China-ASEAN Sub-Regional Cooperation: Progress, Problems, and Prospect

CHINA-ASEAN

SUB-REGIONAL COOPERATION Progress, Problems and Prospect

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CHINA-ASEAN

SUB-REGIONAL COOPERATION Progress, Problems and Prospect

editors

Ming jiang LI Nanyang Technological University, Singapore

Chong Guan KWA Nanyang Technological University, Singapore

World Scientific NEW JERSEY

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LONDON

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SINGAPORE

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BEIJING

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HONG KONG

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TA I P E I

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CHENNAI

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Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

CHINA-ASEAN SUB-REGIONAL COOPERATION Progress, Problems, and Prospect Copyright © 2011 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher.

ISBN-13 978-981-4340-42-7 ISBN-10 981-4340-42-1

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Printed in Singapore.

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Acknowledgments This edited volume is the product of a workshop on China-ASEAN Sub-regional Cooperation that the S. Rajaratnam School of International Studies (RSIS) at Nanyang Technological University hosted in October 2009. The workshop received funding from the China-ASEAN Cooperation Fund coordinated by the ASEAN Secretariat. The editors of this book are grateful to the officials at the foreign ministries of the ASEAN countries and China who kindly supported this project. We also thank the relevant administrators at the ASEAN Secretariat for their coordination and assistance during the application and implementation of the project. We are indebted to many participants of the workshop, including Jusuf Wanandi, Rodolfo Severino, Wang Yuzhu, Djisman Simanjuntak, Pham Quoc Tru, Khamphao Ernthavanh, Samdech Norodom Sirivudh, Sompop Manarungsan, Moe Thuzar, Kuik Cheng Chwee, Noel Morada, Ahmad Nasri Abdul Latif, Ian Storey, and Mely Caballero-Anthony. Their active participation and insightful views presented at the workshop were indispensible for the success of the project. We also thank our colleagues at RSIS for helping to organize the workshop.

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Chapter

Contents Acknowledgments

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List of Contributors

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Chapter 1

Introduction Li Mingjiang

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Chapter 2

China’s Participation in the GMS Cooperation: Progress and Challenges Li Chenyang and He Shengda

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Chapter 3

The Planning and Challenges of the Pan-Beibu Gulf Economic Cooperation Gu Xiaosong

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Chapter 4

Sub-regional Economic Zones in China: Implications for ASEAN-China Cooperation Li Wannan

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Contents

Chapter 5

ASEAN Economic Growth Triangles and Implications for China Sarah Y. Tong and Catherine Chong Siew Keng

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Chapter 6

China’s Collaboration with Indochina Countries in Hydropower Development in the Mekong Region: How Far Can It Go? Phua Peipei

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Chapter 7

China-ASEAN Relations after CAFTA Yang Mu and Heng Siam-Heng

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Chapter 8

China’s Growing Economic Gravity in Southeast Asia: An Opportunity for Economic Statecraft? Kalyan M. Kemburi

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Index

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List of Contributors Catherine CHONG Siew Keng is currently a research assistant with the East Asian Institute, National University of Singapore. She received her Master of Arts (Contemporary China) from Nanyang Technological University in 2008. Her research interests cover China and ASEAN political and economic relations, the crossTaiwan Strait relations, and Northeast Asian economies and development. She also has a deep interest in modern Chinese history. She has co-authored several book chapters, journal articles, and conference papers on China-ASEAN trade relations and economic cooperation in East Asia. GU Xiaosong is Professor and Vice-President of the Guangxi Academy of Social Sciences and Director of the Institute of Southeast Asian Studies at the same Academy. He also serves as Executive Vice President of the Guangxi Institute of Beibu Gulf Development and Vice-President of the China Society for Southeast Asian Studies. His research focuses on international relations in Southeast Asia and regional development. He has authored and edited seven books. His most recent book is Zhongguo yu Dongmeng jiaotong hezuo zhanlue gouxiang [The Strategic Blueprint for Transport Cooperation ix

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between China and ASEAN] (Beijing: Social Sciences and Documentation Press, 2010). HE Shengda is a senior research fellow and former Vice-President of the Yunnan Academy of Social Sciences and a professor at Yunnan University. His research interests include Southeast Asia and its relation with Yunnan Province. He is also Deputy Director of the China Society for Southeast Asian Studies and Deputy Director of the Association for China-Foreign Relations Studies. He has served as a visiting research professor at the Center for Economic and Technological Studies of the Yunnan Provincial Government and a member of the Board of Experts at the GMS Cooperation Office, Yunnan Provincial Commission of Science. He has authored and translated eight books on Southeast Asian studies. HENG Siam-Heng is currently a visiting scholar at the East Asian Institute, National University of Singapore. He obtained his PhD from the Free University of Amsterdam. He has held academic appointments in Australia, China, Malaysia, the Netherlands and Singapore. His most recent book is The Long Recession: History, Ideology, Hubris and Nemesis. His other publications consist of 3 books, 30 peer reviewed journal papers and 12 book chapters. Kalyan M. KEMBURI is a researcher based in Beijing. His research interests include military modernization in Asia; nuclear energy and non-proliferation of nuclear weapons; missiles and naval weapon systems; and China’s foreign and security policies in South and Southeast Asia. He has published with The Bulletin of the Atomic Scientists and the Nuclear Threat Initiative. Kalyan previously worked at the S. Rajaratnam School of International Studies and the James Martin Center for Nonproliferation Studies (California, US) as a research analyst. KWA Chong Guan is Head of External Programmes at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University, and an adjunct associate professor in the

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history department at the National University of Singapore. He has been a co-chair of CSCAP Singapore since its inception. Prior to joining the RSIS he was Head of the old Department of Strategic Studies at the SAFTI Military Institute. Kwa started his working career in the Ministry of Foreign Affairs and Ministry of Defence. He was commissioned into the Singapore Armed Forces in 1969 and retired as a reservist lieutenant-colonel after having served in a series of staff appointments in military intelligence. Kwa’s latest publications include Energy Security: Asia Pacific Perspectives, co-edited with Virendra Gupta, which brings together a selection of papers from the CSCAP Study Group on Energy Security he co-chaired with his CSCAP India colleagues. LI Chenyang is a professor at the School of International Studies and Director of the Institute for Southeast Asian Studies, Yunnan University. He also serves as a standing director at the China Society for Southeast Asian Studies, deputy director of GMS Study Center, Yunnan University. He has taught at the PLA University of Foreign Languages. His research focuses on the political development, the problem of ethnic groups and religion, and foreign relations of Myanmar. He is also interested in contemporary politics and international relations of Southeast Asia. He has written more than 10 books or book chapters and more than 80 papers and policy reports. He has participated in the policy deliberations in China-Myanmar relations. LI Mingjiang is an assistant professor at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University. He is also the coordinator of the China Program and the coordinator of the MSc in Asian Studies Program at the RSIS. His main research interests include China’s diplomatic history, the rise of China in the context of East Asian regional relations and Sino-US relations, and domestic sources of China’s international strategies. He received his PhD in political science from Boston University. He has edited/ co-edited six books. His most recent book is Soft Power: China’s Emerging Strategy in International Politics (Lexington-Rowman & Littlefield, 2009). He has published papers in Security Challenges,

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Panorama (Konrad Adenauer Stiftung), The International Spectator, The Chinese Journal of International Politics, Journal of Contemporary China, China: An International Journal, and China Security. LI Wannan is an assistant professor at the Institute of Southeast Asian Studies of Jinan University. She received her PhD in economics from Xiamen University in 2005. Her principal research fields are China-ASEAN regional economic cooperation and the economies in Southeast Asian countries. She specializes in the Indonesian economy. She has published more than 20 articles and presented papers at various international conferences in Singapore, Malaysia, Vietnam, Hong Kong, and China. PHUA Peipei is an NGO activist. She has worked for nearly 10 years in both the private and public sectors in Singapore. During her stay at the Singapore International Foundation, she engaged professionals and specialists in Singapore to serve as volunteers and trainers to contribute to capacity-building projects in Cambodia. She is interested in East Asian social, political and economic developments, particularly the role of various institutions. She is also interested in ChinaCambodia relations. She has been working to apply academic knowledge to increase the efficacy of project design for various NGO activities. Sarah Y. TONG obtained her PhD in economics from the University of California, San Diego. She is Assistant Professor in the Department of Economics and Research Fellow of the East Asian Institute, both at the National University of Singapore. Her research interests concentrate on the recent transformation of the Chinese economy, including development in trade, foreign investment, and industrial restructuring. Her recent work appeared in journals such as Journal of International Economics, Global Economic Review, China: An International Journal, Review of Development Economics, China & World Economy, Comparative Economic Studies, and China Economic Review. In addition to contributing chapters to several recent books on contemporary China, she also co-edited a book titled China and

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the Global Economic Crisis, published by World Scientific in early 2010. YANG Mu is a senior research fellow at the East Asian Institute, National University of Singapore. He was previously CEO and Executive Vice President of several companies in Hong Kong and China. In the 1980s, he was Deputy Director of the Institute of Industrial Economics, the Chinese Academy of Social Sciences, and participated in China’s central government policy formulation in industrial development and the reforms of the state-owned enterprises. His book Chanye zhengce yanjiu [Industrial Policy Research] was a pioneering academic work during China’s reform era. In 1988, he was a recipient of the Sun Ye Fang Prize for Economics, a prestigious award in China. His research now focuses on the world financial crisis, China’s macroeconomic policy, China’s industrial development, and the M&A of Chinese companies abroad.

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1 Introduction Li Mingjiang

ABOUT THE BOOK The relationships between ASEAN countries and China have entered a new era of dynamic engagement and comprehensive cooperation. Now the cooperation between the two sides is truly multi-dimensional, involving economic integration, political dialogues, security consultations and social interactions. ASEAN countries develop their relations with China at the sub-national level (provincial/local government), the state level (individual ASEAN countries and China), the group level with ASEAN as a collectivity (ASEAN+China), and at the multilateral level (e.g. ASEAN+3 and the East Asian Summit). With the rapid development of bilateral relations between ASEAN and China, some new initiatives have been proposed and new areas of cooperation have emerged. These mainly include the new developments in the Greater Mekong Subregion (GMS) cooperation, the emerging Pan-Beibu (Tonkin) Gulf regional cooperation, the Nanning-Singapore Economic Corridor, the East-West Economic Corridors on the Indochinese peninsula, ASEAN-China cooperation in maritime affairs and non-traditional security issues. 1

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These new initiatives and proposals come from a variety of sources, including central governments, local governments, and the scholarly community. In the past few years, many ASEAN policy makers have been puzzled and perplexed by this dazzling flow of ideas and proposals. To many government officials and observers of regional affairs, it is unclear whether and how these various policy proposals would overlap, conflict, or reinforce each other. It is therefore worthwhile and timely to further explore how ASEAN countries and China could prioritize and better coordinate their regional and sub-regional cooperation. It is also opportune to examine their past achievements and areas of contending or conflicting interests in relation to these new initiatives and proposals in a comprehensive manner. Within ASEAN, the increasing institutionalization of ASEAN and the socio-economic transformations of its member states are also factors that need to be addressed in studying ASEAN-China cooperation. It is unclear how the domestic changes in ASEAN countries and their respective domestic imperatives would warrant ASEAN countries to respond to these new initiatives. In addition, all the emerging new initiatives and projects will also have to be considered in the context of ASEAN integration and cooperation. In this sense, it is highly necessary to explore the implications of further ASEANChina cooperation on the development of ASEAN, especially the community building of ASEAN. The impact of ASEAN-China cooperation will not be limited to the bilateral ties. Regional and sub-regional cooperation between ASEAN and China will also have profound implications for ASEAN’s relations with partners in East Asia and external partners. Many issues in ASEAN-China relations also concern other East Asian countries and external powers. In the eyes of many international observers, many of the sub-regional cooperation schemes are apparently Chinese efforts to continue to proactively engage with ASEAN. There is plenty of evidence to show that other major powers that have a stake in Southeast Asia and East Asia are concerned about these developments. The US, Japan, South Korea, and India are worried about China’s growing influence in the region. Some analysts in

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ASEAN are also concerned about the emerging trend that some ASEAN countries, in particular mainland Southeast Asia, will gradually fall into the Chinese orbit. To address these issues and concerns, the S. Rajaratnam School of International Studies (RSIS) at Nanyang Technological University organized an international workshop among scholars and researchers from ASEAN countries and China in October 2009. This book is a selection of the papers that were presented at the workshop and two additional research papers were added to this final volume. This book attempts to ascertain whether and how the various policy proposals would overlap, conflict, or reinforce each other. The project attempts to further explore how ASEAN countries and China could prioritize and better coordinate their regional and sub-regional cooperation. We examine China-ASEAN relations from a sub-regional cooperation perspective. The book discusses and analyzes China-ASEAN cooperation in the GMS, the emerging Pan-Beibu economic zone, ASEAN’s growth triangles, and the hydraulic power sector, as well as China-ASEAN economic relations in the wake of the financial crisis. We carefully review the progress that has been achieved, examine new policy proposals that have been put forth, and explore problems that exist in all these sub-regional cooperation schemes between China and ASEAN. This book will be the first that examines China-ASEAN relations from a sub-regional perspective. Many existing books study ChinaASEAN relations at either the state or regional level. This book is unique in adopting a sub-regional approach. We believe that because of this new perspective this book can make some contributions to the field. First of all, we think that this perspective is highly relevant and significant because in reality a lot of cooperation between China and ASEAN has taken place in various sub-regional plans. And it seems that this trend is accelerating. This book seeks to give a better understanding of China-ASEAN relations and future trends in the bilateral relations. Second, China’s participation and contribution to all these subregional cooperative schemes have entailed a lot of anxieties on the part of other major powers in East Asia. The US, Japan, India, South Korea,

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and even the European Union are closely watching China’s inroads in these sub-regions. Recently, the US decided to intensify its involvement in the GMS project as part of its strategic plan to balance China’s growing influence in Southeast Asia. In this sense, this book will be very important for our understanding of the strategic dynamics in East Asia as well. Third, taking a sub-regional approach has allowed us to bring in the roles of local governments in forging cooperation between China and ASEAN and shaping the overall bilateral relations. The role of local governments has been largely missing in the existing literature. We hope to fill in this unfortunate gap. Fourth, a lot of discussions and analyses in this book focus on the impact of the financial crisis on the economic relations between China and ASEAN countries. This is an area in which we have seen many new developments that deserve to be carefully studied. Fifth, this book will contribute to studies on East Asian regionalism or regional integration. The existing literature on East Asian regional integration/regionalism has focused on FTAs and security community building. The role of sub-regional cooperation and integration in facilitating regional integration has been largely neglected. It is our hope that this book will help address these important issues.

CHINA’S PROVINCIAL APPROACHES TO ASEAN This book highlights the various provincial approaches in China to relations with ASEAN. Let me briefly summarize some of the provincial approaches to China-ASEAN cooperation. Detailed discussions are presented in the first chapters of this book. In the past decade or so, many observers have described an apparently consistent and unified Chinese approach to ASEAN countries. Many of them would agree that the overall China-ASEAN relations since the mid-1990s can be characterized as ever-increasing economic, political, and social engagements on the one hand and limited progress in the military and security arenas on the other hand. China’s participation in various ASEAN-centered multilateral institutions, the deepening economic integration between China and ASEAN, and China’s involvement in various cooperative schemes in

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non-traditional security have been frequently identified as the positive changes that have taken place in China-ASEAN relations. The lingering strategic distrust in some ASEAN countries towards China, the paucity of security interactions between China and many ASEAN members, and the tensions in the South China Sea have been often cited as evidence of constraints on the further development of ChinaASEAN relations. This description perhaps reflects quite well the reality in ChinaASEAN relations. What is missing in our understanding of China’s policy towards ASEAN is the role of various Chinese provinces which are geographically close to ASEAN in adding to the substance, and in many respects shaping the trajectory, of the China-ASEAN relations. In fact, some of the provincial units in China, such as Yunnan, Guangxi, Guangdong, and Hainan, have played a very important role in steering China-ASEAN relations. These border provinces have been the implementers of various policies and programs agreed upon by the Chinese and ASEAN leaders. Not only that, provincial governments in China have put forth and in many cases quite strongly pushed for various projects between these provinces and ASEAN or part of ASEAN. These provinces have their own local interests and so have also competed amongst themselves in reaching out to ASEAN or some members of ASEAN. As a result of various provincial approaches and their competition for engagement with ASEAN, there has been a flurry of different proposals and strategies with regard to regional and sub-regional cooperation between China and ASEAN. Yunnan Province, which borders Myanmar, Laos, and Vietnam, has been the pioneer in China-ASEAN engagement. Yunnan was the first official participant on behalf of China in the GMS Cooperation that covers transportation, energy, telecommunications, human resource development, tourism, environment, trade and investment, anti-drug operations, and other fields. The GMS platform was the most important and the only officially supported sub-regional economic cooperation mechanism between China and ASEAN before 2001 when the two agreed to build the China-ASEAN Free Trade Area (CAFTA). The GMS has always been the priority for Yunnan’s

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interactions with the Indochina countries. Yunnan took the lead in pushing for transport connectivity between China and ASEAN countries by proposing railway, highway, airport, and river projects. For instance, the Yunnan government played an important role in dredging the Lancang-Mekong River and managing commercial navigation of the river. Yunnan has made strenuous efforts in setting up various subregional cooperation platforms with its bordering countries. It is now a member of various multilateral mechanisms in the GMS, for instance the Joint Committee on Coordination of Commercial Navigation on the Lancang-Mekong River among China, Laos, Myanmar and Thailand, the Yunnan-North Thailand Cooperation Working Group, the Economic Cooperation Consultation of Yunnan and Four Provinces of Vietnam, the Yunnan-North Laos Cooperation Working Group, and the Yunnan-Myanmar Economic and Trade Cooperation Forum. Yunnan also took an active role in constructing the Kunming-Bangkok highway and in enhancing telecommunications cooperation between China and ASEAN. Perhaps more importantly, Yunnan worked with other GMS members in pushing for trade facilitation measures years before the official launching of the CAFTA in January 2010. As a result of all these policies, trade between Yunnan and other GMS participants has increased quite substantially and China-ASEAN cooperation in agriculture, energy, tourism, human resources, environmental protection, and anti-drug operations has made some achievements. A notable example of Yunnan’s success in pushing for its provincial initiatives under the China-ASEAN cooperation framework is the oil and gas pipeline that connects Yunnan and Myanmar. The project has been officially approved by China’s central government and Myanmar and is now under construction. The idea of building this pipeline initially came from Yunnan. Local leaders in Yunnan clearly realized that there were enormous economic benefits to be gained if such a plan materialized. Yunnan adopted a variety of strategies to push for this initiative. First, it effectively took advantage of the “Malacca Strait Dilemma” — widespread Chinese concern about China’s energy transport security through the Malacca Strait.

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Proponents of the China-Myanmar pipeline strongly argued that the pipeline to Myanmar’s coast was necessary for China’s energy security. Some of the most influential media outlets and prominent scholars in China were mobilized to support Yunnan’s plan, which eventually convinced many, including top Chinese leaders, that the pipeline was for national energy security and should be regarded as part of China’s international strategy. Yunnan also quite strongly lobbied various ministries in Beijing to gain their support. Third, the Yunnan government’s initiative coincided with the China National Petroleum Corporation’s plan to expand its business in China’s vast Southwestern market, which has been seriously contended among the oil giants in China. Guangxi, which borders Vietnam and has a few ports in the Beibu (Tonkin) Gulf, was a latecomer in China-ASEAN relations. Guangxi joined the GMS as an official member in 2005, but policy makers in Guangxi realized that Guangxi did not have any advantage in participating in the GMS. In the early years of the 2000s, Guangxi stepped up efforts to match and compete with Yunnan in getting more attention, support, and preferential policies from the central government in Beijing under the framework of China-ASEAN business ties. One success story is the decision to have the annual China-ASEAN Expo permanently held in Nanning, the capital city of Guangxi. In 2004, the Vietnamese proposed to China to build “two corridors and one circle” economic cooperation zones with China. The “two corridors and one circle” refer to the Kunming-Lao Cai-Hanoi-Hai PhongQuang Ninh corridor and the Nanning-Lang Son-Hanoi-Hai Phong corridor and the Beibu Gulf economic circle. China agreed to the Vietnamese proposal. The Beibu Gulf economic circle would also include China’s Guangdong and Hainan Provinces and five provinces in Northern Vietnam. This economic circle covers a total land area of nearly 870,000 square kilometers and a population of 184 million. Starting from early 2006, however, Guangxi began to push for a Pan-Beibu Gulf Economic Cooperation Zone to include parts of China’s Southwest and Southeast, Vietnam, Malaysia, Singapore, Indonesia, the Philippines, and Brunei. Under the proposed PanBeibu Gulf Zone, China and ASEAN would pursue an M-shaped

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economic cooperation structure: the Mekong Subregion, the Nanning-Singapore Economic Corridor (mainland economic cooperation), and the Pan-Beibu Gulf zone (maritime economic cooperation). Guangxi proposed that the Pan-Beibu Gulf regional economic zone be officially incorporated into the ASEAN-China cooperation. Guangxi has organized five large-scale forums on the Pan-Beibu proposal and has invited various policy makers in Southeast Asia, officials from the Chinese central government, and experts to participate in the forums and to obtain their support. Initially, for the Pan-Beibu scheme, much attention was on cooperation in the maritime domain, for instance, maritime connectivity through ports cooperation, maritime tourism, joint exploitation of maritime energy, and marine industries. But over the years, policy makers in Guangxi have realized that maritime cooperation is very difficult due to the disputes in the South China Sea. Now the focus of the Pan-Beibu scheme has shifted to land, particularly the NanningSingapore Economic Corridor. Scholars at the Guangxi Academy of Social Sciences have conducted extensive research into the infrastructure conditions of the corridor and have had extensive discussions with experts in other relevant think tanks in Southeast Asia. The most recent Pan-Beibu forum, held in Nanning in August 2010, highlighted the feasibility and usefulness of the Nanning-Singapore Economic Corridor. Chinese senior officials have indicated that China would be willing to provide finance and technology for the construction or renovation of high-speed railways and highways from Nanning to Singapore. It is hoped that the Nanning-Singapore Economic Corridor will help promote China-ASEAN cooperation in tourism, logistics, trade, investment, and the formation of industrial chains. At the same time, Guangxi is pushing for cooperation among major ports surrounding the South China Sea. Obviously, the ambition for Guangxi is to become a regional hub to connect China’s vast middle and Western provinces and almost all the Southeast Asian countries. Guangxi has urged the Chinese foreign ministry and central government in Beijing to submit the Pan-Beibu scheme to meetings of senior officials and even ministers between China and ASEAN. The

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ultimate goal is to make it an official program in the ASEAN+China (10+1) cooperation framework. Guangxi is hoping to shape ChinaASEAN relations under the “one axis and two wings” strategy. The one axis refers to the Nanning-Singapore Economic Corridor and the two wings refer to the GMS on the one hand and the Pan-Beibu scheme on the other. Local leaders in Guangxi are hoping that the “one axis and two wings” strategic plan will be accepted by China and ASEAN as the official blueprint for China-ASEAN cooperation in the long run. Fearing that it might be marginalized by other economic cooperation schemes, Hainan has also quickened its steps to come up with alternative proposals. A few years ago, the National Institute for South China Sea Studies, based in Hainan, made a grand proposal. The institute proposed setting up a Pan-South China Sea regional economic cooperation organization to include China’s Pan-Pearl River Delta region, Taiwan, and six other neighboring states, including Indonesia, Malaysia, Singapore, Vietnam, the Philippines, and Brunei. At the time when the proposal was put forth, Hainan was still searching for an overall long-term development strategy and the central government in Beijing was also considering a grand design for Hainan’s future development. Also, the fact that Hainan itself did not have much industry and was economically weak did not help the proposal attract much attention. As a result, this proposal never surfaced to the level of official discussion. Now the Chinese central government and Hainan provincial government have decided to focus on tourism as the long-term development strategy for Hainan. The goal is to build a world-class tourist island for the province. Very likely, Hainan will not be an important participant in the Pan-Beibu economic zone but will be enthusiastic about cooperation in tourism with ASEAN countries. Currently, many Chinese analysts agree that Guangxi has been able to grasp the momentum in China-ASEAN relations and is now playing a leading role in shaping China-ASEAN cooperation. Yunnan has lagged behind in this provincial competition. Decision makers in Yunnan are now looking for other grand proposals for sub-regional economic cooperation. One big idea that has been circulating among

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officials and experts in Yunnan is the possibility of Yunnan serving as the connecting point for mainland Southeast Asia and the eastern part of South Asia, including India. Guangdong Province, one of China’s most important economic centers, has always been an important participant in China-ASEAN economic relations. Now Guangdong is gradually undertaking a strategy of upgrading its industrial structure. It aims to relocate many of the labor-intensive manufacturing facilities to other places and instead promote more value-added and hi-tech industries. How this new industrial policy in Guangdong will affect China-ASEAN relations, especially the economic relations, remains to be seen.

