July 2005

China and the New Economic Geography of Asia?

On July 21, AEI and the National Defense University Institute of National Security Studies held the fifth in a series of seminars examining the growth of Chinese power and influence in Asia. Experts considered how the growth of China’s economic power is driving the emergence of a new economic geography of Asia and discussed, among other topics, which countries will emerge as China’s major regional competitors, which countries have the most to gain or to lose from China’s economic growth, and how China’s influence is growing in different regions in Asia.

Daniel Rosen
Institute for International Economics and China Strategic Advisory Board

This presentation dealt with the economic relationships of Asian countries between themselves and other nations, starting in 1993 and focusing on China. Mr. Rosen addressed trends in trade and investment flows and honed in on agricultural products, petroleum, electronic goods, and textiles and clothing. In addition, Mr. Rosen considered foreign direct investment and official development assistance. Asia in this context refers to the countries comprising the Association of Southeast Asian Nations (ASEAN).

Since 1993, China has overtaken a greater share of Asia’s aggregate trade with non-Asian countries (global trade), whereas other Asian countries’ share of global trade has declined or remained the same. ASEAN’s share, which increased prior to the Asian financial crisis, has declined to pre-crisis levels. South Korean trade has remained constant, and Hong Kong’s share has declined despite the fact that much of China’s trade goes through it. For Taiwan, trade with China is far more important than before, but due to China’s diplomatic pressure, Taiwan has been locked out of bilateral and regional trade agreements in Asia.

Compared to 1993, China now controls a greater percentage of other Asian countries’ global trade. For example, China as a percentage of South Korea’s global trade rose from 5 to 19 percent. Also, China’s exports to Japan increased from $15.8 billion to $73.5 billion. However, during that same time period, the converse never took place; other Asian countries did not come to control more of China’s global trade. Hong Kong and Japan are less important to China than in 1993, and Taiwan, South Korea, and ASEAN have experienced only small increases in their share of China’s global trade.

Regarding agricultural trade, the economic dynamics for land-intensive (cereal and grains) and labor-intensive (fruits and vegetables) farming are quite distinct. No Asian country, including China, has a clear comparative advantage in land-intensive farming. However, in spite of Asia’s high tariff and non-tariff barriers on agricultural products, China has been steadily exporting more labor-intensive products to Asian markets, first to wealthier countries like Japan and more recently to ASEAN.

Even more dramatic is the increase in China’s imports of labor-intensive crops from Asia, particularly from Thailand. The China-Thailand Free Trade Agreement (FTA) signed in 1993 front-loaded the liberalization of trade in agricultural products. Consequently, Thai exports of labor-intensive agricultural products to China rose significantly. China still imports a small percentage of Asia’s total labor-intensive agricultural imports from the rest of the world, although China’s share has grown sharply, from 1 percent in 1993 to 14 percent in 2004.

For China’s petroleum imports, the Middle East and Angola are now far more important than Asia. However, this pattern might shift when China starts importing more natural gas from Asia.

Electronics are the imports and exports of highest value, with the four largest electronic categories being radio and TV transmitters, video recording apparatus, radio and television transmission parts, and integrated circuits. In three of the four categories, exports and imports have grown in a balanced fashion, but the growth of China’s imports of integrated circuits has far outstripped import growth in other electronics sectors. In percentage terms, China’s exports of integrated circuits and micro-assemblies are still small--4.3 percent of global exports in 2004, compared with 66.6 percent for the rest of Asia--but as China continues to expand its global market share, the rest of Asia could start to lose out. China’s global trade surplus in electronics is moderate or nonexistent because of value-added production and re-exports, and Asia’s share of China’s electronics imports has grown sharply.

Concerning textiles and clothing, in 1993 China was among the top six Asian exporters. Yet while the other five countries’ exports remained constant, Chinese exports rose significantly and are now at a level nearly three times higher than the next largest Asian textile and clothing manufacturer.

Because of the lack of accurate data, it is difficult to calculate foreign direct investment (FDI). Hong Kong remains the number-one source of Asian FDI flows into China, although as much as half comes from Chinese companies routing money through Hong Kong. With the possible exception of South Korea, whose investment in China has risen, Asian investment in China has remained steady.

