Results of industrial innovation are spreading in the single market of ASEAN.

（2）Efforts by China in the improvement of the transportation network in the ASEAN area China has been aggressively promoting the Belt and Road Initiative (BRI) and the Lancang- Mekong Cooperation (LMC) to achieve greater regional connectivity, physically and economically. The Belt and Road Initiative (BRI) is a global development strategy involving infrastructure development and investments in Asia, Europe, Africa, and the Middle East. The Belt covers “Silk Road economy belt” leading to Europe via Central Asia from the western part of China. And the Road indicates “21st Century Maritime Silk Road economy belt” linking Southeast Asia, Sri Lanka, the Arabian Peninsula, and the African east bank from the coast of China. For BRI, the infrastructure investment including roads and harbors, power stations, pipelines, and communication facilities are to be promoted in these areas in future for several decades. Insufficient infrastructure investment is a bottleneck for economic development in developing countries. Accelerating infrastructure connectivity is a key area and core goal of BRI. In the promotion of this initiative, financial integration is an important pillar. Exploring investment and financing models, international multilateral financial institutions and commercial banks have played an innovative role in expanding the channels of diversified financing, and providing stable, transparent and quality financial support. By the end of March 2019, the Chinese government had signed 173 cooperation agreements with 125 countries and 29 international organizations.

There are the six major corridors for international economic cooperation － ① the New Eurasian Land Bridge, ② the China-Mongolia-Russia, ③ China-Central Asia-West Asia, ④ China-Pakistan,

⑤ China-Indochina Peninsula, and ⑥ Bangladesh-China-India-Myanmar economic corridors － connecting the Asian economic circle with the European economic circle.

The programs that ASEAN is related to are ⑤ China-Indochina Peninsula economic corridors, and ⑥ Bangladesh-China-India-Myanmar economic corridors. As an infrastructure investment program for China-Indochina Peninsula area, the Lancang-Mekong Cooperation (LMC) is being promoted, too. The Lancang-Mekong area is one of the regions with the greatest development potential in Asia and beyond. Lancang and Mekong differ in name, but refer to the same river—

an important river running across China and the Indo-China Peninsula. LMC aims at bolstering the economic and social development of the Sub-regional countries, enhancing the wellbeing of their people, narrowing the development gap among regional countries, and supporting ASEAN Community building as well as promoting the implementation of the UN 2030 Agenda

for Sustainable Development. These various efforts of regional connectivity contribute to reinforcement of the base of the ASEAN economy.

Thailand is located geographically in the center of ASEAN. Thus, Thailand is at the crossroads of ASEAN. Surrounded by the world economic powerhouse; for example, China is right there and also to the west is India, and to the east China, Japan, and South Korea. Therefore, Thailand is a strategic location gateway to ASEAN. Geography is good for politics because Thailand is in the middle. Thailand can connect to any surrounding country, by land, by sea, that is by advanced technology and by new markets, respectively. Then neighboring countries, especially Singapore, Indonesia, and Malaysia look to what Thai people use meaning it is good quality. Investment and markets in Thailand will be a good opportunity for the Chinese who want to prove themselves by using Thailand as a showcase.

Thailand is in the center of ASEAN. Thailand has played an important role in the construction of the transportation network of ASEAN. Since before Chinese programs, Japan pushed for the Greater Mekong Sub-region Economic Cooperation Program (GMS Program) to help identify and implement important sub-regional projects in various fields. GMS aims at the transportation infrastructure construction that joins the countries of the neighborhood together not only by ship but also overland. Among ASEAN countries, at least five countries use the Mekong River as a link, starting in the Southern part of China, Laos and Myanmar, Thailand and Vietnam, also including Cambodia. So, five countries plus China makes six. And Thailand is leader of the GMS and the hub of geopolitics in Indochina Peninsula.

In the GMS Program the construction of some economic corridors crossing the Indochina Peninsula to the east and west or the north and south is planned. For example, route number 1 is the Southern Economic corridor passing through Thailand, Cambodia, and Vietnam.

Route number 2 is the East-West Economy Corridor between Myanmar and Thailand and into Vietnam. Route number 3 is the North-South Economic corridor starting in South China (Kunming) and passing through Myanmar, Laos, and Thailand. The Southern corridor (R1) is one of the busy corridors now. Many products come and go between Thailand (Bangkok) and Vietnam (Ho Chi Minh) via Cambodia. It shows the expansion of the domain of industrial accumulation in Thailand. The Eastern Economic Corridor (EEC) is in the west end of R1, the neighborhood of Bangkok. EEC is the economic design that Thailand promotes. In the EEC area the petrochemical industry and the auto industry have accumulated now, and many Japanese- affiliated companies exist there, too. In the EEC, Thailand expects an increase in investment in the high-tech industry, such as the next-generation car, aviation, robotics, and interaction with GMS Program (the Southern corridor(R1).

China and Japan have played significant roles and implemented strategic programs in the

Mekong Region with the aim to increase infrastructure development, provide opportunities, increase security, and drive the economies of ASEAN member countries. On the one hand, Japan has pushed for the Greater Mekong Sub-region Economic Cooperation Program (GMS Program) to help identify and implement important sub-regional projects in various fields. On the other hand, China has been aggressively promoting the Belt and Road Initiative (BRI) and the Lancang-Mekong Cooperation (LMC) to achieve greater regional connectivity, physically and economically. Despite the differences in agendas and initiatives of the two countries, efforts have been made to encourage cooperation with ASEAN member countries and improvements of the transportation network. The cooperation between two these countries, such as extension of the Southern corridor (R1) from Bangkok to Myanmar shoreline, is expected.

Conclusion

Opportunity of interchange between ASEAN and China increases through technology exchanges and mobile improvement.

There are the industrial zones in Guangxi that is located to the west of Guangzhou in southern China. Guangxi is connected to ASEAN by the northern overland route and the southern maritime route. So Guangxi and the northern part of ASEAN are like the same area. Between them a huge amount of products is transported. Besides, Malaysia also has industrial zones in Guangxi, the same as in Malaysia. In the zones of Malaysia in Guangxi, Malaysian technology contributes to production. The northern part of Thailand is located near the Southern part of China. If Thailand connects to Guangxi and Cambodia, and the Southern part of Vietnam, interchange between China and ASEAN will increase more.

As for tourism, the interchange between ASEAN and China is prosperous. Tourism is a strength of Thailand. Many Chinese tourists visit Thailand. Thailand maintains to keep various cultures alive and sustained, for instance local villages that are the threshold of the local cultures. At the same time, the construction of main routes and access networks is necessary to accept more tourists. In Japan, movement is painful during rush hour in the city. In rush hour inhabitants want to go to work and want to go to school but the tourists are also just locked into that subway. This shows that the approach of the long-term viewpoint is necessary not only in Japan but Thailand.　

ASEAN and China will continue to have good relationship in various fields. The good relations bring stimulation and contribute to each other’s growth. However, it often takes time to get results, so the plan from a long-term viewpoint is necessary. The change occurs as a result of much accumulation. It is important to try to make that connection between the younger generations in the next maybe 20 to 50 years.

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