Sth East Asia: Between the US and China

The United States and China may be dealing with each other with a bit more civility these days, but almost no-one thinks the strategic competition between the two great powers is about to give way to something less fundamentally adversarial.

 Rather than being a temporary effect of the Trump era, the U.S. has continued to tighten actual restrictions on doing business with China. Enhanced export controls on sensitive technologies, screening of investments and the effective ban on Chinese companies such as Huawei from operating in the U.S. are just part of the American response to increasing Chinese technological and military power.

The U.S. has also introduced an array of local content and “friend-shoring” requirements, as well as increasingly restrictive controls that reach into firm-level decisions about who their customers are. 

US Trade Commissioner Katherine Tai meets Chinese Commerce Minister Wang Wentao at this year's APEC meeting in Detriot/ Image: Wikipedia Commons

 Trade, for so long seen as lying in the win-win realm of business where deals are done on the basis of mutual gain, can clearly be weaponized when used as an instrument of strategic competition. The consequences for companies that do business with China have in some cases been significant, causing them to re-route investments and divert trade to avoid escalating tariffs and technology controls.

 For its part, China has introduced its own restrictions on the use of foreign technology, tightened access to data and expanded the powers of state agencies to crack down on both foreign and Chinese companies that might undermine the government’s agenda. And that agenda is clearly to develop greater self-reliance in cutting-edge technologies and develop a China-based advanced technology ecosystem capable of underpinning Chinese military and commercial goals.

 All this has left the countries of Southeast Asia with a disturbing dilemma. Like New Zealand, most depend on China as their single most important trade partner and – even more than is the case for New Zealand – as a primary source of investment and finance.

Enmeshed in transnational production and supply networks that link the region to China’s massive manufacturing capacity, Southeast Asian economies have come to depend on linkages to the Chinese economy for their own prosperity and ability to invest in large-scale infrastructure projects.

 The relationship is not always comfortable. No country in Southeast Asia is unaware of the risks of over-dependence on one partner, let alone one that is increasing its military power apace and has unsettled claims to maritime zones that are also claimed by Vietnam, Malaysia, Indonesia and the Philippines. Potential conflict over the status of Taiwan would threaten the economic lifelines that the region depends on.

 For decades, policy makers in Southeast Asia relied on the United States as the strategic counter-weight to China, all the while asserting regional independence. The premier regional organization, the Association of Southeast Asian Nations or ASEAN, has for decades proclaimed the region to be a “Zone of Peace, Freedom and Neutrality” and developed a doctrine of “ASEAN centrality”, insisting that countries of the region must be at the centre of efforts to deal with regional challenges.

 Tension between the United States and China, along with the clear shift in the balance of power in the region as the U.S. position declines in relative terms, raises the stakes for the region.

The countries of Southeast Asia have made it clear that they do not wish to take sides in any conflict between the U.S. and China. And yet their ability to maintain the status quo is precarious.

 At a recent dialogue in Kuala Lumpur co-organised by the Asia New Zealand Foundation, representatives from the ASEAN countries all called for the region – and New Zealand – to maintain independent foreign policies.

If there was one clear message from the three days of discussion it was that the region should stand firm and pursue its own interests, independent of the priorities of the U.S. or China.

ASEAN-Australia-NZ Dialogue in KL, 2023

That is easier said than done. The momentum of regional business ties clearly leads to enhanced relationships with China. The United States refusal to join major regional trade agreements reinforces the economic incentives generated by the weight of Asia’s demography as well as the location of manufacturing skills and supporting infrastructure.

The U.S. stands outside both of the large regional trade agreements that have been struck in recent years, the Regional Comprehensive Economic Partnership or RCEP (which includes China) and the Comprehensive and Progressive Trans Pacific Partnership or CPTPP (which China has applied to join). The American “Indo Pacific Economic Framework” initiative will do little to shift economic incentives, since it is abundantly clear that increased access to the American market is not on the table.

Doing business across the lines of cleavage between the U.S. and China may even become even harder, as the U.S. has written essentially protectionist requirements into its major efforts to reduce its dependence on Chinese manufacturing capacity, regain (or maintain) its technology leadership and decarbonize its economy. 

These developments leave the countries of Southeast Asia vulnerable to further deterioration in the U.S.-China relationship, as well as facing the prospect of seeing the regional power balance shift further in China’s favour.

The search for greater Southeast Asian independence and resilience is also stymied by somewhat contradictory protectionist policies pursued in parts of the region, with a rise in a variety of trade-restrictive or distorting “non-tariff measures” introduced in recent years, from restrictions on unprocessed exports of commodities to subsidies for favoured industries.

The benefits of diversification are clear, but not easy to achieve.

Just as New Zealand exporters have been slow to respond to official warnings against over-reliance on China, the trend in much of the region has in fact been towards an increasing concentration of trade flows for several countries. Businesses respond to the incentives generated by both economic fundamentals – where can they get the best prices for their products, or manufacture most efficiently – and government policies such as tariffs and subsidies.

Somewhat paradoxically, “de-risking” can in fact decrease resilience, if flexible access to supply chain partners is decreased.

For the time being, Southeast Asian economies have benefitted from the supply chain restructuring that has seen some investment move from China to manufacturing locations such as Vietnam, Thailand and Malaysia. Chinese investment has also flowed to Indonesia’s minerals industry.

 The sustainability of these economic flows depends on the continued willingness of both the U.S. and China to tolerate the region’s choice, not take sides.

The opinions stated are those of the author. 

Natasha Hamilton-Hart is Director of the New Zealand Asia Institute and Professor in the Department of Management and International Business, University of Auckland Business School

- Asia Media Centre