Impact of China on South East Asian Countries - Case Study Example

Impact of China on ASEAN Name Class Unit Introduction The rapid growth of China in the recent decades has led to fear based on its impacts on South East Asian countries (SEA). The country economic impact on its neighbors has been of great importance. Most of the Southeast Asian nations are export dependent. According to Shen & Chen (2010), it was thus expected that as these countries continued to prosper, they would be able to take part in value added economic activities which are a preserve of countries with highly advanced infrastructure, educated labor force and good governance. The recent explosion of Chinese economic growth was seen by many that it was to cloud out the SEA countries in all areas of the economic ladder. There were still others who saw that Chinese economic growth would enable the South East Asian countries to prosper through trade (Shen & Chen, 2010). This research paper will look to establish whether Chinese economic growth has been of positive or negative impact on the Southeast Asian countries. This will be done through establishing whether the theory of comparative advantage holds in this case. This is through determining whether China has displaced SEA countries in the export markets and also whether SEA has benefited from meeting the Chinese consumption needs. Analysis Lost export market share The Foreign Direct Investment (FDI) data have been portraying China to be taking the export market especially USA from the South East Asian countries. This has been attributed to competitive and diversion effect (Mctaggart, Findlay & Parkin, 2013). A lot of SEA countries share in export trade have been diverted to China. This has led to a situation where the Chinese export figures especially to US being boosted while those for SEA are depressed. The availability of cheap labor in China has made a great impact on Foreign Direct investment (FDI) in the region. Most of the companies have taken the advantage of cheap labor and outsources their production to China. This has led to vertical specialization which in some cases can give misleading figures on Chinese exports. There is high competition for the export market between china and SEA countries (Mukhopadhyay & Thomassin, 2010). The increase of capital industries and services in the newly industrialized economies has also led to loss of market share in the exports segment. Despite this, it is important to know that the Chinese export market has gained a lot from acquiring the industries that were relinquished by the newly industrialized economies (Shen & Chen, 2010). It is also important to note that Chinese export gains are not at the expense of the labor intensive economies of most of ASEAN but can be attributed to the complementation of the economies involved (Percival, 2005). China has been a source of FDI to the SEA which shows that these economies complement each other. Relative to the size of Chinese economy, it can be argued that it receives less FDI than SEA. There have also been proof that Chinese FDI has been positively associated with FDI inflows to other SEA countries. This is due to fact that most of the production carried out in region is integrated. Most of the international firms have been maximizing the production opportunities on the whole region (Evans, Kaplinsky & Robinson, 2006). Complimenting economies There has also been a trend where most of the SEA economies seem to complement Chinese economy. Shen & Chen (2010) asserts that SEA countries have been relinquishing their labor intensive low value added production industries in favor of their high value added and capital intensive production. The Chinese economic boom has led to this transformation to take place fast. The country entry into the world trade organisation (WTO) reduced the risk of conducting business in china which has led to an influx of FDI. There have also been indicators of the Chinese taking over the SEA export market. After the removal of trade quotas in 2005, there was a rapid rise of US textiles imports from China to 55.8% (Percival, 2005). This was accompanied by a fall of imports in the same period by 7.71%. Most of the SEA countries have seen a decline in their exports to EU as Chinese have seen an increase in the EU export market. Despite this, it have been argued that Chinese economy growth have been a great drive for SEA economic growth (Shen & Chen, 2010). As the Chinese economy continues to grow, there has been an increase in demand from Chinese consumers. Analysis based on primary, intermediary and finished products In order to fully analyze the impacts that China have on the SEA countries, it is vital to look at primary, intermediary and finished products. This will help in determining both complementary and competitive impacts (Mctaggart, Findlay & Parkin, 2013). The direct impacts arise from bilateral trade between China and the rest of the world. Indirect effects are associated with the manner in which China economic growth affects the rest of the countries. The indirect effects have been very vital due to the fact that the Chinese economy have expended very fast and is one of the largest trading economies. Different patterns of impacts on the SEA countries emerge depending on the type of trade (Mukhopadhyay & Thomassin, 2010). It is important to know that the current Chinese economy is not self sufficient. This is due to fact that the country has a high dependence on imports of raw materials, food and energy. Looking at Chinese demand for energy, it has a great impact on the SEA countries. This is due to fact that Chinese economy have been