China and ASEAN deepen trade and economic ties
Friendship Pass, a port in the Pingxiang County, Guangxi Zhuang Autonomous Region near China-Vietnam border Photo: XINHUA
Since the 1990s, under the global division of labor, developed economies such as Japan and South Korea have produced core parts and components, based on which, emerging economies such as China and ASEAN countries have handled reprocessing and assembly, while the final products have been shipped to developed markets such as Europe and the United States. By the mid-to-late 1990s, East Asia had formed a regional production network linked by foreign direct investment (FDI) and intermediate product trade.
Deepening cooperation
Intermediate products dominate the bilateral trade between China and most ASEAN countries, an important node of the East Asian production network. Between the 1997 Asian financial crisis and the 2008 global financial crisis, orders concerning semi-finished products, parts and components took account for roughly 60% of the China-ASEAN trade of bilateral goods. Since the 2008 global financial crisis, the field’s proportion has continued to rise from 52.5% in 2009, reaching 58.8% in 2018, close to the pre-crisis level. Driven by trade in intermediate products, the scale of bilateral trade has maintained rapid growth. According to the UN Commodity Trade Statistics Database, from 1995 to 2019, the average annual growth rate of China-ASEAN trade in goods was 15.5%, which was 3 percentage points higher than that of China’s foreign trade in goods.
In the post-crisis era, the adjustment and evolution of the global value chain has had a remarkable impact on the economic and trade relations between China and ASEAN. In terms of product structure, because of the upgrading of China’s industrial structure and the adjustment of the international division of labor, between 2009 and 2018, the proportion of parts and components trade shrank from 27.6% to 15.6%, and the proportion of semi-finished products trade grew from 24.9% to 43.2%. Since 2014, South Korea’s multinational companies such as Samsung, Hyundai, LG Group and SK Group have set up production lines in Vietnam to adjust the regional supply chain, and the scale of intermediate product trade between China and Vietnam has rapidly expanded. Since 2016, Vietnam has surpassed Malaysia and become China’s largest trading partner among ASEAN countries.
Regional trade liberalization is a necessity for strengthening economic and trade relations between China and ASEAN countries. Under the division of labor within the global value chain, the triangular trade model makes East Asian economies rely heavily on European and American markets. Since the beginning of the 21st century, to diversify its growth forces, East Asian economies have promoted regional economic integration by signing bilateral and multilateral free trade agreements. In November 2002, the two sides initiated the China-ASEAN Free Trade Area negotiations, and the FTA was officially established in January 2010. In November 2015, they signed the upgraded protocol, which entered into force in October 2019.
With the establishment and upgrading of the FTA, liberalization and facilitation of bilateral trade and investment have gathered pace, and their economic and trade relations have intensified significantly. From 2002 to 2010, China-ASEAN bilateral trade in goods took up 9% to 10% of China’s total foreign trade, and the figure rose to 14% in 2019. Also, China’s status in the ASEAN export market has been elevated. From 2010 to 2018, its market share in ASEAN primary product exports climbed from 23% to 29%. China’s market share of ASEAN consumer goods exports doubled from 5% to 10%.
As an exemplary practice of regional economic integration, the construction and upgrading of the China-ASEAN Free Trade Area promotes East Asian economic integration. In the near future, the signing of the Regional Comprehensive Economic Partnership Agreement (RCEP) will provide more opportunities and momentum for cementing China-ASEAN economic and trade relations.
International production capacity cooperation is a major driving force for deepening the economic and trade relations between the two sides. Since the proposal of the Belt and Road initiative, international production capacity has become an important field for cooperation. In September 2016, China and ASEAN countries issued the “Joint Statement between ASEAN and China on Production Capacity Cooperation,” which clarified their common interests and the consensus of ideas, laying the foundation for deepening international production capacity cooperation. It covers many fields, such as infrastructure construction, traditional manufacturing, cross-border e-commerce, information technology and financial services.
Thanks to the stable progress of China-ASEAN international production capacity cooperation, China has become one of the important contributors to FDI in ASEAN countries. According to the statistics of the ASEAN Secretariat, China’s FDI to ASEAN countries totaled $46.6 billion from 2014 to 2018, accounting for 7% of ASEAN FDI inflow during the same period. Although this proportion still greatly lags behind the EU, the United States and Japan, it has showcased the vigorous development of international capacity cooperation between China and ASEAN members.