Regarding flows from China, sporadic reports and limited data reveal little. In 2002, there was a spike in reported Chinese investment in Laos. Yet for the most part, Chinese investors probably filter their investment in the same way that American and other foreign companies do--by setting up companies in places like the Cayman Islands and the British Virgin Islands, where the nationality of the firm is difficult if not impossible to identify.

Data on official development assistance (ODA) reveal even less. With the exception of Japan, Asian assistance to China is minimal. ODA figures from China to the rest of Asia are highest to Vietnam, Cambodia, and Myanmar. There are likely to be more significant flows from China into the region this year as a consequence of the Indian Ocean tsunami disaster.

Mounting interdependence and deep integration characterize many sectors in the Asian Pacific. Underlying this trend, however, is the growing asymmetry in China’s trade relationships with Asia and the rest of the world. However, the United States should not criticize China alone, for these patterns also apply to other Asian countries, including U.S. allies.

Compared with the European Union and the United States, Asia is more willing to sacrifice the oft-protected agricultural sector in order to achieve deeper integration and the associated economic gains. Of course, this shift also brings serious domestic strains and social pressures. Some Chinese farmers will have to start producing other more specialized, higher-value, labor-intensive products such as apples or kumquats.

Finally, whereas the United States tends to focus exclusively on “containing” China’s advantages, Asian countries recognize the weaknesses of the Chinese economy and look to capitalize on it. Some of China’s competitive disadvantages include the relative inefficiency of capital markets and environmental degradation. In addition, the United States should be further allayed by its comparative advantage in those areas, as well as its dominant role in several regimes that manage regional economic issues.

Ellen Frost
Institute for International Economics and National Defense University

Four major political trends mark Asia’s new economic geography. The first trend is the momentum toward regional integration, centered on ASEAN and ASEAN+3 (the “+ 3” are China, Japan, and South Korea). Although this trend is of a predominantly economic nature guided by trade agreements and currency swap arrangements, it ends up spilling over into diplomacy, regional politics, and even security. A prominent example is ASEAN + 3’s intent to establish an “East Asian Community,” to be announced at a summit meeting in Malaysia this December. There remain areas of contention within the group, but the competition pertains more to a subtle balance of influence rather than a zero-sum struggle for power.

The second trend is that China has become a skillful practitioner of commercial diplomacy, having taken advantage of opportunities stemming from the Asian financial crisis of 1997-98. Governments in the region perceive that during the crisis, the United States turned its back on them and helped Mexico instead. In contrast, other Asian countries view China as having extended help in a time of need.

The third trend is that China’s activities in the Asian Pacific have triggered strategic interest from Japan and India, which want to become more involved in the economic region.

The final trend concerns widening gaps between cities and rural areas, coastal and inland areas, and globalized and non-globalized areas. Although there is revitalization in certain areas, piracy and other kinds of crime remain serious obstacles.

If the United States continues to downplay Asian regional arrangements--demonstrating an attitude of “benign neglect” and a preference for bilateral agreements only--it will gradually lose influence, especially relative to China.

Dan Blumenthal
AEI

Much of the world benefits from China’s increased global activities, but such activities are not without strategic overlays.

China is neither a revisionist state nor an aggressive one--instead, it is an emerging power.
For China, increasing regional economic engagement is of utmost importance as it serves two purposes: (1) it secures much needed energy resources, and (2) reassures the region that China’s intentions are benign.

China has been trying to mitigate its dependence on the Straits of Malacca for transit of its energy resources coming from the Middle East by supporting road and rail links and constructing port facilities. China has provided $3 billion in assistance to Myanmar, and in Thailand, China is assisting in the Kra Isthmus land bridge. Also, Cambodia has experienced a growing amount of trade and assistance, including a port facility. Further, China invested $198 million in the first phase of Pakistan’s deep-sea port at Gwadar and provided funds for a road link between Pakistan and western China.

National Defense University research assistant Tamara Shie prepared this summary.