Menu
Markets

Will China’s Aggressive View of What is Theirs Blunt Intra-Asian Trade?

Those who have been paying attention to Asia are most likely familiar with China’s “nine-dash line” claim. For those perhaps less familiar with the region, the map below (with nine dashes) outlines China’s view of its territory, extending south well into the South China Sea. This claim seems significantly outside of China’s geographic location and conflicts with Exclusive Economic Zones (EEZs) claimed by Brunei, Indonesia, Malaysia, the Philippines, Singapore, Taiwan, and Vietnam.

Much has been written about the geo-political impact of this claim and the resulting push back from China’s Southeast Asian neighbors. And the political discussion is quite predictable.

China will assert that this is simply a natural and peaceful rise with only territorial claims that are historically backed. The country will then resist multilateral or internationally mediated discussions of any disputes and will insist on bilateral negotiations that obviously favor the larger claimant (i.e., China).

The Southeast Asian nations will amp up rhetoric but take little action other than to try and force the negotiations into multilateral forums like the Association of Southeast Asian Nations (ASEAN). There will be suggestions of international mediation through UN groups and continuing efforts to get the United States to further engage in the region as a counterbalance to Chinese influence.

But over time, the facts on the ground might have the biggest impact. And it here that China is much more aggressive than the other nations involved.

Over the last several decades intra-regional trade has exploded to the benefit of most all Asian markets. These trade patterns have buffered the region from economic troubles in other parts of the world economy. The 2007–2008 economic meltdown that devastated the U.S. and European markets had a much milder impact on Asia, and growth returned faster and stronger than in other parts of the world.

This has been a remarkable shift as many Asian economies got moving in the first place by exporting to the West. Japan in the 1960s and 1970s used exports, mainly to the United States, to kickstart what would become the second largest economy in the world (before being eclipsed by China). This export-led strategy was implemented in the 1970s and 1980s by South Korea to much the same effect. Of course China is the poster child of using exports to build your economy. By becoming the workshop of the world, China is now the second largest economy and looks to be the largest in the not too distant future.

Diversification away from reliance on Western markets gained stream a few decades ago. This was driven in part by the success of other Asian economies who where now looking to import goods, in many cases, from China. Trade bodies and political groups like ASEAN pushed for more integration and trade within the region. As well, trends in China became an engine for Asian trade. As labor costs went up in China, many Chinese manufacturers looked to lower-cost Southeast Asian markets for new bases of manufacturing. The growing middle class in China have increased domestic spending, offering opportunities to Southeast Asian exporters who know the Chinese market better than other foreign players. All of these activities combined to offer opportunities in the supply chain that benefits many of the regional players.

So, will disputes over geography disrupt the growing economic interdependence?

Assuming the political discussion maintains the status quo, it is likely that trade will continue and expand. Economically, all of the players have a stake in continued trade. Additionally, Asian states have shown great pragmatism in the past when it comes to separating political and economic interests.

ASEAN for years followed a “constructive engagement” policy with Myanmar while the international community tried to apply pressure via sanctions. There is now debate about which policy did the most to bring Myanmar out of the cold … but most Southeast Asians will point to engagement. Taiwan has strong economic ties to China even though the politics have been dicey. Old enemies like Japan and South Korea have put political differences aside when it has come to trade.

The economic power of China makes it hard for Southeast Asian countries to resist. Access to the Chinese market and Chinese investment is a powerful engine for growth in Asia. This is only heightened with the economic problems of Europe and the slow recovery in the United States.

As long as the disputes do not get too hot, it is likely that we will see simmering negative political relations in parallel with “business as usual” economic ties.

For more on topics such as this, head over to the ALSANJ site.