CONTENTS OF THE BOOK Chapter 2 gives a comprehensive review of China’s participation in the GMS Cooperation. Li and He, two scholars from China’s Yunnan Province who have been closely involved in the major developments of this sub-regional cooperation, discuss the progress and challenges in the Greater Mekong Subregion. The two authors argue that since its participation in 1992, China has played an important role at every stage in GMS Cooperation to push forward the expansion of the areas of cooperation and deepening of the substance of the cooperation. They elaborate on the role of local governments in China, in particular Yunnan and Guangxi, in the GMS Cooperation. Li and He contend that the involvement of outside powers like the United States, Japan, and India adds more difficulties to the coordination of GMS Cooperation and prevents China from playing the key role in the cooperation. In addition to that, they believe that the Chinese central government has not paid sufficient attention to GMS and as a result the importance of GMS Cooperation for China has declined. They explain how problems like eco-environment degradation, illegal immigration, cross-border ethnic issues, drug trafficking, gambling, and other non-traditional security issues have constrained the cooperation and development in the GMS.

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Chapter 3 addresses the emerging Pan-Beibu sub-regional economic cooperation by examining the origins of the plan, some of the difficulties, and possible areas of cooperation. Gu argues that the PanBeibu scheme is highly feasible and beneficial because it takes advantage of the geographical location of Guangxi and other potential participant states, as well as the intensifying economic ties between China and ASEAN. Gu contends that the NanningSingapore Economic Corridor, China’s investment and participation in the development of the BIMP-EAGA sub-regional economic cooperation and the Beibu Gulf Economic Zone will benefit all the members of the Pan-Beibu Gulf sub-regional cooperation. At the same time, there are also significant challenges and obstacles. Gu points out that it is difficult for all participating members to agree to some specific projects to make a breakthrough for the Pan-Beibu subregional cooperation. Gu argues that the Guangxi Beibu Gulf Economic Zone should take the initiative to become the core zone for economic cooperation in the Pan-Beibu Gulf area. Chapter 4 discusses various sub-regional economic zones in China and their implications for ASEAN-China cooperation. Li points out that all sub-regional economic development plans in China, including the coastal regions, Western China, Central China and Northeast China, have implications for China’s economic relations with ASEAN countries and are active participants in the establishment of the ChinaASEAN Free Trade Area. In particular, Li Wannan analyzes the sub-regional economic development in the Pearl River Delta, an area that is geographically close to ASEAN and has emerged as one of China’s most important industrial centers. She suggests that the further economic reforms in Guangdong Province will have a significant impact on China-ASEAN cooperation. She believes that the Pearl River Delta economic development and the Western Taiwan Straits Economic Zone will further strengthen the economic links between China and ASEAN. The author further points out that Guangdong’s ASEAN strategy is still in the making but that Guangdong will very likely become an important investor in many ASEAN countries. Tong and Chong in Chapter 5 explore the progress and problems in ASEAN economic growth triangles and the implications for

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China-ASEAN relations. Within the Southeast Asian (SEA) region, there are a lot of so-called economic growth triangles like IMS, SIJORI, GMS, IMT, BIMSTEC and BIMP-EAGA. They argue that the implementation of the CAFTA will have a big impact on these growth triangles because multinationals in the region will gradually restructure their supply chains and rationalize their production networks by taking China and ASEAN together as a single market. ASEAN countries have to accelerate their economic consolidation and integration within the region to remain competitive. The two authors suggest that, as a rising regional power, China needs to be accommodating in inviting and welcoming wider participation from different parties. It is crucial to take into account the concerns of various parties as well as the domestic constraints different governments face. In addition, efforts to promote regional cooperation should be consistent with WTO principles aimed at building a freer global trading system. Chapter 6 discusses a very controversial issue in China-ASEAN relations: hydropower development in the Mekong region. Phua notes that hydropower development and infrastructure building to facilitate regional power trade has been a key investment feature of the GMS program since the 1990s. But at the same time, these projects are generating much controversy and many dilemmas for states and decision makers. On the one hand, they enhance regional and economic cooperation by producing and making available for trading a commonly desired economic good — electricity. On the other hand, they breed potential conflicts as economic losses, devastating impacts on the environment, and hardship for a large number of communities are expected to be borne unequally amongst the riparian states. Phua argues that Indochina governments in the lower basin of the river and more investors have rushed to propose and commit to host new projects. China, being the host to the source of the Lancang-Mekong River, has not only unilaterally planned to build up to a total of eight dams on its part of the upper mainstream of the river, but is also collaborating and investing to build dams in the downstream riparian states of Laos and Cambodia. The author argues that

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hydropower development will still proceed to some extent, particularly that planned for the Mekong tributaries, as political agents, multilateral institutions, and investors have largely geared themselves towards collaborating to develop hydropower and have invested much time, deliberation and finance over the years. However, progress of highly controversial dams on the mainstream of the Lower Mekong River is unlikely in the near future due to the need to assess fresh uncertainties brought about by environmental conditions and climate change. The implementation of the China-ASEAN Free Trade Agreement in January 2010 marks an important milestone in their relations. CAFTA builds on and extends the growing economic relationships between the two sides. In Chapter 7, Yang and Heng argue that the agreement is expected to further promote ChinaASEAN trade along with intra-regional direct investment and extra-regional FDI. However, as a result of the 2008 financial crisis, global economic conditions have changed significantly from those prevailing at the time of drafting the agreement. This may present new opportunities and challenges. The future success of this agreement depends on whether its signatory members can work together to overcome the challenges and make good use of the opportunities. Further down the road, ASEAN and China can build on CAFTA to enhance their economic cooperation and integration through coordination in monetary and fiscal policies as well as industrial policies. Chapter 8, by Kemburi, discusses the rise of China as a key source of demand and investment for Southeast Asia and the institutional capability of Beijing to leverage this economic prowess to influence foreign policies in the region. Kemburi argues that despite the domestic roadblocks and regional concerns, there is much evidence to suggest that the Chinese economy will be a key source of trade and investment for ASEAN due its robust commodities market, growing consumption of final goods, and increasing outward FDI. He also concludes that Beijing has the institutional structures to carry a longterm economic engagement with Southeast Asia, i.e. the capability to mobilize domestic businesses and subordinate their interests to

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political consideration. However, due to fragmented authoritarianism and the evolving nature of the institutional practices and relationships, Beijing is likely to display “dualism” in the implementation of its policy over the short term, a dualism that will inhibit a consistent and effective exploitation of economic means to achieve foreign policy goals.

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2 China’s Participation in the GMS Cooperation: Progress and Challenges Li Chenyang and He Shengda

The Greater Mekong Subregion (GMS) covers a total area of 256.86 million square kilometers and a population of about 350 million, including five Southeast Asian countries and two Chinese provinces in the Lancang-Mekong River Basin, namely, Cambodia, Laos, Myanmar, Thailand, Vietnam and China’s Yunnan Province and Guangxi Zhuang Autonomous Region. The GMS is the land bridge connecting China with Southeast Asia and South Asia. That gives it a very important geographical position in China’s foreign strategy. There are two meanings of Greater Mekong Subregional cooperation. Broadly speaking, it means the various cooperation mechanisms in which the countries of this region have participated, including the GMS Cooperation Program (launched by the Asian Development Bank and all GMS countries), ASEAN-Mekong Basin Development Cooperation (launched by all the ASEAN member states and China), Golden Square sub-regional cooperation (launched by Cambodia, Laos, Thailand and Vietnam) and Ayeyawady-Chao Phraya-Mekong 15

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Economic Cooperation Strategy (launched by all five of the Indocountries). In the narrow sense, it only refers to GMS Cooperation, which was started in 1992 at the urging of the ADB and the GMS countries. GMS Cooperation aims to accelerate sub-regional infrastructure improvement, promote trade and investment facilitation and liberalization to achieve sub-regional interconnection, enhance capacity building and mutual exchanges, enhance overall competitiveness, promote sub-regional economic and social development, continuously improve people’s lives and create a sub-regional environment with the characteristics of peace, stability, equality, mutual trust and win-win relationships.1 GMS Cooperation covers transportation, energy, telecommunications, human resource development, tourism, environment, trade and investment, anti-drug operations and other fields. The ADB-led GMS Cooperation was the first Southeast Asian regional cooperation mechanism that China participated in. It was also the most important regional economic cooperation mechanism between China and ASEAN before 2001 when the two agreed to build CAFTA. Even now, GMS Cooperation still plays an important role in the development of relations between China and the five Indochina countries.

CHINA’S PARTICIPATION IN GMS COOPERATION China is not only a key sponsor of GMS Cooperation but also a key participant in it. China’s participation in GMS Cooperation is characterized by formal overall national participation and direct involvement of the local provinces. According to official documents, GMS Cooperation is among the six sub-regional countries and China participates in it as a whole. In terms of direct Chinese participation, Yunnan Province has been active in GMS Cooperation since 1992, and Guangxi Zhuang Autonomous Region formally joined the cooperation in 2005. 1

National Report: China’s Participation in GMS Cooperation, 2008.

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Chinese Central Government’s Participation in GMS Cooperation GMS Cooperation has constantly expanded its cooperation fields and deepened its cooperation level. Since its participation in 1992, China has played an important role at every stage in GMS Cooperation to push forward the expansion and deepening of the cooperation. As a participant at the national level, the Chinese central government has established various guidelines and principles to coordinate with the relevant countries’ policies and determined participation programs and key projects to guide the local government’s participation. The Chinese government has announced China’s stance on its participation in GMS Cooperation in national reports issued before the GMS Summits in 2002, 2005 and 2008. Chinese leaders have put forward constructive proposals during each GMS Summit. From 1992 to 1994, GMS Cooperation was still at the stage of achieving cooperation consensus and building a cooperation framework. China established the National Lancang-Mekong Development Coordination Group in 1994 to coordinate the promotion of GMS Cooperation. Yunnan actively participated in all the GMS Economic Cooperation Meetings of Ministers. At the first meeting, as the deputy head of the Chinese delegation, the Yunnan representative made the proposal to build “one railway, two highways and one airport.” Four GMS Economic Cooperation Meetings of Ministers were held to confirm the framework of cooperation in the fields of transportation, energy, environmental protection, trade and investment, tourism and human resource development. From 1995 to 2002, GMS Cooperation became pragmatic and implemented a plethora of projects. However, it also encountered some difficulties, particularly after the 1997 Southeast Asian financial crisis broke out. China made great efforts to eliminate the negative impact of the financial crisis on GMS Cooperation. The Chinese government provided billions of dollars in loans to Thailand and other Southeast Asian countries and resisted pressure to devalue the Chinese currency. This projected the image of a responsible big country and won the respect and trust of Southeast Asian countries.

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China’s initiative helped the ASEAN member states overcome financial difficulties and advanced GMS Cooperation. In the same year, Chinese President Jiang Zemin and ASEAN leaders issued a Joint Declaration, confirming their mutual interest in the development of the Mekong River Basin and promising to strengthen the support for other member countries through the promotion of trade, tourism and transportation. At the eighth GMS Ministerial Meeting, the proposal of building a few economic corridors was made. GMS Cooperation expanded to the new areas of anti-drug operations, telecommunications and agriculture. In April 2000, the ministers of transportation from China, Laos, Myanmar and Thailand signed the Lancang-Mekong River Commercial Navigation Agreement. The river was officially opened to traffic in 2001. At the eleventh GMS Ministerial Meeting held in September 2002, the GMS countries adopted a strategic framework for the GMS’s development over the next decade and agreed to give priority to the implementation of the 11 projects within the framework. The meeting also discussed and approved China’s accession to the Memorandum of Facilitation of Cross-boundary Passenger and Freight Transportation in the Greater Mekong Subregion and the Inter-governmental Agreement on Regional Power Trade in the Greater Mekong Subregion. GMS Cooperation has entered a new stage since 2002. The first GMS Summit was held in November 2000 in Phnom Penh, the capital of Cambodia. It decided to make the GMS Leaders Summit annual. The summit announced the GMS’s goal of achieving an “integrated, harmonious and prosperous” sub-region. This meeting was held shortly after the signing of the China-ASEAN Framework Agreement on Comprehensive Economic Cooperation and the beginning of efforts to build the CAFTA framework. The Chinese government issued its first national report on China’s participation in GMS Cooperation before the summit. Chinese Premier Zhu Rongji led the Chinese delegation that attended the summit and delivered a speech on “drinking from the same river, building a beautiful homeland” to show China’s willingness to participate in GMS Cooperation with a more positive attitude. The Chinese government was clear that one of its goals of participating in GMS Cooperation was “to build

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the GMS into an international channel connecting China to Southeast Asia and South Asia and make it the demonstration area of CAFTA.” China provided a 30-million-dollar interest-free loan for the key project of the Kunming-Bangkok highway. The six GMS countries signed the Inter-governmental Agreement on Regional Power Trade in the Greater Mekong Subregion. The second GMS Summit was held in Kunming in July 2005. GMS Cooperation had entered the in-depth development stage. Chinese Premier Wen Jiabao delivered a speech on “strengthening partnerships to achieve common prosperity” at the opening ceremony. He proposed promoting GMS Cooperation through strengthening infrastructure construction, promoting trade and investment facilitation, deepening agriculture cooperation, protecting resources and the environment, and said that “China will continue to provide all the possible support to the development of GMS Cooperation.” Several agreements were signed, such as the Agreement on the Facilitation of Cross-boundary Passenger and Freight Transportation in the Greater Mekong Subregion and the Memorandum of Understanding for Cooperation to Prevent and Control Transboundary Animal Disease in the Greater Mekong Subregion. The leaders issued the Kunming Declaration and agreed to promote GMS Cooperation step by step according to the guidelines of equality, mutual respect and consensus. They also set the future directions for cooperation, namely reinforcing sub-regional infrastructure for development, improving the trade and investment environment, strengthening the social and environmental infrastructure, and mobilizing resources and deepening partnerships. China expanded its scope in GMS Cooperation when Guangxi Zhuang Autonomous Region formally joined the cooperation in 2005. In March 2008, the third GMS Summit was held in the Laotian capital Vientiane. Chinese Premier Wen Jiabao led the Chinese delegation attending the meeting and delivered a speech entitled “Cooperative Ties and Our Common Home.” He put forward recommendations for GMS Cooperation in infrastructure construction, transportation, trade facilitation, promotion of rural development, healthcare services, protection of the environment, human resource

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development, encouraging NGO participation and expanding financial resources channels. He also proposed the establishment of the GMS Economic Corridors Forum. A series of cooperation documents were issued, including the Memorandum of Understanding on the Roadmap for Implementing GMS Cross-border Power Trading and the Memorandum of Understanding on the Sustainable and Balanced Development of the GMS North-South Economic Corridor. The summit issued a Leaders Declaration which outlined the nine major cooperation areas for the next five years and injected new vitality into GMS Cooperation. In June 2008, the first GMS Economic Corridors Forum was successfully held in Kunming. The participating parties reached a broad consensus to promote the development of the economic corridors. GMS Cooperation requires massive investments. As a large country within the sub-region, China is both a capital-receiving country and a capital contributor. By the end of 2007, there were eight projects related to China out of the 34 ADB loan projects. The total cost of these eight projects was about 5.2 billion US dollars, accounting for 44.7% of ADB’s total loans. The Chinese government invested 2.6 billion US dollars, accounting for 26% of the total project amount and 86.8% of the government funds in the 34 projects. China contributes more funds than any other GMS country. Most of the funds contributed towards the 11-billion-dollar co-financing come from the national development bank and financial institutions.2

Chinese Local Governments’ Participation and Roles It is an important feature of China’s participation in the GMS Cooperation that Chinese local governments participate in the cooperation directly. The local provincial government participates in GMS Cooperation mainly under the leadership of the Chinese central government. For a country like China, which features a vast territory and many neighboring countries, regional cooperation, especially those 2 Fu Ruihong, “GMS Cooperation’s Evolution and China’s Role in It,” Around Southeast Asia, 5 (2009).

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with its bordering countries, cannot avoid involving both central and local governments. As the international systems of regional cooperation nowadays are always “national-centered,” the states are the “sovereign subjects” in the cooperation. Chinese local governments do not have the sovereignty or legal equality to carry out negotiations or sign treaties with the central governments of their cooperative partners. They have to serve national strategies and participate in the cooperation by implementing cooperation projects according to the guidelines of the central government. However, due to geographical reasons, the numbers of sub-regional cooperation are embodied by the local governments’ participation. There are more than 5,000 kilometers of land borders and 20 cross-border nationalities among China’s Yunnan and Guangxi and the three GMS countries of Laos, Myanmar and Vietnam. The cultural and economic connections are very close and traffic communication is very convenient as well. That gives the local governments of Yunnan and Guangxi an important role in China’s participation in GMS Cooperation. The non-sovereign status of the local government restricts their cooperation with neighboring countries to a certain degree. The neighboring countries are worried about lacking the protection of the Chinese central government for the implementation of cooperation projects because the Chinese local governments’ power in dealing with foreign affairs is limited. This affects the cooperation between Chinese local governments and their neighboring partners. On the other hand, the cooperation between local governments and their neighboring partners can be more flexible, as they can avoid the highly sensitive issue of sovereignty. The local government can also take the initiative to put forward the idea of model-based cooperation which is conducive to deepening the cooperation. As for the central government, it still has a certain amount of leeway to let the local governments fully play their role in sub-regional cooperation.3 3

Lu Guangsheng, “Analysis of Local Government’s Participation in Regional Cooperation from the International Regime Perspective,” Studies on Southeast and South Asia, 2 (2009).

