Profiting from Growth: Trade, Investment and the ASEAN-China Technology Gap
By Jane Du | 21 July 2022
Southeast Asia’s trade and investment have become increasingly intertwined across national boundaries, with China seen as playing a crucial role in integrating these regional economies with China-centred production networks. Since 2008 exports to China from many Southeast Asian countries have slowed down. Explanations for this include the facts that as China has graduated from labour-intensive production, its move up the value chain has reduced its reliance on Southeast Asian markets. As China’s imports from Southeast Asia have commonly been seen as important for the region’s growth, increasing concern has been expressed that the slow-down could significantly affect economic growth in Southeast Asia. Falling exports have, however, been accompanied not only by a decline in the prices of China’s domestic industrial materials, but also by an increase in its outward FDI to Southeast Asia. China appears to have started trading with Southeast Asia in parts – not only final goods – and investing in producing components within what might be thought of as a vertical industrial framework.
The differing impacts of recent developments on individual countries of Southeast Asia may have offsetting effects, thereby affecting the outcome for Southeast Asia as a whole. With this in mind, exports to and investment from China for each Southeast Asian country are presented and analysed below. Empirical evidence suggests that exports to China play a determining role in the GDP growth of five Southeast Asian member states: viz., Indonesia, Malaysia, Singapore, Cambodia and Vietnam. FDI inflows from China have a wider significance for most Southeast Asian countries (including Indonesia, Malaysia, Singapore, Brunei, Thailand, Cambodia and Vietnam), and are particularly important for member states comprising ASEAN-6.
These countries, which mostly comprise developed and/or fastest-growing Southeast Asian economies, appear to have had a favourable industrial basis for China’s trade and FDI. Following individual country-based analysis above, my investigation finds that:
1) Unlike exports, FDI inflows from China have been of greater importance for Southeast Asian growth – a finding that applies across all Southeast Asian countries;
2) Chinese FDI has been concentrated in countries with favourable or high levels of industrial development in Southeast Asia, enabling China to use their existing industrial externalities to increase profit margins;
3) Southeast Asia’s growth has been affected more by global economic and political fluctuations, as the tipping points are found to have coincided with the 1997 and 2008 financial crises and with China’s changing diplomatic stance towards Southeast Asia since 2012.
Until now, China is not largely advanced in manufacturing efficiency and is therefore less likely to enhance the productivity of labour and capital in Southeast Asian countries hosting Chinese investment inflows. The Southeast Asia-China economic nexus seems to be much more sensitive to economic and political international instability. Events in the year identify 1998/99, 2009/10 and 2012 as the three major tipping points in bilateral economic relations. Specifically, following the 1997 and 2008 financial crises, China increased investment to take advantage of plummeting asset prices in Southeast Asia; by contrast, since 2012 deteriorating bilateral relations have again changed economic relations between China and the region.
Looking ahead, rather than cultivating local growth, China’s trade and FDI relations with its Southeast Asian partners are likely to make use of existing industrial externalities, pursuing trade profits and seeking to maximise investment returns in Southeast Asia. Thus, although China’s efforts to promote industrial upgrading have to some extent reduced its reliance on imported inputs for production and Chinese manufacturers now have a more domestic-based supply chain and are moving into higher value-added production, the overall impact on Southeast Asia’s economic growth is not yet evident. Meanwhile, at the time of writing, no significant technology gap appears to have emerged between China and Southeast Asia.
Dr Jane Du is a Research Associate at the SOAS China Institute.
The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.
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