Against the backdrop of global economic sluggishness and even recession, developed economies are steering the return of international capital, and the international capital gap in emerging economies is constantly expanding. In 2018, US FDI to ASEAN countries showed a slump, and its share of ASEAN FDI inflows reduced sharply from 16.9% in 2017 to 5.5%. According to the CEIC database, in 2019, the FDI flows to the Philippines fell by more than 20%, while the FDI flows in Thailand and Laos both decreased by over 50%. In the post-pandemic period, China’s status as the source country for ASEAN’s FDI will be further elevated, and strengthening international production capacity cooperation will become a significant engine for deepening China-ASEAN economic and trade relations.
Regional production chain
In the short term, China-ASEAN economic and trade relations are expected to be further strengthened. In terms of the global situation, China-ASEAN economic and trade relations are resilient. Under the impact of the COVID-19 pandemic, the scale of bilateral trade has continued to grow. According to statistics by China’s General Administration of Customs, from January to May 2020, the bilateral trade volume (in RMB) between China and ASEAN grew by 4.2% year-on-year despite the significant decline in trade volume with trading partners such as the US, the EU and Japan. Among them, China’s exports to ASEAN expanded by 2.8% year-on-year, and imports from ASEAN increased by 6% year-on-year. In the first four months of 2020, ASEAN has not only become China’s largest trading partner, but also its largest import market and third-largest export market.
Historically, although the growth rate of China’s exports to ASEAN has dwindled significantly and the growth rate of imports and exports has generally slowed down under the impact of the pandemic, the proportion of China-ASEAN bilateral trade in China’s foreign trade has maintained a trend of growth. From January to May 2020, although the growth rate of China-ASEAN bilateral trade fell from 14.1% in 2019 to 4.2%, the proportion of China-ASEAN bilateral trade in China’s total foreign trade increased from 14% in 2019 to 14.7%. Although the growth rate of China’s exports to ASEAN reduced from 17.8% in 2019 to 2.8%, the ASEAN market accounted for 15.1% of China’s total exports, only 0.5 percentage points less than the EU and US markets.
In the short term, ASEAN countries are unlikely to adopt trade protection measures against China, though domestic economic growth, declining exports and increased debt burden may push ASEAN countries to do so. The implementation of trade protection measures is of little significance for domestic economic recovery. In light of the strong trade dependence between China and ASEAN, the cost of trade friction would be enormous, and the protection measures would not be worth the gains. In the context of the comprehensive upgrading of the China-ASEAN Free Trade Area, the two sides are more likely to maintain the momentum of free trade cooperation. On May 29, 2020, the economic ministers of China and ASEAN issued a joint statement, recognizing the important role of the China-ASEAN Free Trade Agreement in promoting trade and investment between the two sides. They promised to keep the market open, cut unnecessary trade restrictions and create a benign investment and business environment.
In the medium and long run, the two sides need to properly handle the challenges facing international capacity cooperation. The pandemic has highlighted the need to diversify multinational companies’ supply chains. In April 2020, Japan, in its anti-pandemic economic rescue plan, proposed a project to reform supply chains and set up special funds to support Japanese companies to transfer some high value-added production lines back to Japan while deploying some product lines to Southeast Asian countries so that Japanese companies can equip themselves with more diversified supply chains. Furthermore, the transfer and restructuring of regional production and value chains may affect the trade ties between China and ASEAN countries. To deal with the localization and diversification trend of the global value chain, Chinese companies should be encouraged to build regional production chains in Southeast Asia and add local companies to the regional production network, laying a micro foundation for the deepening China-ASEAN economic and trade relations during the post-pandemic period.
International capacity cooperation aiming for Industry 4.0 will become the core driving force for furthering China-ASEAN economic and trade relations, but it is necessary to properly address the risks and challenges. To move into the new round of technological and industrial revolution, China and most ASEAN countries have successively launched their versions of the “Industry 4.0” plan. For example, the road maps for Made in China 2025, Thailand 4.0, Indonesia Industry 4.0, etc. The key development areas set by these plans are expected to act as a growth pole for production capacity cooperation between China and ASEAN countries.
Zhang Qun is from the Institute of International Relations at the Shanghai Academy of Social Sciences.
edited by MA YUHONG
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