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As the local provinces (Yunnan and Guangxi) have direct and close geographical, cultural and economic contacts with China’s neighboring countries, their participation in the sub-regional cooperation has high correlation with their development and opening-up. This has the potential to bring them direct benefits. In fact, these neighboring countries usually are the main targets in their openingup. Therefore, local governments are very keen and fully take the initiative to develop this cooperation. They often propose development strategies, such as Yunnan’s strategy to build international channels linking China to Southeast Asia and South Asia and the “one axis, two wings” strategy proposed by Guangxi. The local governments’ involvement has not only played an important role in China’s participation in GMS Cooperation but also brought the two provinces tangible benefits. Yunnan’s involvement in GMS Cooperation includes the following major aspects. First, Yunnan has established both bilateral and multilateral cooperation mechanisms with countries in the subregion under the GMS Cooperation and “ten plus one” frameworks. The Joint Committee on Coordination of Commercial Navigation on the Lancang-Mekong River among China, Laos, Myanmar and Thailand, which meets once a year to promote the coordination of Lancang-Mekong international shipping affairs, is just one of many multilateral mechanisms among them. The Yunnan-North Thailand Cooperation Working Group, established in April 2004, and the Economic Cooperation Consultation of Yunnan and Four Provinces of Vietnam, established in September 2004, are bilateral cooperation mechanisms. In November 2004, the Yunnan-North Laos Cooperation Working Group successfully set up seven working groups in different fields. In June 2007, the bilateral Economic and Trade Cooperation Forum mechanism was established between Yunnan and Myanmar and held its first meeting in Kunming. Through regular meetings, those mechanisms enhanced bilateral communication, promoted the solution of problems, set up cooperation objectives and priorities, and resulted in mutual benefits. One example of mutual benefits would be the Kunming Import and Export Commodities Fair, which is held in Kunming annually. During the

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2003 Fair, an ASEAN exhibition hall was buit to serve as a bilateral tourism cooperation bridge for Yunnan and GMS countries. Xishuangbanna, Ruili and Hekou hold regular commodities fairs together with their neighboring GMS countries, which serve as an important platform for the boundary cities to actively get involved in GMS Cooperation. Second, after more than ten years of cooperation and construction, the transportation and communication infrastructure connecting Yunnan and Southeast Asia has been substantially improved. The integrated transportation system of railways, highways, waterways and air channel connecting Yunnan to Southeast Asia in the east, center and west is now taking shape. Communication networks and service systems are being rapidly promoted. Yunnan has completed the highway which links Kunming to Myanmar, Laos and Vietnam. The 1,818-kilometer-long Kunming-Bangkok highway was completed on March 21, 2008. The eastern part of the Pan-Asian railway from Yuxi to Mengzi was scheduled to be opened to traffic in 2008, but it is still under construction. The Mengzi-Hekou section started in 2008 and was projected to be completed in 2010. Of the southern section of the center line from Kunming to Yuxi, 110 kilometers have already been completed, and the construction of the 600-kilometerlong Yuxi-Mohan section is planned to start during the Eleventh Five-Year Plan. As for the west line, the Kunming-Dali section has been completed and the Dali-Ruili section which started in March 2007 should be completed before 2010. For the waterway, the Lancang-Mekong channel officially opened in 2001. The permitted tonnage of ships navigating the channel increased from 60 tons in the trial period to 200–300 tons after the rectification of 11 places of rapid water flow in the Upper Mekong River. The shipping season was increased from six months to any time throughout the year, and the cargo allowance increased from 500 tons in the trial period to 500,000 tons in 2006. Some progress has also been made in air connection. There are plans for a new Kunming Airport to be constructed. So far, a relatively sophisticated airport network has been constructed. There are 11 civilian airports that have been built and put into operation, with

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more than 200 domestic and regional routes, including those to Bangkok, Singapore, Kuala Lumpur, Hanoi, Ho Chi Minh City, Yangon, Vientiane, Luang Prabang, Phnom Penh and Siem Reap. Various parties also cooperated in customs construction. Yunnan has 13 first-class national customs terminals, 7 second-class customs terminals and more than 90 other service centers for the border residents, the infrastructure of which has all been greatly improved. Hekou-Lao Cai customs’ “one-stop” clearance progresses smoothly. By March 2007, a total of 17 annexes and 3 protocols of the Agreement on Facilitation of Cross-border Transport of Goods and People in the Greater Mekong Subregion had been signed. The agreement will be fully implemented as soon as the governments of the GMS countries approve them. As part of the GMS Information Superhighway project, the cables connecting Yunnan and Vietnam, and Yunnan and Laos were completed in October 2006, coupled with the previously launched international cable connecting Guangxi and Vietnam. This represents the completion of the interconnection of the information highway between China and its GMS neighbors. Third, much progress has been made in trade, investment and economic cooperation between Yunnan and GMS countries. For trade, imports and exports between Yunnan and other GMS members have increased substantially. The other GMS countries have become Yunnan’s major trading partners. In 2007, the trade between Yunnan and other GMS countries accounted for 24.5% of Yunnan’s total foreign trade. From 1992 to 2007, the average annual increase of Yunnan’s trade with GMS countries was as high as 32.7%. The amount of trade in 2007 was 5.9 times of that in 1992. For investment, Yunnan’s investment in GMS countries has grown rapidly in recent years and GMS countries have become major markets for Yunnan’s corporations. Yunnan’s agreed-upon investments in GMS countries has exceeded the summation of that before 2006. According to the ranking of countries in which Yunnan invests, Myanmar comes first, followed by Laos, Vietnam, Cambodia and Thailand. Sub-regional countries are Yunnan’s major market for economic and technological cooperation. By 2006, the amount of Yunnan

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enterprises’ contract project, labor cooperation, design and consultation contracts with GMS countries had reached 2.1 billion dollars. Guided by the “go out” policy, Yunnan enterprises got involved in a variety of sub-regional resource cooperation projects and made significant progress. Take hydropower development as an example. Yunnan started to sell electricity to northern Vietnam in 2004. Two 110-kilovolt and two 220-kilovolt transmission lines have been built between Yunnan and Vietnam. Yunnan had sent more than 3.6 million kilowatts to Vietnam by the end of 2007. Yunnan and Laos reached a consensus on projects involving using 35-kilovolt lines to increase electricity supply for Laos, Boten port and Phongsali. Both projects went into operation at the end of 2008. The Myanmar Ruilijiang hydropower station, which was undertaken by Yunnan, has an installed capacity of 600,000 kilowatts. Its first generating unit started working at the end of 2008. The contract agreements on the 230-kilovolt transmission line in Cambodia and the 120,000-kilowatt Si Dengwo hydropower station construction project amounted to 369 million dollars. The project was launched in May 2008. The agricultural cooperation and exchange between Yunnan and GMS countries has entered a stage of stable and orderly development. Yunnan has implemented a number of agricultural projects in GMS countries which include wheat and barley cultivation experimentation in Vietnam and the construction of vegetable and flower planting training centers in Yangon, Myanmar, household methane in Laos, and the Agricultural Demonstration Garden in Champasak, Laos. It has also implemented cooperation with neighboring countries to plant rubber, sugar cane, cassava, bamboo and promote poppy alternative development, and built technical training centers, seedling centers and rubber plantation bases. Yunnan helped Laos and Myanmar train technical personnel and conduct scientific and technological research and used the Asian regional cooperation fund provided by the Chinese agriculture ministry to launch a cross-border animal disease surveillance cooperation project with Laos and Myanmar. The fire prevention linkage mechanism was established among Yunnan, Laos and Myanmar and a conservation initiative was

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carried out jointly by Yunnan and Laos to protect the Asian elephants in border areas. Tourism has been another area of multilateral cooperation. Yunnan has been included in the Lancang-Mekong River Tourism Infrastructure Development Project. The relevant work is still in progress at present. The Chinese central government has approved the Lancang-Mekong River waterway international tour line from Xishuangbanna to Luang Prabang, Laos. In general, Yunnan has promoted tourism cooperation with its neighboring countries under the framework of GMS Cooperation. Fourth, Yunnan also gained great achievements in non-traditional security cooperation with China’s neighboring countries. Take environmental protection as an example. Guided by the National Environmental Protection Administration, Yunnan became actively involved in a series of implementations of GMS environment protection projects, including GMS Environment Training and Institutional Strengthening Project, the first and second phases of Subregional Environment Monitoring and Information Systems (SEMIS), Poverty Reduction and Environmental Management in Remote GMS Areas, the first and second phases of the Strategic Environment Framework (SEF), and environment supervision and monitoring of the reconstruction project on the Mekong River waterway. The Great Mekong Subregion Biodiversity Corridor Project has been implemented in Xishuangbanna since 2006. Yunnan has participated in various healthcare and human resource development projects with other GMS member countries. It has actively promoted its cooperation with GMS countries in the prevention of AIDS and other infectious diseases and implemented the Mekong Basin Disease Surveillance Network. The commerce, public security, science and technology, agriculture and other sectors in Yunnan have had close cooperation with GMS countries in human resource development and helped them to train professional and technical personnel. The implementation of the educational “go out” strategy promoted education cooperation and exchanges between Yunnan and GMS countries. In 2007, there were 3,696 foreign students from GMS countries, accounting for 66.2% of Yunnan’s total foreign students. The Institute

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of International Relations at Yunnan University has opened its doors to those master’s and doctoral students receiving scholarships from the Chinese government since 2008. So far, it has recruited 40 students, of whom 36 are from GMS countries. Yunnan’s participation in GMS Cooperation has become an effective carrier of CAFTA. It has played a major role in deepening the economic and trade relations between China and other GMS countries and promoted the construction of a series of major infrastructure projects and cooperation in the ecological environment, social development and other fields. It also made useful attempts to eliminate the institutional obstacles in regional economic cooperation and made great contributions furthering the development of friendship between China and its GMS neighbors. Meanwhile, it laid a sound foundation for Yunnan to participate in GMS Cooperation on a larger scale. This shows the importance of local governments’ participation in GMS Cooperation.

THE DIFFICULTIES AND CHALLENGES FACING CHINA IN GMS COOPERATION At present, China is faced with a number of problems and challenges, mainly in the areas described below.

Involvement of Japan, US and Other Outside Powers Although the Cold War ended nearly 20 years ago, there are more and more indications showing that the Lower Mekong countries have become the competition areas of the US, Japan, India and China. The involvement of outside powers is a double-edged sword: it brings more economic and technical assistance on one hand, but leads to a certain degree of confusion on the other hand. They participate in the cooperation for their national interests, which adds more difficulties to the coordination of GMS Cooperation and hinders China from playing a key role in the cooperation. For example, Japan is the most important source of aid and investment for GMS countries and plays a leading role in the ADB.

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Although Kunming is at the center of the three main GMS economic corridors, the East-West Economic Corridor, largely driven by Japan, has become the focus while the vertical corridors have hardly received any ADB funds. This does not mean that the East-West Economic Corridor is not important but that the behavior of Japan has broken the spirit and rule of GMS Cooperation. In late July 2009, Hillary Clinton held an informal consultation with the foreign ministers of Cambodia, Laos, Thailand and Vietnam after the ASEAN Regional Forum. The US tried to build a new framework for US-Mekong cooperation with the four countries. This caused a new imbalance since the framework did not include Myanmar.

The Gap between Ambitions and Actions GMS countries have organized a number of forums, conferences and seminars since 1992, but most of them have not been very helpful. Most documents that have been issued are just guiding frameworks lacking practical implementability. There were more than 70 items on the list of main GMS projects given by the ADB in 2007, but few of them had been implemented or brought benefits to the sub-region. In addition, although there are many cooperation frameworks, they do not specify priorities and consider urgent situations. For example, after shipping on the Mekong River started, the ships encountered serious customs clearance problems in Laos due to various factors. But the parties have not made strenuous efforts to solve these problems. Moreover, Yunnan, Laos and Thailand all thought that the Kunming-Bangkok highway would contribute significantly to GMS Cooperation. It turns out that much development is still required to reach the flow level of cargo and people which the economic corridor was expected to have.

Risk of Being Marginalized by Other China-ASEAN Cooperation Frameworks GMS Cooperation mechanisms were the most important ones between China and Southeast Asia in the short period after the end of

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the Cold War and played an important role in promoting the development of relations between China and the Lower Mekong countries. The objective of the Chinese government’s initiation of the China-ASEAN Free Trade Area is to improve relations with ASEAN, especially to strengthen the cooperation with the island nations of Southeast Asia. GMS Cooperation is still a part of CAFTA after China and ASEAN signed the Agreement on Comprehensive Economic Framework between China and ASEAN in 2002, but among the five priority sectors of CAFTA, development of the Mekong River Basin ranks fifth, which indicates that the importance of GMS Cooperation has declined. Up to now, China’s central government did not pay much attention to the major projects that were already there. For example, the dredging project of the Mekong River has made little progress since 2002 and loans and investments to GMS projects did not increase quickly. In the meantime, GMS countries focused on CAFTA along with China, and this situation caused the imbalance of dynamics for GMS Cooperation. In 2004, Vietnam proposed the “two corridors and one circle” recommendations, which gained an active response from the Chinese central government and the provincial governments of Yunnan and Guangxi. This cooperation mechanism reduced the importance of GMS Cooperation. Although Guangxi joined in GMS Cooperation in 2005, it did not focus on it. Instead, it was committed to starting a new Guangxi-led China-ASEAN cooperation mechanism, namely the Pan-Beibu economic zone. The China-ASEAN Expo settled in Nanning permanently. After the repeated urging of experts and scholars as well as the workings of the government and media, Guangxi proposed the “one axis and two wings” strategy and the Pan-Beibu Economic Cooperation Zone, which quickly gained the approval of the Chinese central government. Then GMS Cooperation became the “one wing” of the Nanning-Singapore axis, and its status continued to decline. At the same time, the Yunnan Provincial Government offered no useful measures to promote GMS Cooperation when the mechanism was faced with a serious bottleneck. Because Guangxi is in a favorable position for China-ASEAN cooperation after the “one axis and two

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wings” strategy was put forward, some scholars and government officials suggested that Yunnan should perhaps shift its focus to South Asia. Some officials even proposed building an impractical Pan-South Asia Economic Cooperation Zone. This proposal, if eventually accepted at the official level, will exacerbate the marginalization of the GMS Cooperation mechanism. In short, too many cross-border mechanisms between China and ASEAN have not only increased the costs of managing these projects but also dispersed the energy of Southeast Asian countries and confused them. This situation is detrimental to the continuing development of GMS Cooperation.

Unabated Non-traditional Security Challenges The long-term stagnation in GMS Cooperation is closely linked to all kinds of non-traditional security issues existing between China and the other GMS countries. First, the Lower Mekong countries express serious concerns and dissatisfaction about China. They believe that China’s construction of hydropower stations in Lancang (the Upper Mekong) has led to certain deteriorations of the ecological environment in the Lower Mekong region such as water temperature change, deterioration of water quality, water and fish reduction, and seawater intrusion of the Mekong Delta. Although the Lower Mekong countries’ accusations have not yet been scientifically verified, it surely brought setbacks to the cooperation between China and the Lower Mekong countries. In addition, China’s investments in resource development in Myanmar and Laos have brought some environmental problems. In addition, a large number of Chinese citizens have migrated to Myanmar, Laos, Cambodia and Thailand illegally, which has led to social problems for these countries. The problems are mainly that the Chinese people do not comply with local laws and customs, compete for profits with local people and even commit crimes. Third, the long-existing armed ethnic conflict along the China-Myanmar border and ethnic movement in Laos have a certain impact on cross-border ethnic populations in China. Moreover, the Chinese government is very discontented with the unsolved drug problem in Myanmar as well as the resurgence of casinos in northern Myanmar, Laos and Vietnam. However, the

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precautionary measures taken by the Chinese government have hindered the flow of cargo and people in the sub-region to a large extent.

Insufficient Investment in Industrial Cooperation and Services So far, the major achievements of GMS Cooperation lie in highway, waterway and other areas of transportation infrastructure. The gas pipeline and large gas trade between Myanmar and Thailand is also a big success. Strengthening cooperation in the “soft aspects” was proposed at the 14th GMS Ministerial Meeting in June 2007. The “soft aspects” include measures to enhance competitiveness, promote socially and environmentally sustainable development, strengthen human resource training, and facilitate trade, investment and crossborder passenger and freight in the sub-region. But the investment in the “soft aspects” is obviously insufficient to the point that these “soft aspects” hardly support other cooperation aspects. Additionally, an industrial chain has not taken shape between China and the Lower Mekong countries despite 17 years of cooperation. This is not conducive to the consolidation of economic cooperation.

THOUGHTS ON PROMOTING CHINA’S PARTICIPATION IN THE GMS According to the problems and challenges facing GMS Cooperation, China needs to strengthen its participation in GMS Cooperation in the following aspects to promote China-ASEAN relations, especially the cooperation between China and the Indochina countries.

Strengthen Communication and Promote Sustainable Development After 17 years of effort, GMS Cooperation has entered a new developmental stage. There are many highlights in its objectives. Although the infrastructure is still an important aspect of cooperation, more and more attention has been given to the coordination and sustainable

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development of the economy and society. “Strengthen communication and enhance competitiveness” has become the focus of GMS Cooperation in its next phase. The developmental goals for the next five years (2008–2012) were set up at the GMS summit held in 2008, namely, “to promote economic development, reduce poverty, promote social development and strengthen environment protection.” The six GMS countries made an action plan in accordance with this objective and promised to focus on the key areas of (1) constructing transportation corridors (including Singapore-Kunming railway construction); (2) speeding up the development of transportation in rural areas; (3) strengthening the development of bio-fuels and renewable energy in rural areas; (4) enhancing forest protection and reducing risk to the environment; (5) enhancing sustainable management of natural and cultural tourist attractions; (6) implementing new strategies of education, health and labor; (7) strengthening prevention and control of the spread of infectious disease in border areas; and (8) simplifying trade and cross-border procedures. The GMS Economic Corridors Forum, held in Kunming in 2008, shows that the GMS countries all hope to integrate infrastructure construction, trade, investment and production so as to promote GMS Cooperation in the direction of integration. The development of GMS North-South Economic Corridor relegating China, Yunnan and Guangxi will promote Yunnan’s participation in GMS Cooperation. As different parties have different geographical locations, statuses and interest demands, more and more contradictions and problems emerge, adding difficulties to coordination. This requires the central government to formulate appropriate strategies, strengthen guidance and promote domestic government departments, social and business sectors to improve capacity and coordination. Meanwhile, it should also take the guiding spirit of mutual benefits to strengthen cooperation, communication and exchange with other GMS countries.

China Should Take a Stronger Leadership Role GMS Cooperation is the first sub-regional cooperation that China has ever engaged in. It is also a key area in CAFTA. Deepening of GMS Cooperation has significant meaning for the social and

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economic development in China (especially in Southwest China). It means a lot for the development of bilateral good-neighborly and friendly relations between China and Southeast Asian countries (the Indochina countries) as well. The GMS countries’ expectation of China has increased in recent years with China’s economy developing and international status rising. China’s attitude and participation have a direct impact on GMS Cooperation development processes. In other words, China is becoming the center in GMS Cooperation. China-ASEAN relations have developed to a sound level and can hardly be promoted. The most serious challenge is how to consolidate these bilateral relations and broaden economic cooperation. Therefore, China has to take on more responsibility, provide more support and help to the underdeveloped countries in the sub-region, and consider more an approach that maximizes the mutual benefits of cooperation. During the current international financial crisis, China needs to provide strategic support to GMS Cooperation and contribute more in promoting sub-regional development. At the same time, if China becomes the core in GMS Cooperation, it is in favor of the implementation of China’s good-neighbor foreign policy and the construction of a harmonious surrounding and world as a whole.

Properly Handle Sensitive Issues and Relations among Major Powers China is an Upper Mekong country with the strongest comprehensive economic power in the sub-region. This gives it both opportunities and challenges, including demands from Lower Mekong countries, challenges from outside powers (India, Japan and the US), and issues emerging from its relation with Lower Mekong countries. Faced with these challenges, China should pay attention to its regional responsibility and realize that “China’s national interests will be determined by the quantity and quality of its international obligation. No national interests can be sustainable without taking responsibility.”4 So the Chinese 4

Wang Yizhou, “National Interests and National Responsibility,” in Wang Jisi, ed., World and China: 2007–2008, New World Publishing, 2008, p. 119.

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government should use its advantages and play a better role as an active promoter and policy coordinator of GMS Cooperation mechanisms. It should strengthen coordination with other countries to properly resolve sensitive issues like ecological and environmental protection. Only then can China truly implement its good-neighbor policy and enjoy its status as a “responsible power” in the international community.

Coordination between the Chinese Central and Local Governments With the diversification of its goals, the content and approaches of GMS Cooperation have become more and more comprehensive. Yunnan and Guangxi participate with unprecedented enthusiasm and have put forth relevant strategies. The Chinese central government should adjust its mechanism to strengthen the guidance and support for the local governments to meet the needs of sub-regional cooperation. At the national level, the issue of insufficient coordination and cooperation among different sectors and mechanisms should be solved. There is no nationally established coordination department for China’s participation in GMS Cooperation. So the relevant functions are under the jurisdiction of the National Development and Reform Commission, Ministry of Finance, Ministry of Foreign Affairs, Ministry of Commerce and more than 20 other departments which makes it difficult to coordinate. Therefore, the central government needs to adjust their function to coordinate and resolve the problems encountered in this new situation. Given the fact that the local governments in Yunnan and Guangxi have accumulated experience and developed relevant strategies during their participation in GMS Cooperation, the central government should give them enough space to fully play their roles while providing guidance and support. The local governments also need to strengthen their ability to address the issues faced in cooperation. Take Yunnan as an example. The current situation is that a number of sectors and mechanisms are involved, but their information sharing and experience exchange are inadequate. They also lack communication with national departments and other countries in the region. Despite

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the establishment of the Lancang-Mekong sub-regional economic cooperation and coordination group, it is only a public administration institution, lacking the means for authority and regulation. What is more, Guangdong is implementing an industrial upgrading strategy now. Its trade and investment in GMS countries is far more than that of Yunnan and Guangxi. Therefore, the central government can consider allowing Guangdong to join GMS Cooperation. This can promote Guangdong’s transfer of its industry to GMS countries and form an industrial chain that will further the mutually beneficial cooperation structure.

More Investment in GMS and More Attention to the North-South Corridor After about eight years of effort, China and ASEAN have become strategic partners for peace and prosperity. However, to a large extent, this kind of relationship between China and ASEAN still exists in slogans; therefore, in the current stage and near future, China’s most important task is to make the base of China-ASEAN relations steadier through sub-regional cooperation and bilateral cooperation. This presents itself as a good opportunity for GMS Cooperation mechanisms to overcome the challenges from the construction of CAFTA, and hopefully GMS Cooperation mechanisms will attract the attention of Chinese leaders again. GMS Cooperation is a resourcebased cooperation model within an underdeveloped region, which has a high demand for energy, transportation and other infrastructure. Infrastructure construction needs vast investments and takes a long time to bring profit. The GMS countries have limited investment capacity, so the capital mainly relies on outside powers. Over the years, GMS countries called for expansion of the financing channels, yet not much has been achieved. Meanwhile, investments from the ADB and other international organizations are limited as well. China should increase its investments and loans while seeking other financing channels. China has promised to provide 15 billion US dollars in credit loans to ASEAN countries and a total of 10 billion dollars as a China-ASEAN investment cooperation fund. Chinese

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Commerce Minister Chen Deming said in August 2009 at the ChinaASEAN Economic Ministers Conference that China has its own thoughts about how to use the credit loans and fund. First, efforts must be made to resolve the interconnection issues between China and ASEAN, such as roads, railways, communication networks, oil and gas pipelines and transmission facilities. ASEAN’s integration process require a higher level of support but will strengthen trade and economic relations between China and ASEAN. Second, arrangements should be called for that spur agricultural projects and lead to structural adjustment and upgrading. The GMS should be the focus in these two areas. As for investment projects, we must give full consideration to the integration of GMS projects and the development projects of China and its neighboring countries. In this way, these preferred subregional projects and China’s national development projects can be complementary to each other. Thus, the GMS cross-border infrastructure project will be linked to China’s national development plan. As China’s opening-up is deepened and ASEAN is currently in the process of integration, Yunnan and Guangxi should take advantage of their location. They should actively promote the construction of the Kunming-Kyaukpyu, Kunming-Hanoi and Nanning-Kunming economic corridors to expand the depth of economic corridors and build a new pattern of participation in GMS Cooperation. The central government should promote Yunnan and Guangxi as the bridge to the hinterland of the Indochina peninsula and the land route to the Beibu Gulf and the Gulf of Bengal. The level of opening-up along the border should be promoted to lay a sound foundation for Southwestern China’s long-term developmental strategy. Last but not least, the Chinese government has to ensure the coherence of policy and implementation of its projects in order to generate maximum benefits.

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3 The Planning and Challenges of the Pan-Beibu Gulf Economic Cooperation Gu Xiaosong

In the four years since it was proposed, the Pan-Beibu (Tonkin) Gulf Economic Cooperation (the PBG Cooperation) has been pushed forward mainly by the governments of its member states. There have been some studies in academic circles that need to be further carried out to cover more content, including the nature, definition and difficulties of this cooperation, and how to make breakthroughs so as to help promote the PBG Cooperation.

CHINA-ASEAN SUB-REGIONAL MARITIME COOPERATION In order to discern the difficulties of the PBG Cooperation and uncover how to overcome such difficulties to make breakthroughs,

37

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we need to first understand what the PBG Cooperation is and in particular its nature and definition.

