How China Is Reshaping the Industrial Geography of Southeast Asia

The variety of channels through which China’s growing economic and political weight has begun impinging upon other countries has aroused intense interest and not a little concern. Nowhere is this interest—and concern—stronger than in China’s Southeast Asian neighborhood. The economies in this region are feeling the sharp edge of competition from Chinese products in their shared export markets. They also are benefiting from China’s swelling appetite for imports fueled by growth of Gross Domestic Product (GDP) averaging close to 10 percent per annum between 2001 and 2007. Southeast Asian countries can see the positive and negative sides of the trade ledger, and they are reassured that in the medium term, China’s rapid development is likely to be a plus. It has provided new and fast growing markets for their exports and opportunities for investment by Southeast Asian firms. Although a substantial volume of foreign capital is now heading toward China, enough is still flowing into Southeast Asia, which soothes nerves. Moreover, governments in Southeast Asian countries believe that their business environment, manufacturing capabilities, and the skills of their workforce provide them with a competitive edge. They also derive some comfort from the rising wages in China’s coastal cities that they hope will contain a widening of the cost advantage in China’s favor.1 Even if China squeezes Southeast Asian producers out of the markets for low tech, labor intensive, “commodified” manufactures, countries such as Malaysia and Thailand see opportunities in moving up the value chain and of diversifying into profitable niches via technological upgrading and innovation. Policymakers throughout the region and around the Pacific Rim console themselves that the laws of trade theory are firmly on their side. In a globalizing and growing world economy, a country, even a very large one, cannot have an absolute advantage in all products and services (Yusuf, Nabeshima, and Perkins 2007).