Asean has more to lose than China from rising geopolitical tensions

In an uncertain global economy, both China and the Association of Southeast Asian Nations (Asean) must strive to ensure that deepening economic relationships do not become stymied by continuing and admittedly thorny territorial differences between Beijing and various Asean members.

That is not to underplay the importance of differences of opinion between China and Asean members such as the Philippines and Vietnam over territorial claims in the South China Sea but to contextualise those issues within the overall China-Asean relationship and with regard to China’s economic ties to the wider world.

Certainly, the new Philippines President Rodrigo Duterte seems to want constructive bilateral engagements with China over the South China Sea.

China urges Singapore not to interfere in South China Sea disputes at Asean meeting

Both Beijing and Manila will be aware that China, with 20.4 per cent of the total, is the single biggest source of imports for the Philippines, while the Philippines itself sells 10.6 per cent of its exports to China. Another 10.9 per cent of the Philippines’ exports go to Hong Kong.

And that’s just one example.

A joint communique issued on August 4 by Asean economy ministers and China’s commerce minister noted that: “despite the uncertainty in the world economy, China maintained its position as Asean’s largest trading partner. Asean’s total trade with China reached US$346.4 billion in 2015, accounting for 15.2 per cent of Asean’s total trade.”

That doesn’t include the fact that Asean classifies its total trade with Hong Kong separately and that accounts for another 4 per cent of Asean’s total trade.

“Trade volume between China and Asean was US$472.16 billion by 2015, equal to 11.9 per cent of China’s total trade,” the communique added.

Most Asean countries ‘want to stay out of Beijing’s South China Sea dispute with the Philippines’

With last November’s signing of a protocol upgrading the China-Asean Free Trade Agreement (FTA) and the prospect of a new FTA between Asean and Hong Kong in the offing, the potential is there for an even deeper economic relationship between Asean members with China and Hong Kong.

But there’s always a potential downside.

An International Monetary Fund (IMF) working paper on August 10, focusing on “the Asean-5” economies of Indonesia, Malaysia, the Philippines, Singapore and Thailand made the point, that taking into account indirect as well as direct effects, negative “spill-overs to Asean-5 from China’s slowdown and rebalancing can be large.”

If Asean’s economies are anyway sensitive to a China slowdown, it might also be logical to expect that Asean stands to lose more than China if rising regional geopolitical tensions were to spill over into trade relations. Yet, China itself cannot be blasé about its own position.

The IMF’s executive board concluded on Friday in its 2016 Article IV consultation with China that while China “continues its transition to sustainable growth with progress on many fronts” it also faces many challenges.

“Vulnerabilities are still rising on a dangerous trajectory and fiscal and foreign exchange buffers, while still adequate, are eroding,” said the IMF staff report for the consultation.

At the same time, China’s trade relations with other major economies are in something of a state of flux.

Both the leading candidates for the US Presidency, Donald Trump and Hillary Clinton, have “talked tough” on China. “As President, I will stand up to China and anyone else who tries to take advantage of American workers and companies,” Clinton said last Thursday in Michigan.

China and Asean have set a sensible tone for progress in resolving territorial dispute

In the Asia-Pacific region, despite the signing of a China-Australia FTA in December, relations between the two countries have hit a bump in the road.

On Thursday, Australia’s treasurer, Scott Morrison, blocked China’s State Grid Corporation and Hong Kong’s Cheung Kong Infrastructure Holdings from taking a controlling stake in state-owned electricity distributor Ausgrid on grounds of national security concerns.

Tensions between China and Japan over sovereignty of disputed islands in the East China Sea led Japanese foreign minister Fumio Kishida to say on August 5 that ties between Beijing and Tokyo were “significantly deteriorating.”

Meanwhile in Europe, it is still not clear if new British prime minister Theresa May is as wedded to mooted deals involving Chinese involvement in building new nuclear power capacity as was the administration of her predecessor David Cameron.

And there are still big question marks over whether the European Union and the United States will accord China “market economy” status, ahead of the expiry, on December 11, of a clause written into China’s World Trade Organisation membership agreement fifteen years ago.

In a troubled global economy, Asean and China both derive considerable benefits from their expanded economic relationship. Both would only lose out if regional geopolitical disputes were allowed to sour that arrangement.

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