A Project at Sea The PBG Cooperation was proposed for the first time at the Forum on Economic Cooperation of the Beibu Gulf Rim which was held in Nanning, China, on July 20–21, 2006.1 This forum was cosponsored by the Office of the Leading Group for Western Region Development of the State Council of China, the Ministry of Finance of China, the People’s Bank of China, the Development Research Center of the State Council of China, the People’s Daily Press, the Asian Development Bank and the People’s Government of Guangxi Zhuang Autonomous Region and was organized by the People’s Government of Guangxi Zhuang Autonomous Region.2 The first seven members of the PBG Cooperation — China, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Vietnam — were referred to as 6+1, i.e. six ASEAN countries and China. At that time China did not make clear whether it intended to participate in the PBG Cooperation as a whole country or merely as several provinces. The development in practice over the past several years, however, has been made mainly by Guangxi Zhuang Autonomous Region, so the PRC’s participation has been accepted as that of several provinces in China. Therefore, we can define the PBG Cooperation as sub-regional maritime economic cooperation. Hainan Province of China was one of the co-sponsors of the 3rd PanBeibu Gulf Economic Cooperation Forum (the PBG Forum), and Guangdong Province also became one of the co-sponsors of the

1

The Forum on Economic Cooperation of the Beibu Gulf Rim was renamed the Pan-Beibu Gulf Economic Cooperation Forum in 2006. The 5th Forum was held in Nanning in August 2010. 2 Liu Qibao, “Promote the Development and Cooperation in the Pan-Beibu Gulf to Construct the New Regional Economic Development Pattern,” speech made at the Forum on Economic Cooperation of the Beibu Gulf Rim, carried in Guangxi Daily, July 21, 2006.

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4th PBG Forum which was held in August 2009. At the 3rd PBG Forum, the Thai representatives showed their presence, becoming the eighth member country of the PBG Cooperation. Actually, Cambodia should also participate in the PBG Cooperation given that they are not only one of the coastal countries along the South China Sea, but also an important link in the Nanning-Singapore Economic Corridor (NSEC). Its participation, therefore, would be very beneficial to the promotion of the PBG Cooperation. The PBG Cooperation at the 4th PBG Forum in August 2009 featured the 7+3 framework — Brunei, Cambodia, Indonesia, Malaysia, the Philippines, Vietnam and Thailand from ASEAN and Guangxi, Guangdong and Hainan from China.3 If the PBG Cooperation is a dynamic, open, and gradual process, Hong Kong, Macao and Taiwan should also become its members as their location in South China, their fairly developed economies, and the strong complementarities with ASEAN countries will be conducive to the promotion and development of the PBG Cooperation. The current 7+3 and the possible 8+6 configuration (Brunei, Indonesia, Malaysia, the Philippines, Vietnam, Thailand and Cambodia from ASEAN and Guangxi, Guangdong, Hainan, Hong Kong, Macao and Taiwan from China) in the future are all either islands or coastal countries and areas. Such geographical locations have determined that the PBG Cooperation must be carried out on the sea and that it represents sub-regional maritime economic cooperation. There are rich marine resources in the PBG area, so it is convenient to develop the potential of these marine resources and the maritime economy. It is both necessary and advantageous for the provinces of China in the Beibu Gulf area and the coastal ASEAN countries to develop the maritime economy through collaboration. Proponents of the scheme believe that parties in China and ASEAN can gradually cooperate in harbor construction, maritime transportation, marine bio-tourism and transnational tourism, exploration and development of marine minerals, oil, gas and other resources, marine fishery, marine biomedicine, maritime ship-making industry and marine chemical 3

The 4th PBG Forum was held in Nanning on August 6–8, 2009.

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industry, to build the PBG area into a world-class maritime economic area. The Beibu Gulf and the rest of the South China Sea are important transportation channels between China and ASEAN, and the trade within this region is mainly conducted through the PBG. The South China Sea also represents a hub between the Pacific Ocean and the Indian Ocean and is the busiest maritime business channel in the world. At the 10+3 and 10+1 State Leaders’ Meeting held in Bali, Indonesia, in October 2003, Chinese Premier Wen Jiabao clearly expressed that the Chinese government would “actively participate in the construction of the marine ASEAN.” 4 The PBG Cooperation has provided a platform and opened a new channel for China to actively participate in the development of maritime ASEAN.

A Project Different from the GMS Cooperation When speaking of the PBG Cooperation, some people naturally associate it with the GMS Cooperation. By comparing the two projects, we can further clarify the definition of the PBG Cooperation and their differences. The PBG Cooperation is the sub-regional cooperation between China and ASEAN on the sea while the GMS Cooperation is that on land. The GMS Cooperation includes China (mainly the provinces in Southwest China) and the ASEAN countries on the Indochina Peninsula — namely Lao PDR, Myanmar, Thailand, Cambodia and Vietnam. In the early stages, only the PRC’s Yunnan Province participated in the GMS Cooperation. In 2004, Guangxi also joined the GMS Cooperation at the invitation of the ASEAN countries although it is not located in the Mekong River Valley. The 5+2 pattern thus took shape with the “5” referring to Lao

4

Liu Qibao, “Promote the Development and Cooperation in the Pan-Beibu Gulf to Construct the New Regional Economic Development Pattern,” speech made at the Forum on Economic Cooperation of the Beibu Gulf Rim, carried in Guangxi Daily, July 21, 2006.

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PDR, Myanmar, Thailand, Cambodia and Vietnam from ASEAN and “2” referring to Yunnan and Guangxi from China. Since its initiation in 1992, the GMS Cooperation has had many cooperative mechanisms at different levels, and three state leaders’ meetings have been held so far. Mainly oriented by and based on the Asia Development Bank’s projects, its members have carried out cooperation in the nine key sectors of transportation, energy, telecommunications, agriculture, environmental protection, trade, investment, human resources and tourism. Over the past 17 years, the GMS Cooperation has achieved the following results: the East-West Corridor running through Vietnam, Lao PDR, Thailand and Myanmar, the Kunming-Hanoi-Haiphong Economic Corridor. And the highway from Kunming (capital of Yunnan Province) to northwest Lao PDR and then to Bangkok of Thailand will be linked up by 2010. The Agreement on Commercial Navigation on the LancangMekong River signed by China, Lao PDR, Myanmar and Thailand would allow vessels of any of the four above-mentioned parties to freely navigate in the 886-kilometer-long section of the river between Simao Port of China and Luang Prabang of Lao PDR. The GMS parties have also addressed the issue of the facilitation of customs clearance. They have also cooperated in tourism, including developing visitors’ markets, e-commerce for tourism, various technologies in tourism, and new tourism products, joint publication and promotion, building tourism networks and promoting tourism facilitation. In 2002, China and ASEAN decided to jointly build the China-ASEAN Free Trade Area (CAFTA) and agreed to list the GMS Cooperation as one of the important components of CAFTA. The GMS Cooperation thus had a more favorable environment in which to operate along with a higher guarantee for its cooperation mechanisms. The PBG Cooperation and the GMS Cooperation have their own respective advantages — the former is carried out on the sea while the latter is conducted on land and along rivers. Some North-South and East-West economic corridors in the GMS Cooperation are under construction or have been put into operation, including the NorthSouth Kunming-Bangkok Economic Corridor, the KunmingHanoi-Haiphong Economic Corridor and the East-West Economic

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Corridor, with the Thailand-Cambodia-Vietnam Economic Corridor in the south soon to be constructed. The GMS Cooperation has become one good example not only of regional economic cooperation between China and ASEAN but also of one of the most effective sub-regional economic cooperatives in the world.

PBG IN RELATION TO OTHER SUB-REGIONAL COOPERATIVE PROGRAMS In the context of economic globalization and regional economic integration, there have been other sub-regional economic cooperation zones or areas between China and ASEAN or within ASEAN other than the PBG Cooperation and GMS cooperation. Examples include the “two corridors and one circle” plan between China and Vietnam, the SIJORI Growth Triangle, the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT), BIMP-EAGA and the NanningSingapore Economic Corridor (NSEC). As the NSEC is located just between the PBG Cooperation and GMS Cooperation, they are described as “one axis and two wings”5 that are relatively independent but co-related, forming the new subregional economic cooperation framework between China and ASEAN. Existing as two different sub-regional economic cooperative schemes, the PBG Cooperation and the GMS Cooperation rely on different cooperation bonds in different areas with different contents and functions. The GMS Cooperation relies on the Lancang-Mekong

5 Liu Qibao said, in his remarks made at the Forum on Economic Cooperation of the Beibu Gulf Rim, “We propose to initiate the Pan-Beibu Gulf Economic Cooperation (the PBG Cooperation) with a deeper consideration of framing a new vision of regional cooperation, i.e. the “one axis and two wings” vision with a look like the letter M composed of the PBG Cooperation, GMS Cooperation and NanningSingapore Economic Corridor (NSEC). From the perspective of content, the vision will have the marine economic cooperation, the mainland economic cooperation and the Mekong Sub-regional Cooperation, the first letters of which are all M; the vision can thus be called the China-ASEAN M-Shape Regional Economic Cooperation Strategy.” Carried in Guangxi Daily, July 21, 2006.

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River, the Pan-Asia railway and roads, while the Beibu Gulf, the other countries and regions surrounding the South China Sea, and the roads and railways from South China to Singapore support the PBG Cooperation. Connected by the NSEC to form a union of cooperative institutions, the PBG Cooperation and GMS Cooperation are closely related to each other and support each other under the 10+1 framework. It has been proven that 10+1 is an effective cooperative mechanism. In recent years, China and ASEAN have had closer and closer cooperation in political and economic relations, and cultural and educational exchanges have also grown. China and ASEAN countries have made joint efforts to stage several sessions of the China-ASEAN Expo (CAEXPO). Previously, people paid more attention to China-ASEAN cooperation on land but ignored cooperation on the sea despite the latter’s importance and huge potential. The GMS Cooperation as well as the PBG Cooperation will comprehensively promote sub-regional cooperation between China and ASEAN because this land-and-sea combination not only covers the GMS Cooperation, which has been implemented and made great achievements, but also embraces the PBG Cooperation as an institution of sub-regional cooperation between China and ASEAN. The CAFTA has now been put in effect. How will China and ASEAN promote their new cooperation in this new situation? While deepening their cooperation in the CAFTA, the two sides also have a high potential to strengthen sub-regional cooperation. A subregional maritime cooperative, the PBG Cooperation will work in concert with the GMS Cooperation on land to further promote comprehensive cooperation on both land and sea between China and ASEAN. Mr. Pisnu Rienmahasarn, the deputy permanent secretary of the Thai Ministry of Commerce, said in his speech at the 3rd PBG Forum, the combination of the vastly developed cooperation and land infrastructures of the existing GMS Cooperation along with potentially advanced coastal and marine logistics of Pan-Beibu Gulf will no doubt bring about trade and investment expansion and seamless connectivity between China

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Gu Xiaosong and ASEAN member countries, leading to enhanced overall trade and economic efficiency of the whole region.6

DIFFICULTIES IN THE PBG COOPERATION The PBG Cooperation represents a sub-regional cooperation between some Chinese provinces and some ASEAN countries. This is certainly a project of major significance for any of the possible participating members. The PBG Cooperation is at the national level, but it was initially proposed by Guangxi, a province of China, and approved by the Chinese government and some of the state leaders of ASEAN afterwards. At present, the parties concerned have reached some sort of agreement to undertake this cooperative project, but they still face numerous challenges and difficulties in the process. It seems that it will take some time to move from consensus to real and practical cooperation.

The Broad Geographical Coverage The Pan-Beibu Gulf area is based on the 180,000 km2 Beibu Gulf that is within the territory of China and Vietnam and extends southwards to cover other parts of the South China Sea and the surrounding ASEAN countries. The current plan is to include Vietnam, Malaysia, Singapore, Indonesia, Brunei, the Philippines and Thailand as well as Hainan, Guangdong and Guangxi Provinces in China in the sub-regional cooperation. It covers a land area of 3.83 million km2 and the total population in this region is 669 million in 2007 (Table 1). The sea area in the PBG Cooperation is even larger than the land covered by this cooperative. Ships can easily navigate on the sea, but it is more convenient to travel along the railways and roads on land for transnational transportation. 6

A Collection of Speeches at the 2008 Pan-Beibu Gulf Economic Cooperation Forum, compiled by the Planning, Development Administration Commission of Beibu Gulf (Guangxi) Economic Zone and the Beihai People’s Government of Guangxi Zhuang Autonomous Region, and published by Guangxi People’s Publishing House in 2008; p. 127.

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Table 1. Area and Population of the PBG in 2007 Area (Thousand km2)

Population (10,000 Persons)

Vietnam Thailand Malaysia Singapore Brunei Indonesia The Philippines Guangxi of China Guangdong of China Hainan of China

329 513 330 0.7 5.8 1904 301 236 179 34

8515 6500 2717 458 38 24545 8870 5002 9449 845

Total

3832.5

66939

Source: Based on China-ASEAN Almanac 2008 and the statistical reports of Guangxi, Guangdong and Hainan in 2007. Note: The population of Brunei was based on figures from 2006.

Major Challenges for the PBG Cooperation There are many practical difficulties in realizing this sub-regional cooperation. First and foremost is the problem of unbalanced economic development among the participating members. The seven countries and three Chinese provinces in the PBG area include Singapore — listed by the UN as a developed country — as well as Vietnam, a nation which just recently shed its status as one of the least developed countries in the world. In 2007, the per capita GDP of Brunei and Singapore was over US$30,000, while that of Vietnam was only US$8357 (Table 2). To put this in perspective, Vietnam’s GDP per capita accounted for only 2.6% of that of Singapore’s, the country with the highest per capita GDP in Southeast Asia. In the PBG area, Singapore, Brunei, Malaysia and Guangdong of China are economically developed with high per capita GDP while other countries and provinces are less developed with weak economic strengths. As a result of the notable economic gap, the development of the PBG 7

The per capita GDP of Vietnam exceeded US$1,000 in 2008, reaching US$1,024.

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Gu Xiaosong Table 2. GDP, Import and Export of the PBG Area in 2007 Total Volume of Import Total Volume GDP Per and Export of Export (100 Million Capita GDP (100 Million (100 Million US Dollars) (US Dollars) US Dollars) US Dollars)

Vietnam Thailand Malaysia Singapore Brunei Indonesia The Philippines Guangxi of China Guangdong of China Hainan of China Total

715 1965 2004 1540 124 4207 1288 775 4035 161

835 3042 7375 32735 32000 1714 1455 1550 4273 1913

1092 2924 3425 5617 96 1885 1055 92 6340 73

484 1524 1868 2990 76 1141 502 51 3692 18

16814

2512

22599

12346

Source: China-ASEAN Almanac 2008 and the statistical reports of Guangxi, Guangdong and Hainan in 2007. Note: The table is for reference only as the countries vary from each other in statistical practice. The GDP of the three provinces of China in 2007 was calculated based on the average exchange rate of 7.6 to 1 between the RMB and US dollar.

area needs enormous funds as well as the active participation and great support of international organizations, especially the international financial organizations.

Political and cultural diversity The countries within the PBG area also vary in their political and social systems: China and Vietnam are socialist countries; Thailand, Malaysia and Brunei are monarchies; Singapore is a parliamentary state; and Indonesia and the Philippines are republican nations. Besides, there are numerous ethnic groups who hold different religions and beliefs in these countries. China, Vietnam and Singapore are dominated by the Confucian culture and many of their citizens

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Table 3. Political and Social Features of the PBG Countries Country

Political System

Ethnic Groups

China

Socialist country

56, with the Han the most populous one

Vietnam

Socialist country

Thailand

Constitutional monarchy Federal and constitutional monarchy

54, dominated by the Kinh Over 30, dominated by the Thai Over 30, with the Malay the major one and ethnic Chinese accounting for about 30% of the total population 28; the Malay are the natives and the Chinese are the most populous. Over 100, with the Javanese the most populous one Over 20, with the Malay the most populous one Over 80, with the Malay the major one

Malaysia

Singapore

Indonesia

Parliamentary country

Unitary republican country Brunei Muslim monarchy The Republican Philippines country

National Religion Its citizens enjoy the freedom of religious belief Mainly Mahayana Buddhism Islam

Most Malay people believe in Islam Islam

Islam Catholicism

Source: The Annual Report on the Cooperation and Development of the Pan-Beibu Gulf Area (2007).

believe in Buddhism. Thailand is totally a Buddhist country. Malaysia and Indonesia are mainly Islamic countries while the Philippines is a Catholic country (Table 3).

Complexities in regional international politics and security Despite the general stability of the PBG area, there are some unstable security issues in certain places in Southeast Asia. For example, there are some disputes in Southern Thailand and south Philippines, and

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the most prominent one is the sovereignty dispute over islands in the South China Sea. The complexities in regional international politics have made it difficult for various parties to agree on specific projects. Generally speaking, sub-regional economic cooperation is carried out transnationally among different countries or different places that are geographically close to each other, and it involves a rather small range, making it easier to find specific projects. For the GMS Cooperation, the projects can be based on the Lancang-Mekong River and the economic corridors along railways and roads. As the parties concerned can easily see the benefits wrought by cooperation, the cooperation can be carried out easily and successfully. Comparatively speaking, the PBG Cooperation covers more countries and a larger area — 3,000 km in length from north to south and 2,000 km wide from east to west. There are some sub-regional cooperation mechanisms at different levels within the PBG area, including the BIMP-EAGA, the SIJORI Growth Triangle and the Beibu Gulf Economic Circle. According to the geographical features, foundation, targets and development direction of the PBG Cooperation, the key sectors for cooperation initially proposed by the relevant departments are harbor and transportation, investment, energy, tourism, agriculture and marine fishery, trade in services and environment protection. These are good options, but there will be many challenges in practice. The marine energy and fishery cooperation should be considered a top priority, but the dispute in the South China Sea has made it very difficult for various parties to sincerely explore joint efforts. Speaking at the second PBG Forum, Mr. Tan Sri Dato’ Ajit Singh, the ex-secretary general of ASEAN, said, “With the Gulf cooperation spread over a widely dispersed geographical area, covering a wide range of sectors and involving in its activities a number of government agencies and departments such as the police, customs, quarantine, and immigration of many countries, the question of

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co-coordinating, monitoring and implementing the various projects and programs becomes very important.”8

In conclusion, the vast coverage of the PBG Cooperation is the root of both its huge potential and its difficulties. The large area, long distance and lack of multilateral communications are the tests for all parties concerned in selecting proper cooperative projects that could benefit all of them.

PROJECTS: THE BREAKTHROUGH FOR COOPERATION It has been four years since the PBG Cooperation was proposed, and evidence shows that some progress has been made: the PBG Forum has been convened five times; the PBG Expert Group has been established and the feasibility study report for the cooperation is about to be drafted. The real breakthrough for the PBG Cooperation, however, relies on the identification and implementation of cooperative projects that will benefit all parties concerned.

The Crucial Importance of Selecting Cooperative Projects Falling into the category of regional economic integration, subregional economic cooperation has the nature of achieving, via the free flow of production factors within the sub-region, the effective distribution of production resources and the growth of productivity, particularly in the trade and investment sectors. In order to achieve the free flow of production factors within the sub-region,

8

A Collection of Speeches at the 2007 Pan-Beibu Gulf Economic Cooperation Forum, compiled by the Planning, Development & Administration Commission of Beibu Gulf (Guangxi) Economic Zone and the Publication Department of the CPC, Guangxi Committee, and published by Guangxi Normal University Press in 2007; pp. 60–61.

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cooperative projects must be the vehicle. Cooperative projects carry the interest of all parties concerned, and that interest is the bond of cooperation. Each party will select the project that will benefit itself instead of one that will be detrimental. Well-selected projects will benefit each and every party who will thus be active in participation. The GMS Cooperation has had many successes, the best of which is the identification of major cooperative areas that was largely guided by the ADB. At the Forum on Economic Cooperation of the Beibu Gulf Rim, the vice president of the ADB said, “The process of the PBG Cooperation can refer to the practice of GMS whose success has provided the former with a possible mode for its future development.”9 Meanwhile, the key factors in project selection are feasibility and high efficiency, with a particular focus on those infrastructure projects that can promote mutual trade, tourism and investment in the subregion and can help mobilize the relevant parties. Due to the geographical features of the PBG area, it is hard to find projects that can benefit each and every party, but the projects that can benefit the most parties (like the NSEC and Chinese investment in the process of the BIMP-EAGA) can be identified.

NSEC as the Top Priority The PBG Cooperation should focus on both the sea and the coastal area. In fact, the cooperation in the coastal area is easier to carry out because relevant projects can connect the most parties. In concept, the NSEC will be located on the western coast of the Pacific Ocean, running southwards through China, Vietnam, Lao PDR, Cambodia, Thailand, Malaysia and Singapore. Functioning as an international transportation channel, regional growth pole and economic influencer and driver, it is an important international channel connecting the two economies of 9 Co-Build the New China-ASEAN Growth Pole — Collection of Speeches at the 2006 Forum on Economic Cooperation of the Beibu Gulf Rim, compiled by the Planning, Development & Administration Commission of Beibu Gulf (Guangxi) Economic Zone and published by Guangxi People’s Publishing House in 2006; p. 176.

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China and ASEAN as well as one component of the PBG Cooperation. The construction of the NSEC can promote the PBG Cooperation from the western coast of the Pacific Ocean to accelerate the development and openness of the PBG Economic Cooperation Zone. The NSEC will rely on the big cities of Nanning, Hanoi, Vientiane (or Phnom Penh), Bangkok, Kuala Lumpur and Singapore, with medium and small cities representing the links, the railways and roads serving as the carrier and bonds, and the flow of people, logistics, information and funds becoming the foundation. Along the NSEC, the sub-regional investment and trade, along with cooperation in industry, agriculture, tourism, transportation and services will be carried out to construct advantageous industrial clusters, city clusters, port clusters and border economic zones along the corridor. By doing so, various resources and production factors can circulate transregionally and transnationally to build a transnational economic corridor with advantageous complementarities, clear division of labor, a complete transportation network, and a prosperous and dynamic economy for common development. What should be done first is to allow the operation of roads and rail transportation to include passenger and cargo transportation along railway and roads connecting Nanning, Hanoi, Phnom Penh, Bangkok, Kuala Lumpur and Singapore; and connecting Nanning, Hanoi and Ho Chi Minh City. The next step is to promote port modernization and the facilitation of customs clearance. The major task is to construct modern road ports and railway ports along the NSEC where the facilitation of customs clearance can be promoted. The third step is tourism cooperation which is the easiest to carry out along the NSEC with low cost and good profits and is able to promote friendship. The tourism activities and programs can be promoted greatly along the NSEC and combined with cultural and people-to-people exchanges. The fourth step is to promote the integration of the transportation economy, according to which the transportation network construction for the NSEC is combined with the economic and industrial development of various localities along the NSEC. In the meantime, the Nanning-Singapore express highway and the Nanning-Singapore modernized standard-gauge railway

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should be planned and constructed to increase the level and benefits of other relevant cooperation.

