How Asia Can Learn to Live with China

Rather than fear the giant's growing power, the region's nations need to work toward ties -- starting with trade -- that will bind

By Mark Clifford

China's continuing rise has left many Asian nations looking like deer frozen in the headlights of an oncoming truck. Nowhere is the paralysis greater than in the Association of Southeast Asian Nations, better known as ASEAN. This is the regional political and economic alliance that endured a severe case of Asian flu five years ago, when Asian economies collapsed during a currency crisis. Today, it's as if the impact of that era -- so painful to the region -- hardly fazed China.

Time for China's neighbors to panic? Not at all. Being scared isn't an answer to the giant's challenge. If ASEAN's leaders act smartly and quickly, it won't end up as roadkill under the China juggernaut.

Expanding trade ties is a good place to start. On May 15 in Beijing, ASEAN and China kicked off the first round of talks aimed at creating a free-trade agreement. Although it's going to be many years -- if ever -- before such a pact takes effect, the discussions should spark some clear thinking about what closer economic ties can do. Few tasks are more urgent for China's neighbors than to figure out how to smoothly handle the surging strength of this emerging power.


  Chinese Premier Zhu Rongji electrified ASEAN leaders in November when he proposed the idea of a free-trade area at an ASEAN summit meeting in Brunei. The audacious goal: Free trade within a decade. Though theirs was one of the world's hottest growth areas before the currency crisis of the mid-1990s, ASEAN leaders have seen their region largely fall off the investment map since then. A decade ago, China received a mere fraction of the foreign direct investment pumped into ASEAN countries.

Now, the tables have turned: China has been pulling in more than $40 billion a year since 1996. Indeed, with China's WTO entry last year, the flows are accelerating and may hit a peak of $50 billion this year. Meanwhile, ASEAN members get just $10 billion a year now.

ASEAN -- which includes Singapore, Thailand, Indonesia, Vietnam, Malaysia, Burma, the Philippines, Laos, Cambodia, and Brunei -- needs to face facts: China is going to be the dominant regional player, at least in the political and military arena. Japan still matters, of course. But China's economy is already one-quarter the size of Japan's.


  And while the latter is crawling out of its third recession in a decade, China's output has more than doubled during that same time. Moreover, Japan's ability to project power -- especially militarily -- will continue to be hampered by its inability to come to grips with its wartime aggression of the 1930s and 1940s.

That leaves the Middle Kingdom. And it's determined to play an expanding role in what remains a rich and strategically significant part of Asia. China has ambitions to build up a "blue-water navy," one that can pack a punch far from home. Chinese planners are looking at the Straits of Malacca, the chokepoint off Malaysia through which much of Asia's oil passes, as an area of great interest and concern.

While the proposed free-trade agreement is mostly about economics, says Shi Yinhong, a professor at Renmin University of China's School of International Studies, "it has great strategic meaning to China".


  ASEAN is understandably suspicious of China's intentions. The giant claims all of the disputed Spratly Islands in the South China Sea. Yet, Malaysia, the Philippines, and Vietnam also claim part or all of the 800-kilometer long chain, which may hold large undersea oil and gas deposits.

China has battled Vietnamese troops in the area and prompted howls of protest from the Philippines after building concrete structures on one of the islands. It has refused to negotiate with ASEAN over the islands' status. Building better economic relations would make it less likely that the disputed islands would bring the two sides to blows.

Hu Jintao, expected to take over as China's Communist Party leader later this year, stopped in both Malaysia and Singapore on his way to the U.S. in April. That Hu chose these two countries for one of his first trips abroad reflects the importance China accords the region. At the top of Hu's agenda: Setting the stage for the trade talks.


  China-ASEAN two-way trade is nothing to sniff at: It totaled $42 billion last year, although that pales in comparison with China's $100 billion-plus in exports to the U.S. last year. Still, even without a formal arrangement, economic links with ASEAN are bound to blossom. Increasingly, exports to China are driving the industrialized economies of Northeast Asia -- especially South Korea and Taiwan.

ASEAN's fear is that it'll be little more than a modern version of the colonial supplier, shoveling food and raw materials to China in exchange for manufactured products that will put its home-grown companies out of business. Yet, it doesn't have to be so. Developing service industries are one way out. Twelve million Chinese went abroad last year, mostly for holidays -- more than double the 5 million that did so in 1997. Nearly 700,000 of them landed in Thailand, where they hit the beaches as well as Bangkok nightspots.

This year should see 14 million to 16 million outbound visitors. Already, the mainland sightseers have bolstered Hong Kong's slumping tourism business. It shouldn't be too hard for ASEAN to find a way to take advantage of this fast-growing source of customers.


  Then, there's China's entry to the World Trade Organization, which should force the country to open up dramatically in the next five years. Trade negotiators can do plenty here: Asian protectionism makes it hard for airlines to add routes and take advantage of new market opportunities. And most places in the world would be delighted to have a nearby market that's growing as fast as China's.

It's up to ASEAN to ensure that it has the policies and people to take advantage of this expected growth. As a long-term project, it needs to invest more heavily in education, especially at the primary and secondary level, to ensure that its workers of tomorrow have the skills they need.

Finally, ASEAN needs to ensure that the U.S. remains involved as a counterweight to China. For the record, Washington says it's pleased with anything that increases trade and promotes economic growth. Privately, U.S. diplomats say they're watching China's moves carefully.


  ASEAN can use this newly rekindled U.S. interest to its advantage. Singapore is the only country that has consistently courted Washington. The prosperity of the 1980s and 1990s lulled much of the rest of the region into welcoming America's off-again on-again approach to Southeast Asia as a way of ensuring that it could count on the U.S. security blanket without too much corresponding meddling. The events of September 11 focused U.S. attention on the region, if only because of the presence of elements of Islamic terrorist groups. ASEAN should ensure that Washington and U.S. business remain engaged in the region.

A century ago, two global wars were fought as a result of the inability of the world to integrate two new powers, Germany and Japan, into the ranks of the global elites. A lot is at stake -- not just for ASEAN but for everyone -- in ensuring that China and its neighbors build stronger commercial and economic ties. Southeast Asia may not fully realize it, but ASEAN has plenty of cards to play.

Clifford, based in Hong Kong, is Asia regional manager for BusinessWeek

Edited by Douglas Harbrecht

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