Why Chinese economic diplomacy is working in Southeast Asia

By Angela Han, an intern with the Lowy Institute's East Asia Program.

When President Rodrigo Duterte stood in the Great Hall of the People in Beijing this October and announced that 'Duterte of the Philippines is veering towards China', he received thunderous applause.

After going on a tirade against Americans (who he considered to be ‘arrogant’ and ‘rude’), he ended his speech on a gentler note, requesting that China invest in Filipino infrastructure projects, and hoping the country would 'find in its heart to help us in our needs'.

The charm offensive worked. Duterte returned to the Philippines with $24 billion worth of Chinese funding and investment pledges, including $11.2 billion worth of agreements signed between Filipino and Chinese firms on railways, ports, energy, and mining. Although there is no certainty that the agreed investments will all materialise, China is clearly enthusiastic about establishing deeper economic ties with the Philippines.

Throughout Duterte's visit, the thorny issue of the territorial disputes took a backseat. President Duterte even told reporters that he 'didn’t come here to talk about the South China Sea'. In July, the Philippines won a landmark victory when an international tribunal rejected China's claims but President Duterte has shown he is willing to put the dispute on hold in exchange for Chinese funding for the developmental needs of his country. In fact, a Chinese firm that managed to secure Filipino infrastructure deals is reportedly the very same firm that Beijing used for reclamation activities in the disputed Spratly Islands.

President Duterte’s visit to China was undoubtedly influenced by the fear of being left out of China’s economic efforts in Southeast Asia. During the last two years, Indonesia, Malaysia, Myanmar, Singapore, and Thailand have all scored major infrastructure deals with the economic giant as part of China’s 'One Belt, One Road' Initiative. Last year, total FDI inflows to the Philippines was valued at only $5.2 billion, far lower than Indonesia ($15.5 billion), Vietnam ($11.8 billion) and Malaysia ($11.1 billion).

In the past five years, the China's relationship with ASEAN nations has been largely defined by the zero-sum scenario present in the South China Sea. But now the Philippines, historically China’s strongest adversary in the region, is appearing to pursue economic rapprochement with China, the China-ASEAN relationship is likely to return to the way it has been for the previous 25 years: one based on the practical aim of mutual economic benefits. With every railway, road or port built, China is cementing its ASEAN ties.

There are two additional reasons why Chinese economic diplomacy is likely to continue working in Southeast Asia.

First, the other prominent economic diplomacy tool in the region, the US-led Trans-Pacific Partnership (TPP), is dead. White house officials have confirmed that the trade deal will not be pushed through Congress in the next two months and President-elect Donald Trump has vowed to withdraw from the TPP 'from day one' in office. Without US participation (which would represent 62% of total TPP GDP), the TPP cannot come into effect, as it requires that the combined GDP of all countries ratifying the agreement amount to 85%.

This is a major disappointment for all other signatories of the pact and also has huge implications for US standing in Southeast Asia. The four ASEAN members involved in the agreement - Brunei, Malaysia, Singapore and Vietnam - made substantial concessions to be part of the deal that promised improved access to member markets that make up 40% of the global economy. Vietnam’s authoritarian communist government, for example, had to accept freedom of association for its labour unions, even though this posed a threat to regime stability.

The frustration and disappointment among Southeast Asian governments was captured by Singaporean Prime Minister Lee Hsien Loong, who spoke about the impact that a TPP failure would have on US credibility in the region:

Your standing goes down with many countries around the world. Your opponents as well as your friends will say: 'You talked about the strategic rebalance, you talked about developing your relationships. You can move aircraft carriers around. But what are the aircraft carriers in support of?' It has to be deeper economic and broad relationships.

Second, Chinese-style economic diplomacy is focused more on the ‘hardware’ of economic cooperation and less on the ‘software’. This is what differentiates One Belt, One Road from the TPP. The latter not only aims to eliminate at-the-border trade barriers such as tariffs and quotas, but also addresses trade barriers that go beyond the border, such as labour rights, environmental standards, intellectual property rights and the regulation of state-owned enterprises.

These are the ‘soft’ issues that ASEAN has persistently struggled with when pursuing its own integration agenda. While reducing intra-regional tariffs has been relatively successful, the implementation of other trade-facilitating initiatives (such as competition policy and the harmonisation of product standards) has been notoriously slow. Such initiatives usually require changes to domestic legislation that some ASEAN scholars have argued go against ASEAN’s core principles of non-interference in domestic affairs.

By contrast, economic cooperation with China does not involve accepting any single homogenising framework with common rules and values. Instead, the terms of any deal are agreed bilaterally and not enshrined in any legally-binding instrument. This plays to another ASEAN value: the aversion to formality and legalism. In this regard, Chinese initiatives are assuming a form and expression that seem familiar, and thus more attractive, to ASEAN members.

ASEAN and China’s joint focus on the ‘hardware’ of economic development reflects a mutual belief that development may best be pursued through infrastructure projects and regional connectivity. The emphasis on infrastructure that connects and engages peripheral and less-developed regions ensures that the benefits of global trade are available to all, rather than being trapped in urban centres such as Singapore, Kuala Lumpur and Jakarta for ASEAN, and the coastal cities for China.

The model thus avoids the ill effects of trade and globalisation now being felt in the developed world where, unlike the win-win scenario promised by economic theory, unequal distribution of benefits has widened the divide between the haves and the have-nots.

Of course, new problems might arise from waning US influence in the region and increasing economic dependence on China. But faced with a TPP failure and a world where globalisation and trade are under unprecedented attack, ASEAN countries are searching for alternative means to continue their pursuit of regional development and integration. China offers just that: a development model which embodies the ideas that globalisation and trade need to be managed, not abandoned.

Photo: Getty Images/Pool