China’s Participation in the BIMP-EAGA There are many sub-regional economic cooperation mechanisms within the PBG area, including the BIMP-EAGA, SIJORI Growth Triangle, IMT-GT, and the “two corridors and one circle” between China and Vietnam. These cooperation mechanisms have made great achievements in promoting mutual investment, trade and facilitation among members and economic growth in the relevant sub-regions. Therefore, to continue to support and deepen these sub-regional cooperation mechanisms will greatly promote the processes of the PBG Cooperation. China and the BIMP-EAGA have strong complementarities with bright futures in their investment and cooperation in agriculture, forestry, fishery, resources development, transportation and tourism. China should attach importance to its cooperation with the BIMPEAGA and regard it as another key project for the PBG Cooperation along with the NSEC. The BIMP-EAGA was established in March 1994 and included the four member states of Malaysia, Brunei, Indonesia and the Philippines. The entire state of Brunei is one of its members while only certain regions or cities of the other three countries participate. These include Mindanao of the Philippines, Sabah and Sarawak of Malaysia and Kalimantan of Indonesia. Since its establishment, the BIMP-EAGA has achieved great results in promoting trade and investment facilitation among members and economic growth in the sub-region. The NSEC and BIMP-EAGA under the PBG Cooperation will cover and benefit all its members.

Development of the Beibu Gulf Economic Circle From the perspective of international cooperation, the PBG Cooperation has two layers: the Pan-Beibu Gulf and the Beibu Gulf Rim. The Beibu Gulf Rim, or the Beibu Gulf Rim Economic Circle (the BGREC), is not only the key area for the PBG Cooperation but

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also an important component of the “two corridors and one circle” between China and Vietnam.10 The “two corridors and one circle” and the “one axis and two wings” proposed by China are closely related and support each other. The BGREC is the starting point, the base and the key of the PBG Cooperation, while the latter is the expansion of the former. China and Vietnam should thus strengthen their sub-regional cooperation with the “two corridors and one circle” as the key and the “one axis and two wings” as the expansion to construct the core zone of comprehensive economic cooperation between China and ASEAN. This will not only benefit the people of the two countries but also contribute to China-ASEAN cooperation. The BGREC can have a profound impact on the protection and development of marine minerals and fish resources, the surveillance and protection of the marine environment, and the construction of transportation infrastructure and industries in the Beibu Gulf Rim. China and Vietnam have demarcated the maritime boundary in the Beibu Gulf, creating the precondition for their economic cooperation.

Guangxi Beibu Gulf Economic Zone as the Core Area for the PBG Project The PBG Cooperation can have three layers: the Guangxi Beibu Gulf Economic Zone (the GBGEZ), the BGREC and the PBG Cooperation. Because the PBG Cooperation was first proposed by Guangxi, the GBGEZ should be the core and pioneer due to its geographical location. The GBGEZ, however, has to develop quickly to become stronger as early as possible to shoulder such a heavy task. The Development Scheme of Guangxi Beibu Gulf Economic Zone was approved by the Chinese government in January 2008, and 10

During his visit to Beijing in May 2004, Vietnamese Prime Minister Phan Van Khai proposed to co-build two economic corridors, namely the Nanning-Long SonHanoi-Haiphong Economic Corridor and the Kunming-Lao Chai-Hanoi-Haiphong Economic Corridor, and the Beibu Gulf Rim Economic Circle (two economic corridors and one circle), which was highly viewed by his Chinese counterpart Wen Jiabao.

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the development and opening of the Beibu Gulf has thus become a national development strategy. This shows that the GBGEZ is not merely the business of Guangxi or China anymore; instead, it has been integrated into the master plan for regional economic development in China and into the important regional economic cooperation between China and ASEAN. The GBGEZ is defined as an important international economic cooperation zone incorporating ASEAN. Therefore, it should take the initiative to rise to become the core zone in the PBG area. In order to become the core zone in the PBG area, the GBGEZ needs to have a Beibu Gulf Technological and Industrial Park Zone similar to the China-Singapore Suzhou Industrial Park. Based on the geographical advantages of the GBGEZ, the opportunities for international and domestic industrial transformation, and the trend of regional economic integration, a technological and industrial park zone over 100 km2 in area should be planned and constructed in a proper location. The spatial and industrial layout of the zone should be reasonably planned to include functional sections like an advanced manufacturing industry section, a new and high-tech industry section, a higher education section and a coastal recreation and tourism section. Such a zone will highly increase the intensive utilization rate of land and reduce the pollution caused by industrialization. In concept, it will take 10 to 20 years to construct a new internationalized coastal zone inhabited by 500,000 to 1 million people that includes a nice living environment, an advanced management system, and numerous talents and professionals. Attracting many transnational corporations will result in many technical innovations and products and strong competitiveness, and the GBGEZ can thus be developed into the China-ASEAN base of trade and commerce, logistics and processing and manufacturing, as well as the information and data exchange center. The above-mentioned development and cooperation requires enormous funds. As many ASEAN countries are less developed and only have limited funds, the PBG Cooperation can go forward quickly to achieve results provided that China can give some financial support and the ADB, as well as other international financial organizations,

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can participate. At the 2009 Boao Forum for Asia, Chinese Premier Wen Jiabao promised that China would invest to establish a US$10 billion China-ASEAN Cooperation Fund to finance infrastructure projects on both sides.11 This historical pledge is providing the PBG Cooperation with a once-in-a-lifetime opportunity.

CONCLUSION Under the 10+1 framework, both the GMS on land and the PBG Cooperation on the sea will propel comprehensive regional economic cooperation between China and ASEAN. The PBG Cooperation covers a big area and has great potential, but it also faces big difficulties and challenges. It can make real breakthroughs only by selecting the projects that are conducive to all parties according to its situation. The NSEC, Chinese investment and participation in the development of the BIMP-EAGA, and the BGREC will benefit all members of the PBG Cooperation. In the context of the global financial crisis, China’s proposal to establish the US$10 billion China-ASEAN Cooperation Fund provides the PBG Cooperation with a historical opportunity and a bright future.

11 Wen Jiabao, “More Confidence and Cooperation for Win-Win Results,” speech at the Opening Ceremony of 2009 Boao Forum for Asia, Xinhua News Agency, Apr. 18, 2009.

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4 Sub-regional Economic Zones in China: Implications for ASEAN-China Cooperation Li Wannan

The Chinese economy has made great progress since the adoption of the reform and opening-up policy in 1978. The Chinese economy in 2007 was 15 times larger than it was in 1978, with an average growth rate of 9.8%. At the same time, the regional economies in China have also been greatly transformed and some important subregions have formed. The target of most of the inter-provincial cooperation aims to promote the growth of the local economy, upgrade the industrial structure and improve the people’s quality of life. In addition, many of the sub-regional economic zones are supposed to implement new reform and opening-up policies of the central government. Since the China-ASEAN Free Trade Area (CAFTA) framework was put forth in 2001, some provinces in China which are involved in sub-regional cooperation are actively participating in the processes of CAFTA. 57

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This chapter studies the sub-regional economic zones in China and the implications for China-ASEAN cooperation at the subregional level, and will be divided into six parts. Part 1 is an introduction of the whole paper. Part 2 reviews the development of sub-regional economic cooperation in China. Part 3 will discuss the Yangtze River Delta, Pearl River Delta, circum-Bohai Bay region, and the Western Taiwan Straits Economic Zone in Eastern China. This part also analyzes the sub-regional cooperation in Western China. Part 4 focuses on the Pearl River Delta Regional Cooperation and discusses the role of Hong Kong and Macao. Part 5 discusses the impacts and implications of these sub-regions for China-ASEAN cooperation. Part 6 is a short conclusion.

OVERVIEW OF REGIONAL ECONOMIC ZONES IN CHINA Since the beginning of the reform and opening-up policy, Chinese regional and sub-regional economic cooperation has enlarged and deepened. The cooperative patterns are of different types, and now some of the cooperative regions plan to develop towards further integration. Under the direction of Deng Xiaoping’s strategy of allowing some people to become rich first, the Chinese government started to open the coastal regions in the 1980s in order to promote economic development and reform in these regions. From May to August in 1980, the Chinese government successively approved the cities of Shenzhen, Zhuhai, Shantou and Xiamen as Special Economic Zones. From March to May in 1984, 14 coastal cities from Northern China to Southern China, including Guangzhou, were authorized to open up. In April 1988, the Chinese government went on to open Hainan Province as a Special Economic Zone. At the beginning of the 21st century, with the booming development of globalization and regional economic cooperation in the world, the Chinese government began to adopt various policies on sub-regional economic cooperation among the different provinces. The central government began implementing the strategy for the

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development of the Western regions in January 2000, in order to reduce the disparities between Eastern and Western China. In the later years, the government went on carrying out the policy of revitalizing the old industrial bases in the Northeast region in October 2003, drawing up the policy of Tianjin Binhai New Area in May 2006, Comprehensive Reforms of the Chengdu-Chongqing Experimental Zone in June 2007, the experimental area in Wuhan Urban Circle in December 2007, Guangxi Beibu Gulf Economic Region in January 2008, and the plan for the reform and development of the Pearl River Delta in December 2008.1 From a comprehensive and all-around perspective, Chinese subregional economic cooperation can be categorized according to four different labels: Eastern China growth, Western China development, Central China rising and Northeast China revitalization.

COMPARISON OF DIFFERENT SUB-REGIONAL ECONOMIC COOPERATION SCHEMES Sub-regional Economic Cooperation in Eastern China As the pioneer of reform and opening-up and an important economic hub of China, the scale of economics in Eastern China is the largest in the country, and its regional cooperation is relatively successful, featuring three different areas: the Yangtze River Delta, Pearl River Delta and circum-Bohai Bay region. In 2007, GDP in the three economic zones totaled RMB 10,470 billion, which represented 42% of China’s total GDP. Respectively, GDP in the Yangtze River Delta totaled RMB 4,700 billion, which reached 18.9% of China’s total GDP; the Pearl River Delta has a GDP of RMB 2,500 billion, 10.2% of China’s total GDP; and the circum-Bohai Bay region’s GDP is RMB 3,200 billion, 13.0% of total Chinese GDP (Table 1).2 1

Wang Qin, “China’s Regional Economic Development and Singapore’s Investment,” Southeast Asian Studies, 1(2009). 2 “Different features of the Yangtze River Delta, Pearl River Delta, and CircumBohai Economic Zone,” http://huanbohai.huanbohainews.com.cn/system/2009/ 01/06/010253046.shtml.

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Table 1. Some Macroeconomic Indicators for the Three Areas in Eastern China in 2007

GDP (billion RMB) GDP ratio to country total GDP (%) GDP growth rate (%) GDP per capita (RMB) Fixed assets (billion RMB) FDI inflows (US$) Export ratio to country total export (%)

Yangtze River Delta

Pearl River Delta

Circum-Bohai Sea Region

4700 18.8

2500 10.2

3200 13.0

15.0 45072 2133.75 371.4 44

16.2 50228 689.93 151.6 35

15.7 27342 3605.43 234.7 21

Source: Calculated by author according to the data from http://huanbohai.huanbohainews. com.cn/system/2009/01/06/010253046_02.shtml.

By comparison, in terms of GDP per capita, the Pearl River Delta’s GDP per capita is RMB 50,228, higher than the other two areas in Eastern China in 2007 (the Yangtze River Delta’s GDP per capita was RMB 45,072 and the circum-Bohai Bay region’s was RMB 27,342. This shows that the production efficiency in the Pearl River Delta is very high, and the circum-Bohai Sea region has potential for future development. The three areas saw US$75.77 billion of FDI inflows in 2007, which nearly represented the nation’s total FDI inflow. Respectively, the Yangtze River Delta received US$37.14 billion, the Pearl River Delta US$15.16 billion, and the circum-Bohai Bay region obtained US$23.47 billion of FDI inflow. The three areas have attracted many multinational corporations and established some competitive industrial clusters. The Chinese government hopes that Eastern China will become the manufacturing center and export base with the most potential in the world. In fact, the booming Eastern Chinese economy aids the rise of neighboring provincial economies. A tendency to transfer industry from the East to the West and from the South to the North is beginning to appear, promoting the well-being of the whole country.

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The Emerging Western Taiwan Straits Economic Zone The concept of the Western Taiwan Straits Economic Zone was first put forward by Lu Zhangong, the governor of Fujian Province, as early as 2004. The new economic zone faces Taiwan across the strait, and connects with the Pearl River Delta and the Yangtze River Delta, including the entire Fujian Province, and parts of Zhejiang, Guangdong and Jiangxi Provinces. On May 5, 2009, the Decision on Accelerating the Construction of the Economic Zone on the Western Side of the Taiwan Straits was passed by an executive meeting of the State Council, which shows that the zone will become a frontier platform for boosting industrial and cultural exchanges across the strait. The short-term goal of the economic zone is to increase local GDP from 755 billion yuan in 2006 to 1 trillion yuan in 2010. The longterm goal is to build a developed and prosperous economic belt along the west coast of the Taiwan Strait.3 Among the affected provinces and cities, the most crucial connection is between Fujian and Taiwan. As a matter of fact, the most important feature of the economic zone is to foster economic integration between Fujian and Taiwan. The Chinese government has attached a great deal of importance to this proposal for both political and economic reasons.4 The Chinese government aims to foster development of industries of specific characteristics in the Western Taiwan Straits Economic Zone, which means that Fujian will prepare to receive some industries transferred from Taiwan. For example, Fujian and other provinces have sped up infrastructure construction to attract investments from Taiwan. In fact, Fujian has been one of the largest destinations for investment from Taiwan since the 1980s when people from Taiwan started to run businesses on the mainland. In December 2006, Fujian 3

Zhao Hong and Liang Ruobing, “Economic Zone on the West Coast of Taiwan Strait,” EAI Background Brief No. 458, June 18, 2009, http://www.eai.nus.edu. sg/BB458.pdf. 4 Tung Chen-Yuan, “Prospects of the Taiwan Strait West Coast Economic Zone,” in Paul Davidson, ed., Trading Arrangements in the Pacific Rim: ASEAN and APEC, Oceana Publications, 2006, Document III.C.10, pp. 1–8.

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Table 2. The Indicators of Western Taiwan Straits Economic Zone, 2008 GDP (billion yuan)

GDP Per capita (US$)

Population (thousand)

Area (thousand km2)

Fujian Province Wenzhou, Lishui, Quzhou in Zhejiang Province Shangrao, Yintan, Fuzhou, Ganzhou in Jiangxi Province Shantou, Meizhou, Chaozhou, Jieyang in Guangdong Province

1082.31 351.0

4364 4092

36469.4 12615.6

124.0 37.9

210.1

1524

20284.3

84.6

262.1

2116

18212.5

26.3

Total

1905.6

3200

87581.8

272.8

Region

Source: Chan Yuli, “Integrating the Resource of the Western Taiwan Straits Economic Zone,” Working Paper for the Seminar on Asia-Pacific Regional Cooperation 2009, Fuzhou City, August 2009.

became the first mainland province to import zero-tariff fruits from Taiwan. According to statistics from Fujian’s Taiwan Affairs Office, Taiwan has become the second largest offshore investor for Fujian this year, following Hong Kong.5 We can also see that Fujian is the main province in the Western Straits region (Table 2). Fujian Province emphasized urban and transportation development and industrial cluster in its Development Guidelines for the Taiwan Strait West Coast Economic Zone promulgated in November 2004 which aimed at expanding its market size and improving its infrastructure to attract more FDI from Taiwan. In the future, Fujian will go on to take advantage of its geographic proximity, similar ancestral origins, languages, folk customs and cultural traditions with Taiwan to promote bilateral exchange. The mainland and Taiwan started historic direct flights, along with postal and shipping services on December 15, 2008, ending a 5

Xie Yu, “Straits Economic Zone Gets Nod,” China Daily, May 5, 2009, http:// www.chinadaily.com.cn/bizchina/2009-05/05/content_7743122.htm.

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59-year ban on such links.6 The establishment of a Western Taiwan Straits Economic Zone will further enhance communication between the two sides and contribute to the peaceful reunification of China. It will also help boost the country’s coastal economy as a whole and channel overseas capital to West and Central China.7

Sub-regional Economic Cooperation in Western China Western China includes six provinces, five municipalities and one autonomous city, covers an area of 5.4 million km2 and represents 56% of the whole country’s area. The Chinese government first put forward the strategy for the development of the Western region in January 2000. Some favorable policies were carried out in support of developing the Western region. In June 2007, the central government approved Chengdu city and Chongqing city as comprehensive planning and reform experimental zones, which were regarded as the third new special zones only after Shanghai Pudong District and Tianjin Binhai District. Chengdu city and Chongqing city have a sizable population and relatively well-developed economies. The function and target of the two experimental zones is to reduce the disparity between the urban areas and the suburbs (countryside), build the new “socialist countryside,” utilize resources appropriately and sustainably without destroying the environment, and explore a new developmental pattern which would fit the Western region. In 2008, the plan for the Guangxi Beibu Gulf Economic Zone was approved, which is another important strategic policy for the development of the Western region. The Chinese central government expects to develop the Guangxi Beibu Gulf Economic Zone as an important production base, trade hub and information exchange center, which connects ASEAN countries and South China, further driving the development of Western China. 6

“Mainland, Taiwan Start Direct Links After 59 Years,” GOV.cn, Dec. 15, 2008, http://english.gov.cn/2008-12/15/content_1178015.htm. 7 “Xie Yu, “Plan for Straits Economic Zone Gets Nod,” China Daily, May 5, 2009, http://www.chinataiwan.org/english/key/sr/csf/256/268/200905/t20090518_ 900426.htm.

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THE PEARL RIVER DELTA AND THE ROLE OF HONG KONG AND MACAO The Pearl River Delta (PRD) region consists of nine cities in Guangdong Province, including Guangzhou, Shenzhen, Zhuhai, Foushan, Jiangmen, Dongguan, Zhongshan and Zhaoqing.8

Achievements of the PRD The PRD region has made great achievements since the 1980s. GDP in the PRD in 2007 reached RMB 2,545 billion. According to data from the National Bureau of Statistics of China, per capita GDP of the PRD is RMB 62,643.83, 66.7% higher than the average level of Guangdong.9 Table 3 shows the importance of the PRD in Guangdong Province and China. Industrial structure adjustments in the PRD also made big progress. The ratio of the agriculture, industrial and service sectors is 2.5 : 51.3 : 46.2. The PRD region has become an important manufacturing base for automobiles, electronics and information, and household electric appliances. The hi-tech and modern service industries were growing quickly. The added value of the hi-tech industry was RMB 1,400 billion in 2007, accounting for 97% of the total of Guangdong Province. Till now, the PRD has six national-level hi-tech industry development zones and four provincial-level hi-tech industry development zones. Guangzhou, Shenzhen and Zhuhai cities have established software industry bases which contribute to the formation of new ideas and innovative systems. 8 The Pearl River Delta area has different definitions on different occasions. The nine cities are the main cities of the Pearl River Delta. The Pan-Pearl River Delta area includes mostly cities of Guangdong Province, Wuzhou city and Yulin city in Guangxi Province, Chenzhou city in Hunan Province, Ganzhou city in Jiangxi Province. The Pan-Pearl River Delta region includes nine provinces plus Hong Kong and Macau: Guangdong Province, Fujian Province, Jiangxi Province, Hunan Province, Guangxi Province, Hainan Province, Yunnan Province, Guizhou Province, and Sichuan Province. This chapter refers to the nine cities in Guangdong. 9 National Bureau of Statistics of China, http://www.stats.gov.cn/.

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Table 3. The Importance of the Pearl River Delta (PRD) Region in Guangdong and China

Indicators Land area Permanent population 2007 GDP 2006 Fixed assets investment 2007 Consumption Total trade 2007 Export 2007 Import 2007 Foreign direct investment 2007

PRD Compared to PRD Compared to Guangdong Province (%) Mainland China (%) 23.1 50.0 82.7 71.8 73.7 96.2 95.9 96.7 88.2

0.4 3.5 10.3 — — 28.8 29.8 27.6 18.8

Source: Calculated by author using data from the Guangdong Province government, http://www.gd.gov.cn/gdgk/qyjjjs/200901/t20090122_84368.htm.

The infrastructural development in the PRD has been quite impressive. The length of completed highways in the PRD by 2007 was 42,000 km (22.6% of which was in Guangdong Province), of which the length of expressways connecting the nine cities in the PRD is 1,940 km (53.4% of which was in Guangdong Province). The length of completed railway is 287 km, 15% of which is in Guangdong Province. The ports are also advanced, processing 75.6% of containers throughout Guangdong Province. Guangzhou Port is one of the 10 biggest ports in the world and Shenzhen Port is ranked 4th in the world for the number of containers handled. Guangzhou Baiyun Airport is one of the three busiest air networks in China. The PRD is highly internationalized with advanced foreign trade and FDI. Although the PRD is negatively affected by the global financial crisis and the rising costs of the raw materials, foreign trade in the PRD is growing fast. In 2007, foreign trade reached US$610.1 billion, an increase of 20.4%, and represented 96.2% of Guangdong’s total trade. Export reached US$354.1 billion, an increase of 22.6%, and represented 95.9% of Guangdong’s total trade. Import reached US$256.0 billion, with an increase of 17.3%, representing 96.7% of Guangdong’s total trade. In 2007, the PRD attracted FDI contracts

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worth US$29.9 billion, which accounted for 88.2% of the total FDI in Guangdong Province.

Three Economic Models in the PRD The PRD has created a developmental miracle and established a special economic model over its 30 years of development. There are three different models in the PRD10: (1) The Shenzhen economic model is also called a comprehensive model, which first develops processing export zones, and then develops the commercial and financial industry and real estate and so on. The Shenzhen economic model is regarded as a successful model in China. (2) The Dongguan economic model is based on FDI inflows. Many manufacture processing factories are oriented toward export, which not only brings large amounts of tax to the local government, but also promotes commercial development and urban building. But the Dongguan model is easily affected by the external world. The global financial crisis hit the Dongguan model hard. Many foreign factories were transferred and exports were blocked. (3) The Foshan economic model is also regarded as successful and is based on the private sector and local capital. The pillar industries in Shunde District and Nanhai District in Foshan city are all investments by private enterprises, which congregate household electric appliances, chinaware production, stainless steel products, textiles, furniture production and so on. Fortunately, the Foshan model was not hit by the global financial crisis.

Challenges for the PRD There are still several challenges facing the PRD. First, the Guangdong government hopes to upgrade the industry structure by transferring some industries within the PRD, but it is difficult to transfer labor-intensive and low-tech industries from the advanced city to other undeveloped cities because the infrastructure in the undeveloped cities is not ideal enough to attract capital inflow. Second, the 10

http://zmhd.dingnan.gov.cn/zdgz/sdtxjs/2008-08-07/5579.html, Aug. 7, 2008.

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environment in the PRD has been heavily destroyed during the economic development in the past 30 years, and the water, air, and land is highly polluted. The Guangdong government now has to input much money to restore the environment. Third, many factories are short of skilled workers because of rising wages and labor costs in the subregion. Skilled workers do not work in factories in the PRD due to low wages. Fourth, the harmonization of different cities in the PRD is not adequate. Many important infrastructure projects in some cities, such as ports and airports, have been unneccessarily built because such facilities were conveniently available in neighbouring cities.

