China has mostly been very successful in managing its complex relationship with the US. It appears supportive of US-led initiatives on North Korea and Iran, has found a little room for compromise on the renminbi, and still posts massive trade surpluses without unleashing, so far, a US protectionist backlash.
When it comes to relations with Asian countries, however, China’s track record in balancing economic and strategic interests is less stellar.
Take South Korea. For several years its links with China grew rapidly as domestic companies made the most of investment opportunities and domestic consumers gobbled up low-cost Chinese consumer goods. China is now easily South Korea’s main trading partner. But there has clearly been a shift in Korean attitudes that cannot simply be attributed to the rightward shift of Seoul’s policies following the election of President Lee Myung Bak. It is connected to Beijing’s support of Pyongyang in the face of the latter’s nuclear and missile ambitions. South Koreans have also noted China’s naval buildup and denunciations of the US-South Korea naval exercises.
Some of the same problems have arisen with Japan. Prime ministerial visits to the Yasukuni war shrine may have stopped for now, but beyond that Tokyo appears more suspicious of Beijing’s long-term intentions and the wisdom of relying so heavily on the Chinese market for export growth.
For sure, in neither case have political divides yet had any discernible impact on trade and investment. However, these things take time and can be hard to measure.
Commodities king
Looking at the wider region, Beijing is still in a very strong position as long as its commodity needs grow while those of Korea and Japan are nearly stagnant. Palm oil and natural gas from Malaysia, coal, copper and timber from Indonesia, iron ore from India, and coffee from Vietnam – in each case Chinese demand has boosted global prices and spurred export volumes.
Now China has the cash and technical experience to help the region. Countries such as Indonesia, Vietnam and the Philippines are badly in need of infrastructure; China has companies that can build it. Beijing also has a free trade deal with the Association of Southeast Asian Nations (ASEAN) and is aware of the long-term growth potential – and therefore the opportunities for private investment – of these countries.
There are several reasons why the region remains wary. They include concerns about quality, difficulties in dealing with Chinese firms that have limited foreign experience, and a perceived preference for bringing in Chinese labor rather than hiring locals. Most activity so far has been by state-owned firms pursuing national interests – such as access to commodities – rather than long-term profits.
There is also concern about Chinese penetration of domestic markets leading to the undercutting local producers. This explains a preference for Japanese and Korean investment, which can help ward off Chinese competition or bring in new technology.
Socio-political divisions
Beyond these commercial issues are deeper factors. The first is Beijing’s recent reassertion of its claim over the South China Sea, which makes smaller nations wary of becoming too reliant on China for trade and investment. Then there is the cultural gap between China and the ethnic Malay nations; residual doubts remain in these countries about the commitment of some ethnic Chinese citizens to their adopted nations. Vietnam may have closer cultural links with China, but the two sides have a history of territorial dispute.
As for India, the huge growth in trade with China is largely due to raw material exports as well as Chinese penetration of Indian consumer goods markets. Neither is viewed favorably in India, which wants to be able to produce most low- to mid-market consumer goods as cheaply as China. The future scope for China-India trade growth is probably already limited and recent diplomatic scuffles don’t help matters.
None of these problems is currently at crisis level and all can by dealt with in a spirit of compromise. But China does need to be more sensitive to its neighbors’ national interests if it is to leverage its current economic strength and deepen its trade and investment relations in Asia on a permanent and mutually profitable basis.