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Free Trade, Disputed Waters

Simon Roughneen, August 15, 2010

Mount Merapi in Indonesia.

The Association of Southeast Asian Nations (Asean) has often been sidelined by bilateral dealings between China and Asean member-states. But on January 1, the organization scored a major victory when the free trade agreement (FTA) between China and Asean came into effect.

The FTA was a logical follow-up to the facts on the ground: Trade between the two sides more than quadrupled between 2001 and 2009, from $41.6 billion to $213 billion. With the FTA in place, trade between China and Asean is expected to surpass that between the United States and Asean by the end of 2012.
Also on the positive side, in late 2009, China and Asean decided to set up the $10 billion China-Asean Investment Cooperation Fund to underwrite infrastructure, energy, and information and communications technology projects across the region.

Some Asean members have substantial reserves of resources such as oil, natural gas, coal and other commodities that China needs, and new infrastructure development will be required to access them. In return, Asean member-states and their flagship companies get access to the vast and growing Chinese market, highlighted in July by the pledge of Thailand’s CP Group to expand its retail business in China to 1,000 outlets over the coming decade.

The full story of China-Asean relations, however, is a mix of good and bad. Both Thailand and Vietnam recently complained to China about the impact of a series of dams, both existing and proposed, to be built on the Mekong River (known as the Lancang River in China). A Chinese public relations exercise bringing lawmakers from neighboring countries to view dam projects in Yunnan failed to dampen anger. Thai officials said that the existing four dams have compounded the effects of drought for millions of Southeast Asians who depend on the river for their livelihood.

China’s bilateral trade with Burma reached $2.9 billion in 2009, second only to trade with Thailand among Asean countries, and China is the third-largest investor in Burma after Thailand and Singapore. With China set to pay the Burmese regime an estimated $970 million a year for gas from the Shwe field, economic links between the two neighbors will continue to grow. There were a few turbulent months after bilateral relations were damaged by Burma’s attack on the ethnic Chinese Kokang militia in Shan State last August, but China’s Premier Wen Jiabao received the red-carpet treatment in Naypyidaw in June, and some observers see Burma gradually slipping into a vassal-state relationship with China—although this probably underestimates the wiles of a Burmese regime adept at playing big powers against each other.

Vietnam is one Asean member-state that bristles at the notion of being a Chinese vassal. But Chinese investment in Vietnam comprises a third of all ongoing construction projects such as railways, ports and power plants, and the Vietnamese doi moi system—economic liberalization coupled with a one-party state—is modeled on Chinese reforms under Deng Xiaoping. One investment now causing friction, however, is the multi-billion dollar Chinalco-run bauxite mine in Vietnam’s central highlands. The Vietnamese are angry that 20,000 Chinese workers are filling jobs that locals could perform, perhaps contributing to Hanoi’s recently announced visa restrictions that are aimed at stemming the flow of illegal Chinese labor into the country.

The ongoing dispute over who owns what in the South China Sea puts China at odds with five Asean member-states, Vietnam included. At the turn of the year, China angered Hanoi by setting up local authorities on the disputed Paracel Islands, occupied by China since 1974 but regarded by Vietnam as part of its territory. In addition, the Philippines currently administers several islands claimed by China.

In 2002, the Asean-China Declaration on the Conduct of Parties in the South China Sea was set up as a mechanism to mitigate rising tensions over the maritime area, but China prefers to proceed on a bilateral basis rather than with the 10-member grouping as a whole, an approach rejected by Asean. The United States is backing Asean as it sees Chinese dominance of the South China Sea as a threat to American interests in the Asia-Pacific region, where it maintains treaty alliances with Australia, Japan, the Philippines, South Korea and Thailand.

U.S. Secretary of State Hillary Clinton said Washington is seeking to work with Asean nations, China and other countries to develop an international mechanism to resolve the disputes. She said the process should be institutionalized through Asean and based on the international law of the sea.

“The United States supports a collaborative diplomatic process by all claimants for resolving the various territorial disputes without coercion,” Clinton told reporters at the end of the two-day Asean Regional Forum in Vietnam in July. “We oppose the use or threat of force by any claimant.”

China’s claims in the South China Sea seem partly designed to keep the United States out of the region. Beijing has accused the United States of using naval ships in the area to conduct espionage, and China’s own claims over the sea would, if realized, prevent the United States from accessing the waters. China is currently retrofitting the 67,000-ton ex-Soviet vessel Varyag as an aircraft carrier. This would likely give China an unmatched advantage in any bilateral territorial dispute in the South China Sea and would give it enhanced leverage over the United States.

The United States is trying to gain traction with Asean and its member-states in other areas. In 2009, the United States and Asean signed a Treaty of Amity and Cooperation. In addition, the United States has embarked on an outreach effort with the Burmese regime, promising relaxed sanctions in the event of reforms in Burma. Old staples—such as the annual Cobra Gold military exercises with Thailand—also remain in place, and the United States continues to court Indonesia and Vietnam as growing political and economic friends in the region.

For Asean, however, the state of U.S.-China relations might have more of an impact on member-states than issues directly between the states and the two world powers. Most troublesome may be the public disquiet being voiced by U.S. multinationals about the changing business environment in China. In recent years, business interests have ensured that, despite their rivalry, U.S.-China relations have been kept on a fairly even keel. But giants such as Google and General Electric have recently broken taboos about criticizing the Chinese government, complaining that China is hindering the operations of multinational investors and boosting its own state-linked companies.

This could be a double blow to Asean members. To start with, it comes just as China begins to promote domestic consumer spending, with the vast domestic market representing the pot at the end of the rainbow for companies setting up shop in China. In addition, if U.S. companies sour on China, one of the effective brakes on bilateral rivalries coming to a head will be removed, and increased friction between China and the United States would have serious implications for Asean.

This article was originally published by The Irrawady: www.irrawaddy.org/.

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