increasingly demanding more energy as it grows. The country energy has doubled since 2002. As the rest of the SEA countries, China has been relying heavily on oil imports. By 2030, it is expected that China will be importing almost 73% of oil consumed by the economy. The country import of oil from other parts of Asia will have a direct impact on SEA countries. The country have been constructing infrastructure to link it to Asian oil producers. As China strives to address the urgency need for energy, the weaker and poorer SEA countries will be affected negatively (Shen & Chen, 2010). China demand for oil has an indirect effect on global oil prices. If the oil prices can remain high due to Chinese economy, increasing demand, SEA countries producing oil are bound to benefit (Percival, 2005). A negative indirect effect is the country impact on the global climate. The Chinese economy has also become highly dependent on raw materials. The domestic demand has outstripped China domestic supply. Though Russia has been the main supplier of timber to China, SEA countries such as Malaysia, Indonesia and Myanmar have also been major suppliers (Shen & Chen, 2010). The increase in demand for timber in China presents the SEA countries with an increase in income but unregulated imports will be a major problem that has to be tackled. Another negative impact on the SEA countries is over exploitation of forests. This has been a major environmental problem which has led to some of the SEA countries imposing bans. Another issue arises due to fact that SEA forests have been overexploited leads to reduced earning opportunities for the population. A good example is Indonesia whose forests have been overexploited. The poor control of timber trade in the SEA countries has thus threatened the countries furniture industries (Mukhopadhyay & Thomassin, 2010). The Chinese economy has become a last stop in production systems. Most of the goods are imported from the SEA countries and final assembly is carried out in China. This has led to a synergetic complementary relationship (Lall & Albaladejo, 2004). Chinese economy has been able to increase their regional sourcing. This is through China sourcing for the intermediate products from SEA countries. For example, in the electronics industry, sourcing of parts and components have been on rise. This has made SEA countries to benefit from Chinese growth based on the intermediary products. This shows that the success of the Chinese economy has benefited the region. China has also become a significant market for the SEA countries (Mukhopadhyay & Thomassin, 2010). Cooperation between China and SEA countries According to Ducanes & Abella (2010), statistics show a booming trade between china and SEA countries in the 21st century. China has become a major trading partner with SEA. Chinese sound investment policies have been able to support investment in the SEA countries. The country trade with SEA can be seen in a broader perspective to include financial services and coordination as well as tourism. There has been regional financial cooperation which has been enhanced by the CMI initiative. This has been carried out as a measure towards the financial crisis. There has been signing of memorandum between China and SEA countries based on tourism cooperation. This is due to the growing tourism sector in the region. Tourism is a vital sector in the economic growth (Shen & Chen, 2010). Most of the SEA countries have been targeting China as a source of tourists. According to Shen & Chen (2010), SEA countries which are less developed have benefited from financial aid from the Chinese government. This is mostly devoted to the infrastructural development and technologies. Chinese government has been sending technical professionals to give volunteer training to the less developed SEA nations (Percival, 2005). Most of the SEA countries are members of economic bodies such as the WTO and IMF. This has led to an economic cooperation between China and SEA. The cooperation has led to a rise of bilateral trade and investments between china and SEA countries. The economic relations between these countries are based on getting the best and lowest priced product with a main aim of profit maximization (Lall & Albaladejo, 2004). Chinese government and their SEA counterparts came into an agreement to come up with good neighbor diplomacy. According to Shen & Chen (2010), this was agreed in a summit on 1997. The main aim was coming up with friendly relations; enhance trade cooperation, cooperation and understanding all aimed at creating mutual benefit. From the time the agreement was made, Chinese government has been working hard to ensure that they enhance the agreement. For example, the initiative started with Chinese FDI in SEA reaching US$1.5 billion in 2004 and was up to US$2.5 billion in 2006, the figure rose to US$6billion in 2009. There has been creation of the China-ASEAN Free Trade Area. This is with an aim of ensuring that countries allied to ASEAN enjoy the economic benefits of china entry to WTO before the rest of the developed world. This has also contributed to cross boarder investment within the SEA region (Lall & Albaladejo, 2004). The growing import demands from China presents the SEA countries a chance to expand their capacity in areas such as electronics, machinery and agricultural processing (Evans, Kaplinsky & Robinson, 2006). The Chinese demand for these products will also be aided by the demand from the country trading partners such as Japan and US. The SEA countries have been forced to invest in human resource training in order to facilitate transition from labor intensive