The Economic Impact of China and India on Southeast Asia

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China's growing economic clout is increasingly felt in Southeast Asia. Competition has intensified in trade and foreign direct investment (FDI). Many companies in the region are finding it hard to compete against the lower prices offered by Chinese competitors. At the same time, China's voracious appetite for imports and the growing numbers of Chinese tourists have also brought good news. Just as the region is adjusting to China's growing economic presence, it is also now evident that India is also casting a potentially competitive shadow over Southeast Asian economies - it is beginning to attract more FDI and it is clearly highly competitive in several service activities.

This chapter will argue that the emergence of China and India will precipitate substantial policy and micro-level changes to the region. These adjustments will help Southeast Asian economies to respond to the growing competition and so permit them to find their own niches in the emerging new division of labour. In the process, there will be many winners and quite a few losers in the region. Whether the balance is a net positive or a net negative will depend on how effectively each country adjusts to the more competitive world that China and India create. It is argued here that the winners will be those countries that have the political will to reinvent policies and the entrepreneurial capacity to adapt and re-engineer the microeconomy.

This chapter will begin with a review of how China and India have affected the regional economies in trade, investment and other economic areas. It will then review how these countries are adjusting to this new world and conclude with an assessment of what the net impact would be on economic growth and development in the region.

Recent Economic Trends

Goods Trade: China's Increased Share of Exports not at Region's Expense

Recent trends in global exports of merchandise goods and of services are presented in Figures 1 and 2 and Table 1. A number of important features stand out:

* Both China and Southeast Asia increased their share of global merchandise exports in 1990-2002. China's increased share did not come at the expense of Southeast Asia in general. India's share has increased much more slowly in trade. Southeast Asia has seen its share of global merchandise exports slip a little from the peak it reached in the mid-1990s but generally has clung on to its global export position.

Given that India's goods exports have not really posed a challenge to Southeast Asia yet, we will focus on China's impact:

* It is also noteworthy (see Figure 3) that China has increased its share of U.S. imports while many Southeast Asian economies have seen their share of the U.S. market diminish.

* China's goods imports from Southeast Asia have grown rapidly, in fact with extraordinary strength. As a result, China has seen its trade deficit with Southeast Asia grow rapidly. As Figure 4 shows, the growth of this trade deficit mirrors the expansion of China's trade surplus with the United States.

* At the same time, it is also important to note that Southeast Asian exports to China have grown rapidly (see Figure 5).

China's trade balance with U.S. and Asia, USD bn

This brings out a crucial feature of the new division of labour. China is increasingly sourcing raw materials and industrial components from Southeast Asia, among others. Whereas in the past, those industrial components were probably processed within Southeast Asia into finished goods for export to the U.S. market by a Southeast Asian economy, these components are now exported to China where the finished good is assembled and then sent to the U.S. market to be recorded as a Chinese rather than Southeast Asian export. Since the global data suggest that Southeast Asia has gained an increasing share of global exports, this changing division of labour has been a win-win position for both China and Southeast Asia. …