John Ravenhill, ‘Is China an Economic Threat to Southeast Asia?’ IR Working Paper 2006/4, Canberra: Department of International Relations, Research School of Pacific and Asian Affairs, The Australian National University, May 2006.

China’s entry into the World Trade Organization (WTO) caused widespread concern that it would gain market share at the expense of other economies in East Asia, especially the lower-income ASEAN economies. Economic modelling done by the World Bank and others appeared to substantiate these fears; the conclusions of these studies caused further consternation among politicians and academic commentators in Southeast Asia who believed that China’s success in the 1990s in attracting foreign direct investment had come at ASEAN’s expense.

Data on investment and trade have now been published for the first three years since China’s accession to the WTO, enabling an initial investigation of the impact of this development on ASEAN. Data on FDI inflows at first sight appear to support an alarmist view of the impact of China on ASEAN economies. But much of the commentary on this subject contains a number of logical fallacies. These include mistaking correlation for causation, a misrepresentation of foreign direct investment as constituting a fixed sum and a consequent fallacy that competition for foreign direct investment is inevitably a zero-sum game, and unwarranted implicit assumptions about what an ‘appropriate’ level of FDI for China might be. Data on stocks rather than flows, and data drawn from source countries rather than from China, present a more positive picture for ASEAN. China’s FDI inflows are also overstated because of the phenomenon of ‘round-tripping’ capital.

Trade data do provide evidence of how Chinese manufactured exports have supplanted those of ASEAN in the Japanese and US markets. But losses in these markets are offset by gains in ASEAN manufactured exports to China. A new regional division of labour is emerging in which ASEAN economies are becoming important sources of components for assembly in China.