Prospects for the PRD In December 2008, the Outline of the Plan for the Reform and Development of the Pearl River Delta (2008–2020) was issued by The National Development and Reform Commission. It is a very important program of action for current and future reform and development and has become the basis for compiling relevant specialized plans in the Pearl River Delta. According to the Outline, the PRD is strategically positioned as an experimental region for exploring the patterns of scientific development, a pilot region for further reforms, an important international gateway for expanding the opening-up program, a world-class base for advanced manufacturing and modern service industries, and an important national economic center.11 According to the Outline, by 2012, the region will have built a comprehensively and moderately prosperous society. In this region, per capita GDP will have reached RMB 80,000, with the service industries accounting for 53% of the growth. Additionally, per capita incomes for urban and rural residents will have increased remarkably compared with those of 2007, the urbanization level will have reached over 80%, and the quality of the environment will have improved. According to the Outline, by 2020, the region will have basically realized modernization ahead of other regions, established a sound 11

National Development and Reform Commission of China, Outline of the Plan for the Reform and Development of the Pearl River Delta (2008–2020).

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system of a socialist market economy, and formed an industrial structure featuring modern service industries and advanced manufacturing industries. Moreover, per capita GDP of the region will have reached RMB 135,000, with the service industries accounting for 60%, the income levels for the urban and rural residents will have doubled compared with those of 2012, the urbanization level will have reached 85%, and the energy consumption per capita GDP and environmental quality will have reached or approached the advanced levels of the world.

The Role of Hong Kong and Macao Thanks to the geographic connection, the Pearl River Delta has close economic ties with Hong Kong (HK) and Macao. HK and Macao have become important and necessary bridges connecting Guangdong with the outside world. The signing of the Closer Economic Partnership Arrangement (CEPA) between mainland China and HK and Macao in 2003 has changed spontaneous economic ties into rational cooperative mechanisms. As international financial centers, trade centers, and centers for shipping, logistics, trade, conferences and exhibitions, tourism, and innovation, Hong Kong and Macao have played an important role in the economic development of the PRD. The cooperative model of HK and Guangdong can be described as a model of “stores in front and factories behind,” which means that HK investors established their factories in the PRD and sell their products in HK. The ratio of HK investment to foreign capital inflow to the PRD is 72%, and about half of the manufacturers in the PRD are funded by HK investors. In fact, HK investors have established 55,200 manufacturing companies in the nine cities of the PRD, including Shenzhen, Foshan, Dongguan, and Guangzhou.12 But on the other hand, the model of “stores in front and factories behind” has faced some challenges. The global financial crisis hit the HK capital in the PRD. About 10% of HK investors in the PRD were 12

Bao Fei and Tu Jianhua, “A Study on the Industrial Transfer in the Pearl River Delta,” Xiandai nongye keji [Modern Agricultural Science and Technology], 2(2009).

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bankrupt in 2008, and 37.3% of HK investors were planning to transfer their factories in the PRD to other provinces.13 With the implementation of Guangdong’s policy on “two transferring,” the model should also be changed into new cooperation modes encouraged by the central government. It is necessary to formulate regional cooperation plans through consultation and agreement for Guangdong, HK and Macao. In the future, the PRD, together with Hong Kong and Macao, will jointly forge the most dynamic and internationally competitive city cluster in the Asia-Pacific region.

IMPLICATIONS FOR CHINA-ASEAN COOPERATION Sub-regional cooperation in China holds great significance for ChinaASEAN cooperation. It will encourage the provincial government and local enterprises to engage in closer contact with ASEAN and promote China-ASEAN cooperation. Although most of the sub-regional cooperation began very early, they are still working under the framework of China-ASEAN cooperation, especially since China and ASEAN started to establish the China-ASEAN Free Trade Area ten years ago in 2001. ASEAN has shown itself to have many advantages for China such as the geographical proximity, abundant natural resources and free trade between its members which have attracted many provincial governments. The following section will discuss the impacts and implications of the PRD cooperation, the Western Taiwan Straits Economic Zone, and the Guangxi Beibu Gulf Zone on China-ASEAN cooperation.

PRD Cooperation Contributes to China-ASEAN Relationship PRD cooperation aims to achieve the sustainable development of local economies based on an ideal industrial structure. But how to 13 He Tianzhuang, “Close Cooperation of Guangdong, Hong Kong and Macao Region,” Special Zone Economy, March (2009).

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upgrade the industrial structure is becoming an important issue. One of Guangdong government’s policies is to perfect foreign trade and advance FDI by taking advantage of opportunities from CAFTA. According to the Outlines of the Plan for the Reform and Development of the PRD (2008–2020), the Guangdong government was supported by the national government under the CAFTA framework to set up dialogue and coordination mechanisms with ASEAN countries, hold economic and trade fairs, and expand cultural exchanges. It was especially encouraged to cooperate with advanced ASEAN countries like Singapore in the fields of economics, technology, industrial park management, and talent training.14 In fact, recently, Guangdong Province had formulated its special policy toward ASEAN. This was dubbed “Guangdong’s ASEAN Strategy” by the media after Wang Yang, Party Secretary of the CCP Guangdong Committee, visited the ASEAN countries in September 2008. The visits were Wang Yang’s first foreign visits since he became leader of Guangdong, which showed that Guangdong had begun assessing the importance of ASEAN to Guangdong’s future development. The Memorandum of Cooperation between Guangdong and ASEAN was signed. According to the Memorandum, both sides will expand cooperation in 11 priority fields including agriculture, telecommunication, energy, environment, trade, investment, logistics, and infrastructure. According to Dr. Surin, Secretary-General of ASEAN, Guangdong is the southern gateway of China and links between Guangdong and ASEAN have been growing. The Memorandum will not only promote people-to-people ties, it will also further promote the development of the ASEAN-China Free Trade Area.15

On March 24, 2009, Goh Chok Tong, Senior Minister of Singapore, visited Guangdong and witnessed the signing of a Memorandum of 14 National Development and Reform Commission of China, Outline of the Plan for the Reform and Development of the Pearl River Delta (2008–2020). 15 ASEAN Secretariat, “Press Release: ASEAN Secretariat Enters into Cooperation Agreement with Guangdong Province, China,” September 5, 2008, http://www. aseansec.org/21923.htm.

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Understanding for the establishment of the Singapore-Guangdong Collaboration Council and an MOU on the construction of a “Knowledge City” between the two regions,16 showing that governmental cooperation between Guangdong and ASEAN countries has intensified, while PRD cooperation continues. Unquestionably, PRD cooperation has promoted inner economic development and also strengthened external links with ASEAN which further enhances the extent and level of China-ASEAN cooperation. In 2008, bilateral trade between Guangdong Province and ASEAN countries amounted to US$62.65 billion and accounted for 27.1% of the total national trade to ASEAN, an increase of 11.9% over 2007. Although negatively affected by the global financial crisis, from January to September 2009, Guangdong’s exports to ASEAN reached US$18.51 billion while imports from ASEAN reached US$25.32 billion, up 3.5% and down 13.2% respectively (Table 4). Table 4. Trade between Guangdong Province and ASEAN, 2000–2009 (billion USD, %)

Year

Total Trade

Increase (%)

Export

Increase (%)

Import

Increase (%)

Deficit for Guangdong

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

13.77 15.33 19.92 26.49 32.29 36.90 44.15 55.96 62.65 43.83

38.5 11.4 29.9 32.9 21.9 14.3 19.6 26.7 11.9 −6.9

4.56 4.93 6.17 7.30 9.27 11.58 14.67 20.50 24.66 18.51

33.9 8.1 25.2 18.3 27.0 24.9 26.7 39.76 20.3 3.5

9.21 10.40 13.75 19.19 23.02 25.32 29.48 35.46 37.89 25.32

40.8 13.0 32.2 39.5 20.0 9.9 16.4 20.28 7.0 −13.2

−4.65 −5.48 −7.58 −11.89 −13.75 −13.74 −14.82 −15.46 −13.34 −6.81

* Data only from January to September 2009. Source: Calculated by the author using data from Guangdong Statistical Yearbook and data from the Ministry of Commerce of China website.

16

“Guangdong and Singapore Seek Further Cooperation,” http://www.iccfed.gd. gov.cn/arrangement/Item/Detail_N.asp?id_no=931&typeNo=001003000.

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Guangdong Province is an important investment destination in China for ASEAN. From 1979 to 2008, ASEAN’s cumulative consultative FDI reached US$12.94 billion, and actual FDI reached US$7.44 billion. ASEAN’s investments in Guangdong Province account for about 14.3% of overall investments in China. In 2008, ASEAN’s actual FDI in Guangdong amounted to US$366.89 million.17 At the same time, the national government encourages enterprises with financial and technological advantages to conduct cooperation in ASEAN countries for resource exploitation, product marketing, infrastructure construction, cultivation and processing of agricultural produce. Recently, more and more Guangdong companies from PRD cities have expanded their investments in ASEAN countries. By the end of 2008, Guangdong enterprises had established 162 branches in ASEAN countries, with consultative investments reaching US$1.54 billion.18 In 2008, an agreement on China-Vietnam (Shenzhen-Haiphong) economic and trade cooperation zones, which are located in Hai Phong city, Vietnam, was signed and approved by the Ministry of Commerce of China. Shenzhen city was the first city to take part in the China-Vietnam economic and trade cooperation zones. The Shenzhen-Haiphong economic and trade cooperation zones are regarded as Guangdong Province’s largest project in Vietnam, cover an area of 800 hectares, represent a total investment of US$200 million, and are scheduled to be completed in four years. The zones will be designed as industrial parks and will provide various support services, such as the development of computer programs for electronics companies and garment manufacturers, financial services, research and development, quality control, legal advice, customs, logistics and other support services.19 In the future, the zones will attract many more Guangdong enterprises to collectively invest in Vietnam. 17

Data from Guangdong Statistical Yearbook 2009. Data from the website of the Department of Foreign Trade and Economic Cooperation of Guangdong Province. 19 “China-Vietnam Economic and Trade Cooperation Zone to Start Construction of Infrastructure in 2010,” http://info.e-to-china.com/investment_guide/71660.html. 18

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Therefore, the Guangdong government strengthens PRD cooperation while keeping closer contact with ASEAN countries.

Western Taiwan Straits Economic Zone Helps China-ASEAN Cooperation Generally speaking, the Western Taiwan Straits Economic Zone has two policy instruments: one is to reinforce infrastructural construction and foster regional economic integration between Fujian and neighboring Chinese provinces; the other is to strengthen economic exchanges between Fujian and foreign economies. Fujian Province’s strategic policy on the Western Taiwan Straits Economic Zone aims not only to develop its relationship with Taiwan, but also to cooperate with ASEAN. In 2008, ASEAN was Fujian’s fourth largest trade partner, its fourth largest export market, the second largest source of import for Fujian’s foreign trade and the third largest FDI investor for Fujian Province. There are many complementary factors between Fujian and ASEAN countries. For example, Fujian has a relative advantage in agriculture, textile, clothes and shoes, medicine, and household appliances. These products are the ASEAN countries’ relative disadvantage. According to Fuzhou Customs statistics, in 2009, trade volume between Fujian and Taiwan reached US$9.35 billion, with a growth rate of 11% over 2008 figures. ASEAN rose to the third largest trade partner for Fujian in 2009. Therefore, under the central government’s package of preferential policies and capital investments for the Western Taiwan Straits Economic Zone, Fujian will modernize its fundamental facilities and boost its economy, which will further the economic linkage between Fujian and ASEAN.

Guangxi Beibu Gulf Zone to Boost China-ASEAN Cooperation In the Western region, Guangxi and Yunnan Provinces have made great efforts to develop a good relationship with ASEAN. Both provinces want to become the “Chinese gateway” facing ASEAN and

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the logistics and regional business center under the framework of China-ASEAN cooperation by improving local infrastructure and manpower training. Guangxi Province has had the right to hold the China-ASEAN Expo each year since 2004, which was regarded as an important cooperative opportunity to present Guangxi’s special culture as well as to provide Guangxi with increased business prospects. In January 2008, the State Council officially approved the implementation of the Guangxi Beibu Gulf Economic Zone Development Plan, marking the opening of the Beibu Gulf Economic Zone in Guangxi and a development in national strategies. The Beibu Gulf Economic Zone, which encompasses a population of 12.55 million and a land area of 42,500 km2, is the biggest multi-regional cooperation area in China. Located in the Pan-Beibu Gulf Region, it covers four major cities — Nanning, Beihai, Qinzhou and Fangchenggang. With big advantages in terms of natural resources and geographical proximity to ASEAN, the economic zone has become a bright spot in Western China. Under the current policies, labor costs in the economic zone are 20% lower than in Eastern China, the cost of water and electricity is 20% less, and land costs for investors are also lower.20 According to the official website of the Nanning government, from 2008 to 2015, the Beibu Gulf Economic Zone faces a crucial time for its efforts to speed up social and economic development. Human resource is regarded as the most important factor in promoting regional economic recovery. The government endeavors to train and attract top-level, innovative talent with the combination of skills and knowledge, and to offer favorable conditions for them to start up their businesses. Nanning city is also designed to be the hinge city connecting China and ASEAN. The Nanning government is planning to increase fixed capital investment by RMB 135.8 billion in 2010 and to build Nanning city as the China-ASEAN logistics base, processing and manufacturing base, business and trade base, traffic conjunction center, information exchanging center and financial center.21 The 20

Wang Ke “Beibu Gulf Economic Zone Revives Regional Economy,” China.org.cn, http://www.china.org.cn/learning_english/2009-10/23/content_18759271.htm. 21 http://www.gxi.gov.cn/syttxw/201002/t20100209_174950.htm.

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redesigning of Nanning and other cities in the Beibu Gulf Economic Zone contributes not only to developing relations between Guangxi and ASEAN, but also to facilitating the cooperation between China and ASEAN. In fact, in past years, Guangxi and ASEAN countries have fostered closer relationships. ASEAN has continuously been the biggest trade partner for Guangxi for the past 10 years. From 2004 to 2008, trade between Guangxi and ASEAN increased by 39.4%, 8.8% higher than Guangxi’s average total foreign trade level. In 2008, the bilateral trade between Guangxi and ASEAN reached US$3.99 billion, an increase of 37.1% from 2007. ASEAN is also the third most important investor for Guangxi. By the end of 2008, ASEAN countries had actually injected US$0.98 billion worth of capital and contributed consultative investments worth US$2 billion to Guangxi, while establishing 454 enterprises in Guangxi.22 Manufacturing, real estate and industry building are the main investment fields. Singapore, Indonesia, Thailand and Malaysia are the main investment countries. At the same time that Guangxi added its investments to ASEAN, the ratio of Guangxi’s investments to the world’s was 66% in 2008. In the foreseeable future, Guangxi will take full advantage of the platform of the China-ASEAN Expo to improve linkages with ASEAN countries. With the progress of the tariff reductions and eliminations under the framework of CAFTA and the rise of China-ASEAN cooperation, the Beibu Gulf Economic Zone will become a thriving region and also help the economic prosperity of the China-ASEAN region.

CONCLUSION This chapter comparatively analyzed different sub-regional economic zones and discussed the impacts and implications of the Pearl River Delta regional cooperation, Western Taiwan Straits Economic Zone, and Guangxi Beibu Gulf Zone in regard to China-ASEAN cooperation.

22

http://www.gxtv.cn/Special/ShowArticle.asp?ArticleID=48019.

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Since the 1980s, the Chinese central government has put forward several regional development strategies and provided packages of preferential policies which have proven to be overall successes. Till now, most of the Chinese local provinces were motivated by the national support, involving different kinds of cooperation between provinces and forming different kinds of sub-regional economic zones. While these cooperation models enhance the economic growth they also increase the competition for developing a relationship with ASEAN. Of course, this competition is by no means a bad thing for establishing closer economic exchange and cooperation mechanisms between China and ASEAN, which will lead to a winwin situation for China-ASEAN cooperation. For example, most local provincial governments have realized the significance of keeping contact with ASEAN and tried to draw up measures to take advantage of opportunities provided by CAFTA, further expanding ASEAN-China relations. Therefore, sub-regions in China, working under the framework of China-ASEAN cooperation, are considered catalysts rather than obstructions for China-ASEAN cooperation.

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5 ASEAN Economic Growth Triangles and Implications for China Sarah Y. Tong and Catherine Chong Siew Keng

Regional trade agreements (RTAs) have proliferated around the world in the past two decades, and now nearly all members of the WTO are party to at least one. According to the World Trade Organization, there are over 200 regional trade agreements currently in force, from the West African Economic and Monetary Union (WAEMU) to the North American Free Trade Agreement (NAFTA), while another 32 are under negotiation. To a large extent, this is a natural response to the need to enhance economic cooperation and the difficulties in advancing multilateral trade arrangements like the WTO. As a region that depends heavily on trade and cross-border investment, Southeast Asia has been active in pursuing intra-regional and inter-regional economic integration. In addition to RTAs, such as the ASEAN Free Trade Area (AFTA) and the China-ASEAN Free Trade Area (CAFTA), there have also been growing efforts to promote economic integration at the sub-regional level, which involve sub-regions 77

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across national borders such as ASEAN’s growth triangles.1 The growth triangle of Singapore, Johor of Malaysia, and Riau of Indonesia is one such example. Such initiatives reflect ASEAN’s overall principle of an open, non-exclusive and pragmatic approach to economic integration, both at the intra-regional and inter-regional level. In this chapter, we first examine ASEAN’s recent experience in promoting sub-regional growth triangles to see what lessons can be drawn from such experiences — especially in ASEAN’s future involvement with China. This is followed by a brief discussion of China’s own practices in promoting regional development. The focus then shifts to implications for future economic cooperation in East Asia, particularly of that between China and ASEAN.

ASEAN ECONOMIC GROWTH TRIANGLES Though it began as a political entity, ASEAN has increasingly focused on economic development, especially on economic integration among member states as well as with the rest of Asia. Growth triangles (GTs) within ASEAN, as a form of intra-regional economic integration, started in the early 1990s. The main underlying rationale is that such an arrangement provides the necessary flexibility to pursue economic integration, given the diverse levels of development and differing aspirations for economic opening among different countries in the region. The objective is for regions to take advantage of different comparative advantages and complementarities in economic structure though trade and cross-border investment.2 With

1

In this chapter, growth triangles refer to a type of regional cooperation and integration that intends to exploit complementarities in factor endowments of three or more countries/regions for trade and investment. Growth triangles have drawn increasing attention for their market-driven, peripheral-oriented and private sector-led nature in regional cooperation (Hiroshi Kakazu, “Growth Triangles in ASEAN: A New Approach to Regional Cooperation,” APEC Discussion Paper Series, March 1997). 2 Nathaniel Landingin and David Wadley, “Export Processing Zones and Growth Triangle Development: The Case of the BIMP-EAGA, Southeast Asia,” Journal of International Development 17(2005): 67–96.

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limited exposure to economic liberalization and external competition, GTs allow different national and local governments to exercise more control in negotiating and designing terms suitable to their particular conditions. The development of growth triangles in ASEAN has also coincided with the rise of international production networks in East and Southeast Asia, which requires not only the exchange of goods, but more integrated regional business operations.

Indonesia-Malaysia-Singapore (IMS) and SingaporeJohor-Riau (SIJORI) Growth Triangles Early examples of ASEAN’s GTs include the Indonesia, Malaysia, and Singapore (IMS) GT and the Singapore-Johor-Riau Triangle (SIJORI).3 The IMS-GT has a clearly defined focus on resource pooling and investment cooperation and has been in operation since 1992. By combining the three regions and capitalizing on different advantages of capital, technology, and human resources, the IMS-GT intends to enhance its investment competitiveness and develop into a self-sustaining growth region with a sufficiently large regional market, a highly competitive cost advantage, and a technologically advanced industrial structure. While the region of Johor intends to exploit the metropolitan spillover effects of Singapore by attracting labor- and land-intensive factories to relocate, Singapore aims to maintain the high value-added functions of the businesses. As labor- and land-intensive activities are shifted out to lower-cost regions, Singapore is to consolidate its position as a manufacturing base and service hub by taking advantage of its geographic proximity with Johor and Batam. Among various growth triangles, the IMS-GT may be considered a success. The grouping of Singapore-Johor-Riau enjoys a good degree of economic integration with a relatively clear division of labor, where 3

Chia Siow Yue, “Regionalism and Subregionalism in ASEAN: The Free Trade Area and Growth Triangle Models,” in Takatoshi Ito and Anne Krueger, eds., Regionalism versus Multilateral Trade Arrangements, NBER-EASE Vol. 6, University of Chicago Press, 1997, pp. 275–312.

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Singapore focuses on high value-added manufacturing and services, and Johor and Batam serve as the manufacturing bases for labor- and land-intensive industries. The crucial factors underlying such success include evident economic complementarities among the three areas and close geographic proximity. Jointly, SIJORI is more attractive to investments than a national economic zone because it enjoys higher economies of scale, which allows clustering and specialization. It also facilitates the establishment of production and distribution networks in the region due to close geographical proximity. Moreover, the governments have been instrumental in the sub-region’s development. For example, the government of Indonesia has cooperated with Singapore’s government and implemented policies to liberalize foreign investment regulations in Batam. After more than a decade of development, several new pillar service industries have developed in the sub-region, including health services, education, and financial services.

Indonesia-Malaysia-Thailand (IMT) Growth Triangle Immediately after the creation of the IMS-GT, another growth triangle was launched in 1993, involving Indonesia, Malaysia, and Thailand (IMT-GT), where assistance from the Asian Development Bank was also requested. Involving 14 provinces in Southern Thailand, 8 states of Peninsular Malaysia, and the 10 provinces of Indonesia in the island of Sumatera, the IMT-GT covers a much larger area than the IMS-GT, but it is based on the same principle of economic complementarities, geographical proximities, and close historical, cultural and linguistic ties. The IMT-GT is part of a broader plan to realize the ASEAN Community in 2020 by accelerating private sector-led economic growth and facilitating the development of the sub-region as a whole.4 It prioritizes economic cooperation in areas including trade; investment and labor mobility; transportation and communications; agriculture and fisheries; industry and energy; and tourism.5 4

IMT-GT website, http://imtgt.org/About.htm. “Indonesia-Malaysia-Thailand Growth Triangle to Offer $20 Billion in Business Opportunities,” ADB Press release dated March, 21 1995, http://www.adb.org/ Documents/News/1995/nr1995023.asp. 5

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Although the IMT-GT has enjoyed support from the respective governments as well as the private sector, progress was relatively slow until recently due in part to the impact of the Asian Financial Crisis, SARS and avian flu epidemics, and security concerns during 9/11. With China’s accession to the WTO in the early 2000s, and the country’s increasing economic involvement in ASEAN, there has been a renewed interest in sub-regional cooperation. Indeed, the first Leaders’ Summit of the IMT-GT was held in 2005 and the Working Groups and Planning Meetings started in 2007. Compared with the IMS-GT, the IMT-GT program of cooperation to accelerate the sub-region’s economic transformation not only covers significantly larger areas but also has much broader objectives, including enhancing competitiveness for investment and exports; promoting tourism; lowering transport and transaction costs; and reducing production and distribution costs through scale economies.6 The program has achieved some success in a number of aspects, such as promoting travel and tourism for the sub-region in terms of more flights and hotels; increasing sea and land transport; the construction of telecommunication infrastructure; the development of trade within the sub-region; and the promotion of human resource development in the sub-region. However, further development and sustained transformation of the sub-region’s economy have not been easy. For example, many businesses in the region complain about difficulties in getting access to financing and shortages in the supply of electricity. The IMT-GT program is also less known to businesses compared to SIJORI. More broadly speaking, the sub-region is facing a number of other serious challenges. Indeed, there is mounting competition brought on by an increasing number of bilateral and regional trade deals as well as by the emergence of several Asian economies such as China and India. Much more effort is also required to accelerate the implementation of liberalization, simplification, and harmonization measures covering investments, trade in goods and services, and mobility of labor. Security concerns and threats of infectious diseases have led to more complexity in sustaining the momentum for cooperation. 6

“The IMT-GT Sub-regional Cooperation Program,” ADB website, http://www. adb.org/IMT-GT/programme.asp.