manufacturing to high end manufacturing. Shen & Chen (2010) asserts that reduction in Chinese market protection has offered great opportunities for the exporters in the SEA countries. It is also important to note that the improved high end manufacturing in the Chinese economy have been a major cause of competition between advanced SEA economies and China. For the less developed SEA countries, China has become a great competitor in the apparel and textile industry. These are the areas which the less developed countries in SEA had a comparative advantage (Ducanes & Abella, 2010). Recommendations There is need of change in perception by the poor SEA countries if they are to fully benefit from the Chinese economic growth. Fearing that Chinese economy will have great negative impacts has hindered their chances to identify the opportunities. These are opportunities that need to be invested on. There has been a shortage of commercial attaches in China from the developing SEA countries (Devare, Singh & Marwah, 2014). These countries have been sending a lot of financial attaché to Europe and US and ignoring china. The EU and US market are saturated as opposed to Chinese market which has more opportunities. There is also need for the SEA economies exporting to china to understand the Chinese market. This is due to fact that Chinese market has varying demands based on resources, market, climate, wealth and preference. There is also need for the SEA countries to invest more in order to exploit the advantage of Chinese economic growth (Mukhopadhyay & Thomassin, 2010). Reliance on the foreign donors and consultants by the poor SEA countries acts as a hindrance in building trade capacity. Despite the fact that the consultants are well versed on market penetration, they are not well versed on the differentiated Chinese market. There is a need to use consultants who have knowledge on the Chinese market. There is a need for the poor SEA countries to address value chains that can connect them to Chinese market. Regional infrastructure has been a major bottleneck for trade between some of SEA countries with China. Infrastructure plays a major role in ensuring that there is economic growth. Interconnection through infrastructure is thus supposed to be addressed to ensure that all SEA countries are able to benefit. Enhanced global integration will lead to commercial linkages and ensure that there is transfer of stimulus between the SEA economies and china (Devare, Singh & Marwah, 2014). There is also need for the SEA economies to pool together core technologies that will ensure that there is no digital divide. This will help in coming up with low cost solutions that can help in connecting poor and remote regions in SEA. According to Shen & Chen (2010) policies based on connectivity and sustainability is thus needed for the Chinese economic gains to spread well into the SEA countries. It is vital to note that connectivity and sustainability issue cannot be solved by a single actor. This implies that there is need for alliance between the public and private sector in China and SEA countries. Conclusion Trade report shows that Chinese economic growth does not fully dominate the whole economic ladder for SEA countries. Instead, it shows that there is economic complementation between the countries and limited competition. The impacts also vary among the SEA countries economic status. Chinese economic growth acts as an opportunity for the SEA economic growth and integration. SEA has been able to benefit from an increase in exports to China. Chinese economy has led to increase in demand by the consumers. SEA which will are able to have technological advance are benefiting from Chinese economic growth. SEA countries have also been benefiting from financial aid and professional help from China. Good neighborhood policy between China and SEA countries have led to increased cooperation in trade and economic development. SEA countries have been able to advance in capacity in areas such as electronics, machinery and agricultural processing. Change of negative perceptions on Chinese economic growth, understanding Chinese market and use of more commercial attaches to Chinese market is needed. There is also need for improvement in infrastructure between SEA and China to enhance trade. This implies that SEA countries and China have to address policies based on connectivity and sustainability in order to enhance positive impacts from Chinese economic growth. References Devare, S. T., Singh, S & Marwah, R 2014, Emerging China: Prospects of Partnership in Asia. Hoboken: Taylor and Francis. Ducanes, J., & Abella, M 2010, The future of Chinese and South-East Asian migration to OECD countries. Oecd Journal: General Papers, Vol. 4, no.2, p.7-29. Evans, D., Kaplinsky, R & Robinson, S 2006, “The emergence of India, China, and an East and South East Asia region on the world economy: a typology of drivers and impacts”, IDS Bulletin, Vol. 37, no.1, pp.34-67. Lall, S. & Albaladejo, M 2004, “China's competitive performance: A threat to East Asian manufactured exports?” World Development, Vol. 32, no. 9: 1441-1466. Mctaggart, D., Findlay, C & Parkin, M 2013, Economics (7th edition), Pearson Australia Mukhopadhyay, K & Thomassin, P. J 2010, Economic and environmental impact of free trade in East and South East Asia. Dordrecht: Springer. Percival, B 2005, “China’s Inflence in Southeast Asia: Implications for the United States”, US- China Economic and Security Review Commission. Shen, H. & Chen, L 2010, “China-Southeast Asian Economic Relations in the 21st Century”, International Journal of China Studies, Vol. 1, no. 1, pp. 25-45 Read More