What explains the sharp growth in ASEAN-China trade, and can this be sustained?
Trade flows between ASEAN nations and China have grown sharply in recent years. During the ten-year period between 2005-2014, trade flows (the sum of exports and imports of goods) between ASEAN members and China tripled – reaching US$ 380 billion in 2014 – while ASEAN overall trade “only” doubled, with China’s share rising to 15 per cent of the total.
In 2014, ASEAN exports to China amounted to US$ 163 billion, as much as three times their value in 2005, as a result of an average annual growth rate of 12 per cent over the period. China’s share in ASEAN overall exports had reached 12.5 per cent by 2014, with a 4.4 percentage point increase compared to 2005. Since 2011, China has become the first destination market for Southeast Asia exports.
Over ten years ending in 2014, ASEAN imports from China increased 3.6 times, at an annual average growth rate of 13.5 per cent – faster than export growth – reaching a total of US$ 217 billion in 2014. China was the leading and the fastest growing country of origin for ASEAN imports, with a 17.5 per cent share in 2014, compared to 10.5 per cent in 2005.
China, which since 2014 has become the largest economy in the world in terms of GDP at purchasing power parity, consistently appears among the top five trading partners for every single ASEAN nation. However, each country shows a different degree of dependence from China either as importer or as exporter. While the six more advanced economies trade with a diversified group of partners, the less developed nations, including Cambodia, Laos, Myanmar and Vietnam, also known as CLMV, rely heavily on China.
Among the most important growth factors are the following.
ASEAN-China Free Trade Area
ACFTA, which entered into force in 2010, constitutes the world’s largest FTA with about 2 billion consumers and the third FTA in terms of total trade volume. China and the six more advanced ASEAN nations had progressively removed 90% of tariffs by 2010, while CLMV did so in the following five years. ACFTA significantly led the integration process in the region, although many non-tariff barriers and other trade obstacles still remain.
Rapid GDP growth of both trading partners
Besides geographical proximity and cultural affinity, the size and growth of their respective economies is a key determinant of import and export flows between trading partners. In fact, over the period 2005-2014, ASEAN’s and China’s GDP grew at an average annual growth rate of 5 per cent and 8.8 per cent, respectively, sharply in contrast with the performance of their main trading partners, such as Japan (0.4 per cent), USA (1.1 per cent) and EU (0.7 per cent).
Regional value chains (RVCs)
RVC refers to the value created or added during the different production phases by independent or connected enterprises in different countries in the same region. In Factory Asia, Chinese companies and enterprises from one or more ASEAN nations participate in large transnational production networks which are largely responsible for the rapid growth of intra-regional trade in intermediate goods.
In 2014, ASEAN-China trade in intermediate goods was 3.5 times higher than in 2007. It amounted to US$ 127 billion, equivalent to 27 per cent of total trade flows between the two partners, and represented the fastest growing component, holding second position after capital goods. With the exception of Brunei, Cambodia and Laos, all ASEAN countries significantly participated in the trade of intermediate goods, where Vietnam was the first importer and Thailand was the leading exporter. Consumer electronics and car parts and components were particularly important in RVCs between ASEAN and China, with Singapore, Malaysia and Thailand playing a key role, while RVCs in textiles and clothing were significant only for CLMV.
A large share of imported semi-processed goods is incorporated, as an input, into exported goods and crosses borders more than once. Consequently, data for China-ASEAN trade, based upon the final value of exports rather than the value added in the exporting nation magnify the volume of intra-ACFTA trade.
Foreign Direct Investment (FDI)
While ASEAN’s FDI inflows from China were relatively modest, although rapidly growing, they still contributed to intra-ACFTA integration, especially for CLMV. According to official statistics, with a value of US$9 billion in 2014, China accounted for only 7 per cent of ASEAN’s FDI inflows, while ASEAN’s share in China’s total FDI outflows was 8 per cent.
Actual FDI flows are, however, underestimated in official statistics, as trade data are, because Chinese FDI flowing through Hong Kong are not included. Moreover, China deploys other financial instruments in addition to FDI to finance projects in the region. Singapore is the main destination for Chinese investments, a large part of which is channelled to other ASEAN nations. Singapore is the strategic financial hub in the region linking the two partners and is the first ASEAN investor in China. China itself is the first country of origin for FDI in Cambodia, Laos, Myanmar, and the second in Vietnam. Chinese FDI finances infrastructure, mining, real estate, as well as the financial and manufacturing sectors. A growing number of Chinese companies, especially in the textile and clothing sector, are relocating the labour-intensive phases of production to CLMV, where workers’ average daily wages may be a quarter of those in China.
Other financial flows from China
These supported both intra-ACFTA trade and FDI. These flows, which rapidly grew in the last ten years, include Official Development Assistance (ODA) – whose main beneficiaries were CLMV – bank loans, export credits and the operations of China-ASEAN Investment Cooperation Fund (CAF) launched in 2010.
ACFTA’s ambitious goal is to contribute to raising ASEAN-China trade to US$ 1 trillion by 2020, and concurrently to promote the growth of Chinese FDI stock from US$ 50 billion to 150 billion, of which US$ 10 billion would be financed by CAF. There are favourable prospects for further sustained growth in trade between ASEAN and China, in light of the following considerations:
Firstly, the progressive removal of non-tariff barriers and obstacles to trade in services and investment, following the decisions taken during the 18th China-ASEAN Summit in November 2015. The two partners are also committed to simplifying customs procedures, upgrading rules of origin and improving customs procedures.
Secondly, the increasing relocation of Chinese enterprises to ASEAN nations, fostered by the widening wage differentials between the two partners and the excess production capacity of such enterprises in view of the slowing down of domestic demand. Furthermore, given the great number of trade agreements recently signed by ASEAN, Chinese companies are eager to utilize ASEAN countries as a bridgehead to conquer foreign markets.
Lastly, rapid economic growth of CLVM could stimulate faster expansion of trade between these countries and China than between other ASEAN nations and China.
Even in this optimistic scenario, there are some potential weak spots.
The sustained increase in intra-ASEAN trade could limit expansion of trade between China and ASEAN. This scenario could materialize in the case of a fast increase in ASEAN nations’ GDP spurred by a rapid integration process, due to the completion of the ASEAN Economic Community (AEC).
Another example is sharp increase in the trade deficit of some ASEAN nations vis-à-vis China, an increase that is not followed by growing financial flows from China, as has happened so far.
Lastly, a reduction in the large gap between the two Asian partners’ economic growth rates on one side and those of the other leading actors in the international trade on the other could have an impact. A strong reduction in this growth differential, which might occur according to the most pessimistic forecasts about Chinese economy, could slow down growth in ASEAN-China trade.
Mr Francesco Abbate is Adjunct Professor of International Economics at the Law Department of the University of Turin, Italy. Ms Silvia Rosina is a business manager and expert in international economics.