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Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA) A third initiative for ASEAN’s sub-regional growth area is the BruneiIndonesia-Malaysia-Philippines East ASEAN Growth Area (BIMPEAGA). It was first proposed by then president Fidel V. Ramos of the Philippines in 1992 and formally launched on March 24, 1994. Unlike the IMT-GT, the BIMP-EAGA relies more on the private sector, involving only the local government of Malaysia. Partnering with the European Union,7 the EU-EAGA BizTech Partnership is co-funded by the Asia-Invest Program of the European Commission. The project aims to improve the competitiveness of small and medium enterprises (SMEs) in both the EU and EAGA regions via trade and investment linkages, technology transfer and cooperation, and capacity building in the four key sectors of environment and energy, natural resources, agriculture and aquaculture, and ecotourism.8 In the short to medium term, the goal is to ensure that EAGA becomes a major location in ASEAN for high value-added agro-industry, natural resource-based manufacturing, and high-grade tourism. In the longer term, the region also intends to develop non-resource-based manufacturing in the subregion. The local government of Makassar City (now Ujung Pandang) is also working with Darwin, Australia, to facilitate cooperation in investment and other areas. While the sub-region is abundant in natural resources such as vast and rich agricultural land, tropical forests, oil, and natural gas and coal, the efforts to transform the region from a mostly agricultural economy to a manufacturing-based one has been very limited.9 For example, the Ayala de Zamboanga Industrial Park in the Philippines has not been successful in attracting investors. Overall, economic transformation in the sub-region has been slow. One key factor is that 7

Overview of EU-East ASEAN Growth Area project, EU-East ASEAN Growth Area website, http://www.eu-eaga.org/about.html. 8 “Overview of BIMP-EAGE,” http://www.bimp-eaga.org/about.php. 9 Nathaniel Landingin and David Wadley, “Export Processing Zones and Growth Triangle Development: The Case of the BIMP-EAGA, Southeast Asia,” Journal of International Development 17(2005): 67–96.

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the economies within EAGA do not have strong complementarities with each other. The sub-region also suffers from inadequate infrastructure, although it does have access to raw materials as well as lowand semi-skilled labor. Given that the sub-region started from a weak base in manufacturing and relatively poor physical infrastructure, it is difficult to take advantage of the regional production network, especially as China has risen to become a key competitor for low-end manufacturing. Furthermore, some countries involved in the subregion also experienced changes in leadership and some political unrest which inevitably affected the efforts to promote growth in the sub-region.10

Ayeyawady-Chao Phraya-Mekong Economic Cooperation Strategy (ACMECS) A relatively new initiative of growth triangles in ASEAN is the ACMECS that involves Thailand, Laos, Vietnam, Cambodia, and Myanmar. The idea was raised by Thailand’s then prime minister Thaksin Shinawatra in 2003 with the leaders of Cambodia, Lao PDR, and Myanmar, and was then called the “Economic Cooperation Strategy.” Vietnam joined the group the following year.11 The ACMECS is strongly led and supported by Thailand and aims to achieve sustainable development for the region through self-help and partnership, including poverty reduction in line with the United Nations Millennium Development Goals. More specifically, the objectives of the new initiative are to bridge the economic gap among the four countries and to promote prosperity and sustainable development in the sub-region. It would be achieved by enhancing competitiveness and generating growth along the borders; by relocating business within the sub-region to capitalize on comparative advantages; by generating jobs; and by promoting peace, stability, and shared prosperity. Five areas of cooperation are endorsed by the ACMECS Plan of Action, including trade investment facilitation; 10

“Prioritizing Strategic Directions for BIMP-EAGA,” ADB website, http://www. adb.org/BIMP/default.asp. 11 ACMECS website, http://www.acmecs.org/index.php?id=9.

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agricultural and industrial cooperation; transport linkages; tourism cooperation; and human resource development. A sixth area, public health, was later established for cooperation in 2005. Under the action plan, 46 projects and 224 bilateral projects were identified for implementation. While the program is relatively new, some progress has been made. In 2009, for example, Thailand and Cambodia sped up a single visa plan under the ACMECS to boost tourism between the two neighbors.12 Various MOUs between Thailand and the ACMECS countries on energy cooperation and cooperation in renewable energy development have also been established.13

Greater Mekong Subregion (GMS) Perhaps the most noticeable ASEAN growth triangle is the GMS. Featuring the participation of Laos, Myanmar, Thailand, and Vietnam, it is also the only one that China is involved in. The GMS started in 1992 when the six countries entered into a program of subregional economic cooperation with assistance from the Asian Development Bank, designed to enhance economic relations among the countries. The program has not only contributed substantially to the development of the region’s infrastructure to enable economic development and sharing of resources and to promote freer flow of goods and people in the sub-region, it has also led to the increasing recognition of the sub-region as a growth area. The GMS initiatives have a strong appeal to the countries involved. For China, the GMS helps to open up the landlocked provinces of Yunnan and Guangxi to Cambodia, Laos, Vietnam, Myanmar (CLVM) and other ASEAN members for trade and investment. The CLVM countries, on the other hand, benefit from

12

“Thailand, Cambodia to Speed up ACMECS, Single Visa Scheme,” Thai Visa forum, August 5, 2009, http://www.thaivisa.com/forum/Thailand-CambodiaSpeed-Acmecs-t286264.html. 13 “Concept Paper on Sub-Regional Energy Security for ACMECS,” ACMECS website, http://www.acmecs.org/index.php?id=140.

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China’s assistance in developing the sub-region’s much needed infrastructure.14 As a result of closer cooperation, economic relations among countries in the sub-region, especially between China and the countries in the Great Mekong Basin, have been significantly strengthened in trade, cross-border investment, and in areas such as the construction of roads, bridges, and channels to foster better transportation in the GMS. Progress has also been made on the construction of power lines and hydropower stations, the GMS Information Highway, the building of a biodiversity protection corridor, as well as cooperation in logistics and customs.

Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) The most recent of ASEAN efforts in sub-regional growth is BIMSTEC and involves a group of countries in both South and Southeast Asia, including Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan, and Nepal.15 The goal of BIMSTEC is to foster rapid economic development and to accelerate social progress in the subregion. It aims to promote active collaboration and mutual assistance on matters of common interest, to maintain close and beneficial cooperation within existing international and regional organizations,

14

Gu Xiaosong and Brantly Womack, “Border Cooperation between China and Vietnam in the 1990s,” Asian Survey 40 (2000): 1042–1058; Saw Swee-Hock, Sheng Lijun, Chin Kin Wah, eds., Developing ASEAN-China Relations: Realities and Prospects, ISEAS Publications, 2005. Lu Bo, “ASEAN-China FTA: Negotiation, Implementation and Prospect,” in Saw Swee-Hock, ed., ASEAN-China Economic Relations, ISEAS Publishing, 2007. 15 It was first formed in 1997 as BIST-EC, with the grouping of Bangladesh, India, Sri Lanka, and Thailand as members. Myanmar attended the inaugural June meeting as an observer and joined the organization as a full member at a Special Ministerial Meeting held in Bangkok on December 22, 1997, upon which the name of the grouping was changed to BIMSTEC. Nepal was granted observer status by the second Ministerial Meeting in Dhaka in December 1998. Subsequently, full membership was granted to Nepal and Bhutan in 2004.

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and to cooperate on projects that can be dealt with most productively on a sub-regional basis. In effect, it combines the Look West policy of Thailand and ASEAN with the Look East policy of India and South Asia and thus may be viewed as a union of ASEAN and the South Asian Association for Regional Cooperation (SAARC). Although a relatively new program, BIMSTEC has already achieved some success, such as the finalization of free trade agreement negotiations and the signing of Memorandums of Association regarding energy, weather, and climate, and a Memorandum of Understanding on cultural industries.16 From the brief discussion of ASEAN’s growth areas, it is evident that there exists a large variation among these initiatives in various aspects. For example, various countries, often in different stages of economic development, are involved in the growth areas. The size of these growth areas also varies greatly. Moreover, some involve only members within ASEAN while others involve countries outside ASEAN such as China, Australia, and countries in South Asia and Europe, as well as international organizations like the ADB. Moreover, some rely more on private initiatives while others emphasize the role of governments. Perhaps more importantly, while all initiatives aim to foster growth and development, they differ in their focuses and strategies. Consequently, the growth triangles met with different challenges and achieved different degrees of success. It is thus important to recognize that, indeed, setting up suitable and feasible objectives is an important step towards the successful development of growth triangles. In principle, the success of growth triangles depends on several key factors, including economic complementarities among the regions, geographic and cultural proximity, political commitment and effective policy coordination, as well as sufficient infrastructure.17

16

“Report of the Eleventh BIMSTEC Ministerial Meeting, 12 November 2008, New Delhi,” Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) website, http://www.bimstec.org/2ndBimstecSummit_ pdf/11_MM_Report%5B1%5D.pdf. 17 M. Aynul Hasan, “Conceptual Framework for Growth Triangles,” The Pakistan Development Review, 38 (1999): 805–822.

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These have also been the case for ASEAN growth triangles. For example, complementarity among economies within IMS/SIJORI is essential for the development of an integrated sub-regional economy. In the case of the GMS, strong government commitment and policy coordination played a significant role in the region’s development. In contrast, sub-regions such as the BIMP-EAGA which feature weak complementarity, inadequate infrastructure, or ineffective government coordination tend to attain much less advancement.

CHINA’S EXPERIENCE WITH GROWTH TRIANGLES Similar to economies in ASEAN, there are vast diversities among regions within China with respect to resource endowment, degree of industrialization, and development of infrastructure. Unlike ASEAN, however, China is a unified country governed by the national government even though local governments have considerable autonomy in economic decision making. Conceptually, localities within China may also accelerate growth and development by forming and promoting growth triangles. In fact, China has experimented with various growth triangle initiatives over the decades, which often coincide with China’s regional development strategies. Some are considered highly successful. One early and most apparent example is the development of the Pearl River Delta (PRD) region in Southern China. The economic opening of Special Economic Zones facilitated the investment inflow from the neighboring economies of Hong Kong, Macao, and Taiwan, which in turn accelerated trade within the sub-region. Here, economic complementarity, geographic as well as cultural and historical proximity, heavy investment in infrastructure, and the Chinese government’s commitment to economic opening have all been important in the rapid development of the sub-region. Indeed, the Pearl River Delta region has been at the forefront of China’s economic growth, especially during the first two decades of the country’s reform. The region has been transformed into a highly competitive manufacturing base and accounts for more than a third of China’s total export, and is often called the “factory of the world.”

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Another example of growth triangles is the Yangtze River Delta (YRD) region, which involves three provincial jurisdictions: Shanghai Municipality, Jiangsu Province, and Zhejiang Province. Similar to the PRD region, economies within the YRD region have complementarity, proximity, and good infrastructure. Moreover, as the richest and most developed region in China, the YRD region is endowed with significantly better human capital and a more sophisticated industrial base. Built upon such a strong footing, the YRD region is able to attract investment in high-end, technology-intensive manufacturing as well as facilities for research and development (R&D). In recent years, Shanghai has spearheaded the development of financial and logistics centers for coastal China. It aspires to become East Asia’s financial hub. One latest effort in China’s growth triangle is the Pan-Bohai Region or Pan-Bohai Economic Circle, which includes the coastal regions of Hebei, Liaoning, and Shandong Provinces, as well as the two provincial-level municipalities of Beijing and Tianjin. The subregion, accounting for 13% of the country’s total land area and 22% of its population, is the northernmost section of coastal China. It is rich in natural and agricultural resources and strong in capitalintensive industries. Less dependent on export demand, the sub-region has suffered less during the current financial crisis and, in fact, benefited from the government’s recent emphasis on infrastructure and resource-intensive industries. It also aims to be China’s third growth pole in the coming decade. One concern is that the subregion lacks a clear leader in joint efforts, and competition between different jurisdictions are intensive, especially that between Beijing and Tianjin. Complementarity within the sub-region is also weak. As the national government has recognized the development of the New Binhai Area to be the engine of the sub-region, it is hoped that more coordinated regional growth can be achieved. In addition to the three growth triangles along China’s coastal regions, there are also efforts to form and foster growth triangles in the inland regions. One proposal is to build China’s Western Economic Triangle (WET), which involves three of the most developed cities in the western part of China, namely Xi’an in Shaanxi Province, Chengdu in Sichuan Province, and the provincial-level

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municipality of Chongqing. There is no strong natural rationale behind this grouping since the three cities do not have clear complementarities in their economic structure. The cities also do not have very close proximity. So far, the proposal has not been taken up by the national government. Besides efforts to advance growth triangles within its borders, China has also participated in cross-border initiatives for sub-regional growth, such as the GMS discussed in the previous section. A recent and more ambitious scheme is the Pan-Beibu Gulf Economic Cooperation (PBG-EC). The initiative involves several Chinese provinces, as well as six ASEAN members, namely Vietnam, Malaysia, Singapore, Indonesia, the Philippines, and Brunei. Within China, this initiative has the prestige of a national-level development strategy. Unlike the other GTs, the PBG-EC requires the joint effort of different countries at both the national and local levels. Naturally, it faces more challenges and requires stronger government commitment and cooperation. Compared to the GMS, China plays a more significant role in the PBG-EC. As a large and rising regional power, China needs to be mindful of the concerns of other parties and should take a more accommodating approach in order for cooperation to be effective and successful. Moreover, the PBG-EC is considerably more comprehensive in its coverage and includes plans for building infrastructure for transportation, environment, and telecommunication; developing industry, logistics, the financial sector, and tourism; promoting trade and investment; encouraging the development of small and medium enterprises; and facilitating the development and cooperation of sea ports in the region. The long-term objective is for the region to become the new engine of growth along the western Pacific coast.

THE IMPLEMENTATION OF THE CHINA-ASEAN FREE TRADE AREA On January 1, 2010, the China-ASEAN Free Trade Area (CAFTA) came into effect. As the world’s third largest regional free trade area, after the European Union (EU) and North American Free Trade

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Area (NAFTA), CAFTA has, and will continue to have, significant implications for trade and development for Asia and beyond. First and foremost, CAFTA shall help ASEAN and its members to maintain and strengthen their competitiveness through closer integration within the region as well as with China.18 An FTA with China helps ASEAN countries to overcome the disadvantage of smallness by pooling resources and combining markets. By instituting a more inclusive CAFTA, which also covers investment and trade in services, ASEAN is able to forge a more comprehensive economic partnership with China and to enable a deeper economic integration in the long run. With the CAFTA, multinationals in the region will gradually restructure their supply chains and rationalize their production networks by taking China and ASEAN together as a single market. This will lead to a redistribution of the regional FDI flows and trade. As such, both trade and FDI in the region should continue to grow to generate mutual benefits by further exploiting the comparative advantages of different participating countries. With the exception of China and Singapore, the mutually competitive rather than complementary structures of China and ASEAN prevent significant growth in trade,19 whereas most ASEAN countries are still competing for third-country markets, e.g. the US and the EU. China’s export-oriented development strategies have cast a large shadow on ASEAN economies which have to compete with China to attract FDI and export manufactured products to the same thirdcountry markets. 18

In his article titled “ASEAN and Free Trade Area Cover China, Japan, India,” Mr. S. Pushpanathan, then assistant director for external relations at the ASEAN Secretariat, wrote, “Economic liberalisation under the FTAs would help to integrate the region more quickly and generate more and new economic activities. Specialisation and economies of scale would also set in with the removal of barriers to trade in goods and services, and investments. … [However] ASEAN may have to advance the implementation of the ASEAN Free Trade Area (AFTA) to gain a fair deal out of the FTAs. ASEAN will have to improve its economic competitiveness and regional integration to better deal with its FTA partners” (The Jakarta Post, November 14, 2002). 19 John Wong and Sarah Chan, “China-ASEAN Free Trade Agreement: Shaping Future Economic Relations,” Asian Survey, 43(2003) 507–526.

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With CAFTA in force, export-orientated ASEAN countries have to deal with the initial risk of trade diversion and related structural adjustments. In general, the FTA scheme will give rise to an uneven distribution of costs and benefits to different industries, different sectors, and even different ASEAN countries. After the initial process of adjustment, individual ASEAN economies will then develop their own niches in their economic relations with China.20 By the end of 2009, China will have already overtaken the US to become ASEAN’s third largest trading partner, and with the CAFTA in force, China may soon overtake Japan and the European Union to become ASEAN’s largest trading partner. To enhance the positive effect of such relations, ASEAN countries may have to continue to take a positive approach to adjust their economic structures so as to reduce direct competition and create more room for mutual complementarity with the Chinese economy. Singapore has worked hard for years to move away from labor-intensive production and turn to producing higher-value-added and more sophisticated products.21 Those labor-intensive productions have been moved to Johor and Batam, which incidentally lie within the SIJORI growth triangle. Similar efforts were also seen in Malaysia, the Philippines, and Thailand where more labor-intensive productions have been moved to the GMS.

FUTURE PROSPECTS AND IMPLICATIONS FOR CHINA-ASEAN COOPERATION After examining the various initiatives for growth triangles in ASEAN as well as in China, we pose two questions. First, what are the future prospects for regional GTs? Second, what are the implications or lessons for China in its efforts to promote regional and sub-regional growth areas within and beyond its border? 20

J. Wong, “China-ASEAN Relations: An Economic Perspective,” in China-ASEAN Relations: Economic and Legal Dimensions, World Scientific, pp. 17–32. 21 Singapore Economic Development Board website, http://www.sedb.com/edb/ sg/en_uk/index/why_singapore.html.

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The world economy has suffered a serious recession since late 2008. While major economies have put various measures in place to re-invigorate their economies, individually or jointly, it remains uncertain whether and when a sustained recovery has or will take hold. One outcome is that Asian economies may face a prolonged weak outlook in external demand. At the same time, the process of worldwide economic integration will slow down. Consequently, we will see more efforts to foster regional and sub-regional economic cooperation, with more determination by national governments. But there is no guarantee of success, as we have seen from past experience. In the long run, however, such an accelerated rush towards regional initiatives may hinder the effort to advance a more comprehensive global trading system. China has become a leading trader in the world, ranking number two in exports and number three in imports in 2008, and accounting for 12% and 9% of the world total, respectively.22 The recent economic crisis has resulted in weaker external demand, thus affecting China’s exports. However, temporary seasonal factors such as Christmas and Chinese New Year consumption still have a hinge on the export demand.23 With it, China still needs raw materials and intermediary goods for its production. Amongst ASEAN’s top exports to China are electrical equipment, computer/machinery, lubricants/fuels/oil, organic chemicals, plastics, fats, oil, and rubber. Apart from raw materials, ASEAN also produces intermediary products with materials from the ASEAN region and exports them to China. Notably, these products are mostly intermediate goods for China’s exports to third-country markets. Thus, we can expect that with CAFTA in place, China will import more from ASEAN countries to fulfill the input requirements of its production processes and to sustain the 22

The percentages are calculated by the authors using data from China’s Customers Statistics 2009 (for trade figures). 23 “China’s export far from recovery despite orders surge — analysts,” China Daily, September 13, 2009, http://www.chinadaily.com.cn/china/2009-09/13/ content_8686475.htm.

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country’s financial needs as its income and standard of living improve.24 At the same time, China’s economic integration with the rest of Asia and the world at large will no doubt place more competitive pressure on its smaller neighbors in Southeast Asia. Consequently, ASEAN countries have to accelerate their economic consolidation and integration within the region to remain competitive. Joint efforts by governments to strengthen their economic cooperation and facilitate the growth and integration of their GTs are essential. For China-ASEAN economic integration and cooperation in the future, there are perhaps two lessons to be kept in mind; especially when the sub-region attempts to form and foster regional and sub-regional cooperation. First, as a rising regional power, China needs to be accommodating in inviting and welcoming wider participation from different parties. It is crucial to take into account the concerns of various parties as well as domestic constraints different governments face. While direct government intervention can often be effective in certain areas, active involvement by businesses, especially non-state businesses, should be strongly encouraged. Second, efforts to promote regional cooperation should be consistent with WTO principles aimed at building a freer global trading system — an open, non-exclusive approach. Domestically, this means the government needs to tackle the problem of local protectionism. Internationally, China needs to reaffirm its commitment to freer trade. Such principles apply also to growth triangles in other parts of the world. Third, China’s efforts to build regional growth triangles, within and beyond its borders, should be consistent with its longterm objective of more balanced and sustainable growth.

24

Raul L. Codenillo, “The Economic Benefits to ASEAN of the ASEAN-China Free Trade Area (ACFTA),” Studies Unit, Bureau for Economic Integration, ASEAN Secretariat, January 18, 2005, http://www.aseansec.org/17310.htm.

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6 China’s Collaboration with Indochina Countries in Hydropower Development in the Mekong Region: How Far Can It Go? Phua Peipei

China has been developing stronger relationships with ASEAN countries over the past 18 years.1 One of the platforms through which China enhances its cooperation with ASEAN is the Greater Mekong Subregion (GMS) Program. Hydropower development and collaboration count among the many projects in which China participates in the GMS,2 1

Xue Hanqin, “China-ASEAN Cooperation: A Model of Good-Neighbourliness and Friendly Cooperation,” Speech at a seminar hosted by the Institute of Southeast Asian Studies (ISEAS), Singapore, November 19, 2009, http://www.iseas.edu.sg/ aseanstudiescentre/Speech-Xue-Hanqin-updated.pdf, accessed on March 3, 2010. 2 “Country Report on China’s Participation in Greater Mekong Sub-regional Cooperation,” National Development And Reform Commission, Ministry of Foreign Affairs, Ministry of Finance, PRC, March 28, 2008, www.fmcoprc.gov.hk/ eng/zgwjsw/t419062.htm, accessed on March 3, 2010. 95

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together with Myanmar, Laos, Thailand, Cambodia and Vietnam, who are all members of ASEAN. As demand for electricity increases in the region, so will the interest in implementing these projects. Of key concern is whether the negative environmental and social impacts of hydropower projects may breed conflict in the Indochina communities3 and create a backlash and challenge for China instead.4 This chapter therefore seeks to analyze the factors surrounding hydropower development in the Mekong and determine the extent to which collaboration in hydropower development will proceed between China and the Indochina countries. The chapter begins by describing the Mekong River, its dependents and its strategic significance to each riparian country and thereby highlights the controversies and differing impact brought by hydropower development — such a situation necessarily implies great potential for conflicts between states. The next section then looks at how such conflicts have been largely diffused with the intervention of multilateral institutions and the role played by China. The GMS and support from ASEAN have been instrumental in driving interest and providing the platform for cooperation amongst the riparian states, while China has played a key role in courting lower-stream riparian countries through bilateral means for collaboration in hydropower development. However, the catch to all these collaboration-building efforts is ultimately whether the Mekong River can sustain so many hydropower projects. The third and final section discusses challenges and uncertainties that states and multilateral institutional actors would face in pursuing hydropower projects. Here, the functionality of the Mekong River Commission (MRC) as a knowledge bank and water resource manager is called to test. Its ability to facilitate cooperation is crucial but has become increasingly ambiguous. Amongst various challenges, climate change has the greatest potential to 3

Johanna Son, “China’s PR Problem Rears Head at Mekong Forum,” Inter Press Service, December 12, 2009, http://www.ips.org/TV/mekongmediaforum09/ analysis-china%e2%80%99s-pr-problem/, accessed on March 3, 2010. 4 Michael Richardson, “Dams in China Turn the Mekong into a River of Discord: Rivers Know No Borders, But Dams Do,” The Asia-Pacific Journal, 35(2009).

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heighten tensions within and between states, and poses significant challenges to collaboration. The severe drought experienced in Southwest China and the Mekong which was first reported in February 2010 has brought this issue to the forefront and presents a critical juncture for future hydropower development. For collaboration to continue, China will likely have to increase its cooperation with lower riparian states, especially since it does not wish to join the MRC as a full-fledged formal member in the near term. We may perhaps see some institutional change or coordination between the GMS, ASEAN and MRC in the future. In conclusion, this chapter argues that while it would be unlikely for hydropower projects identified in the mainstream to proceed in the near future, the current difficulties will present an interlude, rather than a turning point away from long-term collaboration between China and its Indochina neighbors, and in the larger context, China and ASEAN. This chapter seeks to update and add to previous studies by looking at hydropower development and cooperation on the Mekong as a reflection of in-progress liberal institutionalism emerging in the region. The findings of the paper give confidence to and further support the direction.

STRATEGIC SIGNIFICANCE AND CONTENDING VIEWS Originating from the Tibetan Plateau, the Mekong River travels 4,880 km and its basin area covers six riparian countries including China (Yunnan Province), Myanmar, Laos, Thailand, Cambodia and Vietnam, before it finally flows into the sea. The river has different strategic uses to each country and the size of the communities depending directly on the river differs widely. The upper section of the river, upstream of the town of Chiang Saen in Thailand, is commonly known as the Upper Mekong and resides mainly in China save small portions residing in Myanmar and Laos. It measures 2,161 km in length (or 44% of the entire river) and flows for the most part through steep gorges that have restricted settlement and have sites deemed highly suitable for the construction of dams for electricity

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production, and is therefore one of China’s best hydropower sites. The rest of the river flows through Laos, Thailand, Cambodia and Vietnam, and is commonly referred to as the Lower Mekong. In contrast to the sparse settlement in the Upper Mekong, the Lower Mekong and its basin is populated by a rapidly growing population, of about 70 million people currently. Laos has almost all (about 98%) and Cambodia has no less than 85% of their national territory lying within the river basin. And even though Vietnam has a much smaller portion of its territory within the basin, the Mekong Delta is of key significance as it is Vietnam’s main rice cultivation cradle and supports a dense population directly dependent on the river.5 Specialists estimate that no less than eight out of ten of those living in the basin depend on the river for subsistence, either in terms of the fish caught from the river or in terms of agriculture.6 Beyond water for consumption, there are many areas in which the river has exploitable economic potential, including water for agriculture (especially rice), fisheries, electricity generation and improved shipping networks to facilitate intra-regional trade. Each of the six countries also has different dependency and end-uses for the river: China and Laos primarily wish to realize their hydropower-generating potential, yet also partner Myanmar in deepening the river channels for transport navigation; Thailand seeks cheap energy (hydropower development in Laos), more irrigation water for its modernized agriculture sector, and enhanced flows in the Chao Phraya Basin stretching through the central part of the country; Cambodia would be best served by the conservation of the natural hydrological regime, including the seasonal flooding that gives rise to its huge fishery — 70% or more of its protein source is derived from fish in Tonle Sap Lake; and Vietnam wishes to construct hydropower facilities in the Central Highlands tributaries, as well as to protect the efficient 5 Evelyn Goh, “Developing the Mekong: Regionalism and Regional Security in China-Southeast Asian Relations,” Adelphi Paper 387, 2007. 6 Milton Osborne, “River At Risk: The Mekong and the Water Politics of China and Southeast Asia,” Lowy Institute Paper 02, The Lowy Institute for International Policy, Sydney, 2004.

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agriculture and aquaculture production in the delta — its rice and catfish exports are highly dependent on the silt and constant flow of water from the river to ensure that the flood plains are not threatened by rising salinity.7 Managing the water resource of the river amidst such diversity in strategic needs is a great challenge — wherein some countries would derive benefits by altering the river’s natural course, depth and flow, while there are others whose benefits or even survival are dependent on the natural flow and sedimentation of the river. Under such conditions, it is understandable that conflicts are more likely than cooperation. Notwithstanding such diversity of needs and different levels of dependency on the river, the case is such that all six riparian countries have developed a common interest in hydropower development,8 as electricity has become the commonly desired economic good in the region with the possibility of power trading — not just in the Mekong region, but also in the wider ASEAN context. Hydropower development and energy cooperation in the Mekong region is an area closely watched by international relations experts who are following the development of cooperation between China and ASEAN, as well as non-traditional security experts who are studying related threats to both states and communities in Asia. Milton Osborne,9

7

Alex Liebman, “Trickle-down Hegemony? China’s Peaceful Rise and Dam Building on the Mekong,” Contemporary Southeast Asia, 27(2005), 281–304. 8 Myanmar’s hydropower interest in the Mekong is minimal and indirect. Its hydropower plans and direct interest are actually in the Nu-Salween River, which runs parallel to the Mekong. However, it is the Mekong Power Grid that links Myanmar’s interest to hydropower development in the Mekong; for the grid provides connectivity and access for Myanmar to trade its planned electricity output from the Tasang Dam to the region. 9 Milton Osborne has consistently written about the threats to the Mekong brought forth by China’s projects on the Mekong. See “River at Risk: The Mekong and the Water Politics of China and Southeast Asia,” Lowy Institute Paper 02, The Lowy Institute for International Policy, Sydney, 2004, and “The Mekong: River Under Threat,” Lowy Institute Paper 27, and Lowy Institute for International Policy, Sydney, 2009.

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Alex Liebman10 and Oliver Hensengerth11 see these cooperations mainly as zero-sum games, where China takes a lead in advancing its own national interests. Liebman was more explicit in saying that China will not cooperate if it has to incur costs. While I am much guided by their views, I argue that realism does not explain China’s behavior totally. Increasingly, there are signs showing China’s willingness to assure and cooperate with others even if it means bearing costs. I find it more apt to view China’s actions as attempts to balance domestic and regional needs. Evelyn Goh has very rightly recommended the utility of reconceptualizing the dynamics in terms of comprehensive, human and economic security to reassess the costs and benefits of hydropower development.12 However, I am skeptical if the dynamics in the Mekong region allows adoption of reconceptualization to the extent of showing benefits. Indeed, such reconceptualization if practised at just one or several levels or in one or several countries has the possibility of merely expanding and highlighting strategic differences. The requirement for the collective act of reconceptualizing security across the entire river basin by all riparian states as well as their non-state actors would be greatly beneficial, but indeed too arduous if not impossible to achieve. Referring to the experience of building the Nam Theun 2 (NT2) dam in Laos, where best practices and intention to care for the environment and social concerns which have been afforded under the tutelage of the World Bank and ADB still end up with a less than satisfying outcome,13 let’s just say that one can only hope that scientific 10

Alex Liebman, “Trickle-down Hegemony? China’s Peaceful Rise and Dam Building on the Mekong,” Contemporary Southeast Asia, 27(2005), 281–304. 11 Oliver Hensengerth, “Money and Security: China’s Strategic Interests in the Mekong River Basin,” Chatham House Briefng Paper, June 2009. 12 Evelyn Goh, “China in the Mekong River Basin: The Regional Security Implications of Resource Development on the Lancang Jiang,” in Mely Caballero-Anthony, Ralf Emmers and Amitav Acharya, eds., Non-Traditional Security in Asia: Dilemmas in Securitization, Ashgate Publishing Ltd, 2006, pp. 240–242. 13 As the first major dam approved by the World Bank and widely touted as the model hydropower project which has been employs best practices to mitigate trade-offs in Laos, the NT2 controversial. As it turns out, restoring people’s livelihood is easier said

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knowledge production will improve over time and be better employed in future development and cooperation, and that civil society may find better avenues of leverage and participation with the establishment of an ASEAN Intergovernmental Commission on Human Rights.

MULTILATERAL INSTITUTIONS AND CHINA’S ROLE Greater Mekong Subregion (GMS) Program In 1992, the Asian Development Bank (ADB) took the lead to launch the Greater Mekong Subregion (GMS) program, an initiative that focuses on developing economic benefits by fostering the market integration of the six Mekong countries through a system of transport (road and shipping), energy grids and telecommunication links amongst other economic networks. Oriented around establishing a neoliberal market-based economy, the GMS was endorsed by all six riparian governments, and to date has emphasized and made good progress in physical inter-connectivity, in particular the road transport network of the region.14 It can be said that the key success of the GMS has been its ability to spur the interdependence of each economy in diverse dimensions of cooperation. One of the key thrust of the GMS has been its promotion of integrated electricity markets in the region. This involves than done. After reviewing independent audits conducted by its Panel of Experts, the bank had to concede that full development of sustainable livelihood programs remain the biggest challenge of the project. Shannon Lawrence, “The Nam Thuen 2 Controversy and Its Lessons for Laos,” in Francois Molle, Tira Foran and Mira Kakonen, eds., Contested Waterscapes in the Mekong Region, Earthscan, 2009, pp. 95, 81–111. 14 In 2008, leaders of the six countries endorsed a comprehensive five-year Vientiane Action Plan 2008–2012 which identifies nine key sectors (transport, energy, telecommunication, agriculture, environment, tourism, human resource development, trade, investment) for collaboration and development. Xinhua News, “Third GMS Summit Concludes with Five-Year Plan for Future Development,” March 31, 2008, http:// news.xinhuanet.com/english/2008–03/31/content_7890419.htm, accessed on March 3, 2010.

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establishing a regional competitive power market linked through a regional transmission grid to connect 12 hydropower dams in Cambodia, China, Laos and Myanmar to Thailand and Vietnam.15 In a GMS energy study conducted in 2008 by the ADB, the forecasts estimated that electricity demand in the region would triple or quadruple in the next 20 years, from the baseline consumption of 200,000 GWh in 2005.16 Hydropower has been identified as a key resource that can be developed to meet this demand and in addition be made available for trading over the grid. The ADB launched a series of regional technical assistance programs to study and facilitate interconnection and trade coordination development after all the six riparian governments had signed an Inter-Governmental Agreement on Regional Power Trade in 2002. The latest program launched in 2008 had even focused on promoting environmental sustainability, which goes to some extent to show that the GMS is paying attention to the realities of non-traditional security threats brought by hydropower development.17 In June 2009, GMS ministers endorsed the Roadmap for Expanded Energy Cooperation at the 15th GMS Ministerial Conference, where countries agreed to accelerate 15

Proposed transmission lines would link Thailand to the Tasang Dam on the Salween River in Burma and the Jinghong and Nuozhadu Dams on the Mekong mainstream in China’s Yunnan Province, and Thailand and Vietnam to the Nam Theun 2 dam in Laos. Dams are also being considered on Cambodia’s Se San River, China’s Panlong River and rivers in central and southern Laos, among others. International Rivers, “Trading Away the Future: The Mekong Power Grid,” September 2006, http://www.internationalrivers.org/files/MekongPowerGrid09 2506.pdf, accessed on March 3, 2010. 16 Lawrence Haas, “Energy and Power Baseline,” Mekong River Commission Secretariat, Initiative on Sustainable Hydropower, Strategic Environmental Assessment Team Workshop Presentation, January 2009, slide 28, http://www. mrcmekong.org/ish/SEA-Baseline/3.%20Power%20Baseline-%2027%20Jan.pdf, accessed on March 3, 2010. 17 “Regional Technical Assistance Programme: TA 6440-REG: Facilitating Regional Power Trading and Environmentally Sustainable Development of Electricity Infrastructure in GMS,” http://www.gms-powertrade.net/, accessed on March 3, 2010.

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action on cross-border power trade and aim at environmental improvements.18 At this point, it must be mentioned that ASEAN has played an important role in promoting energy cooperation in the GMS. Cambodia, Myanmar, Laos, Thailand and Vietnam are all members of ASEAN. The first meeting of the ASEAN Economic Ministers on Energy Cooperation was held in Bali, Indonesia, in September 1980.19 The meeting discussed energy policies, institutional arrangements, energy cooperation within ASEAN and between ASEAN and other countries or international organizations. In order to improve welfare and support social and economic growth in member countries by ensuring energy supply, the Bali meeting agreed to formulate a framework for energy cooperation; work towards lessening dependence on imported oil, developing indigenous energy resources, enhancing energy efficiency and conservation; and encourage information and technology transfer. To significantly enhance economic integration and industrial development within ASEAN, a decade later, the ASEAN Power Grid (along with the Trans-ASEAN Gas Pipeline) programs were proposed in the early 1990s.20 Today, the ASEAN Power Grid consists of 15 bilateral and multilateral electricity interconnection projects that cover many areas in the GMS.21 Going forward, demand for energy security within ASEAN and carbon emissions reduction are two macro trends that will contribute to propelling a bigger interest in expediting the ASEAN Power Grid 18

ADB News Release, “Mekong Nations to Expand Energy Cooperation Beyond Electric Power Sector,” June 19, 2009, http://www.adb.org/media/Articles/ 2009/12918-mekong-energies-developments/, accessed on March 3, 2010. 19 Joint press release for the First Meeting of the ASEAN Economic Ministers on Energy Cooperation, September 29–30, 1980, http://www.aseansec.org/1422.htm, accessed on March 3, 2010. 20 Joint press release for the Ninth Meeting of the ASEAN Economic Ministers on Energy Cooperation, November 12–16, 1990, http://www.aseansec.org/1090.htm, accessed on March 3, 2010. 21 See “Asean Plan of Action for Energy Cooperation (APAEC) 2010–2015,” ASEAN Centre for Energy, March 16, 2010, http://www.aseanenergy.org/ace/ apaec.php, accessed on March 3, 2010.

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program. The ASEAN Plan of Action on Energy Cooperation22 (APAEC 2010–2015) has set a roadmap to establish the grid by 2015. This commitment is further strengthened by the ASEAN Charter, where its coming into being is an achievement in itself, reflecting the members’ willingness to cooperate. The Charter provides the legal (including dispute settlement mechanisms) and institutional framework for ASEAN to be a more rules-based, effective and people-centered organization in realizing its aspiration of building an ASEAN Community by 2015.23 After more than 20 years of deliberation, these recent undertakings by the GMS and ASEAN to expedite action to establish the grid and facilitate power trade are pointing positively towards collaboration in hydropower development. The next section describes the evolution of hydropower development and two strategic acts that China undertook in courting cooperation with lower riparian states.

CHINA’S LEAD IN HYDROPOWER DEVELOPMENT AND EFFORTS IN COURTING COLLABORATION Although China had began building the Mekong River’s first mainstream dam at Manwan in 1984 and continues to be the only country to have dams on the mainstream, the earliest proponents for hydropower projects on the Mekong were not the Chinese or ADB. The initiation in hydropower interest was first brought about by the United Nations Economic Commission for Asia and the Far East (ECAFE) in 1951, in line with its effort to promote postwar economic development in the region. ECAFE supported the setup of Mekong Committee which had the membership of Thailand, Laos, Cambodia

22

“ASEAN Plan of Action for Energy Cooperation (Apaec) 2010–2015,” ASEAN Centre for Energy, March 16, 2010, http://www.aseanenergy.org/ace/apaec.php, accessed on March 3, 2010. 23 Tommy Koh, Rosario Manalo and Walter Woon, eds., The Making of the ASEAN Charter, World Scientific, 2009.

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and Vietnam in 1957. With US involvement24 and support, the Mekong Committee published in 1970 its first development plan for the entire lower basin which listed some 180 possible projects on the mainstream and tributaries. Eight dam projects on the Lower Mekong mainstream were particularly prized; for apart from generating electricity, these projects were deemed to have functions in controlling floods and irrigation, beneficial for the entire lower basin. However, growing unrest in the region interrupted progress. These mainstream projects were never picked up again when stability and investment interests in the Mekong eventually returned with the entry of the ADB in 1992. Insofar, the ADB and World Bank through the GMS program had consciously concentrated on helping the lower riparian states in developing hydropower projects on the Mekong’s tributaries, and largely in Laos.25 So even though the Lower Mekong riparian countries have had a long history and grand plans to build mainstream dams, and even if this is still a cherished dream held by some Lower Mekong riparian countries today, it hasn’t been realized through the GMS. Meanwhile, unknown to most of the outside world, China had already begun its own dam-building program and by 1995 was supplying electricity to power-short Yunnan. China had never made any major announcements of its plans or sought any international finance or technical assistance for the construction it was undertaking. It was after the attempted re-emergence of multilateral institutionalism introduced by the ADB and inviting the participation of China that the 24

Apart from ECAFE’s interest in promoting regional development, at the same time, the US was also looking at Southeast Asia as a critical terrain in its effort to contain the spread of communism and saw economic development as one measure of its wider containment policy for the region. The US was not only the largest nonriparian aid donor, providing 37% of the total US$86 million contribution in the first ten years of the Committee’s existence; it also provided substantial technical advice to the Mekong Committee. From the 1950s to 1970s, the US and Japan exerted considerable influence and promoted the development of hydropower in the Lower Mekong Basin, particularly in the mainstream. 25 Carl Middleton et al., “Old and New Hydropower Players in the Mekong Region: Agendas and Strategies,” in Francois Molle, Tira Foran and Mira Kakonen, eds., Contested Waterscapes in the Mekong Region, Earthscan, 2009, pp. 26–27.

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scope of China’s plans for dams on the Upper Mekong in Yunnan Province gradually became more generally known by the early 1990s.26 To date, there is no international treaty governing the use of transboundary rivers or compliance standards governing hydropower development, so China is in a dominant position to decide how it wants to develop its section of the river.27 It had unilaterally planned, without consulting any of its neighbors, to construct eight dams on its upper section of the river. Today, four dams fully financed and built by China are in operation. The Xiaowan Dam, the largest dam on the Mekong with a capacity of 4,200 MW, started operations in September 200928 while the fifth dam, the Nuozhadu Dam, is currently under construction. The sheer scale of China’s engineering and financing might to harness the power of the Mekong and change its natural flow had set off alarm bells for the Lower Mekong countries.29 While such acts had previously alarmed the lower riparian states,30 it has now turned into a different scenario: Cambodia and

26

Milton Osborne, “River at Risk: The Mekong and the Water Politics of China and Southeast Asia,” Lowy Institute Paper 02, The Lowy Institute for International Policy, Sydney, 2004. 27 China is one of three countries (together with Turkey and Burundi) that voted against the United Nations draft of a Convention on the Law of the Nonnavigational Uses of International Watercourses, opposed to 103 countries voting in favor and 27 abstentions. To date, the Convention has not been enforced due to its failure to be ratified by 35 countries. Ratification is proceeding slowly; in April 2009, Tunisia became the 17th contracting state to the 1997 UN Convention. Timo Menniken, “China’s China’s Performance in International Resource Politics: Lessons from the Mekong,” Contemporary Southeast Asia, 29(2007), 102. 28 Yingqing Li and Guo Anfei, “Xiaowan Dam Generating Electricity in Kunming,” China Daily, September 25, 2009, http://www.chinadaily.com.cn/regional/200909/25/content_8788813.htm, accessed on March 3, 2010. 29 Michael Richardson, “Dams in China Turn the Mekong into a River of Discord: Rivers Know No Borders, But Dams Do,” The Asia-Pacific Journal, 35(2009). 30 Speaking at a symposium in Phnom Penh in February 2003, Prime Minister Hun Sen was forthright in his argument that the construction of dams upstream of Cambodia and the growing use of the Mekong for navigation posed threats to Cambodia’s interests and in particular Tonle Sap. However, such statement has never been repeated by the Cambodian prime minister in subsequent years.

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Laos are collaborating with Chinese companies to plan and build dams on their own segments of the river.31 Notably, there are a total of 11 dams being considered for construction on the Lower Mekong mainstream: seven sites are being considered in Laos, two in Cambodia and two between Thailand and Laos where the Mekong forms the national boundary between those two countries. Of these, Chinese companies hold interests in three projects in Laos32 and one in Cambodia.33 Besides these mainstream dams, a whole host of other projects are also being planned and built on the tributaries in all four lower riparian countries. While most of the earlier projects on the tributaries were supported by the ADB and World Bank, from the early 2000s onwards,34 many of them are planned and financed by a variety of financers including Chinese, Thai and Vietnamese companies. Notably, Thailand has taken a lead position amongst a diverse set of investors in developing Laos’s hydropower potential, but China has taken a nearmonopoly position in developing Cambodia’s. 35 It has already begun construction activities at two sites in Pursat and Kampot. The Cambodian National Assembly has even passed a law that would oblige the government to cover any financial losses incurred

31

Milton Osborne, “River at Risk: The Mekong and the Water Politics of China and Southeast Asia,” Lowy Institute Paper 02, The Lowy Institute for International Policy, Sydney, 2004. 32 The other companies holding interest in dam projects in Laos are from Thailand, Vietnam and Malaysia, with Thai companies taking a lead in four projects. Save the Mekong, “Dam Locations and Status,” http://www.savethemekong.org/issue_ detail.php?sid=21, accessed on March 3, 2010. 33 Ibid.; the other company holding interest in dam projects in Cambodia is from Russia. 34 Mekong governments, especially Lower Mekong governments, made deliberate efforts to expand their options to finance development plans independent of the ADB and World Bank in the aftermath of the 1997 Asian Financial Crisis. 35 Carl Middleton et al., “Old and New Hydropower Players in the Mekong Region: Agendas and Strategies,” in Francois Molle, Tira Foran and Mira Kakonen, eds., Contested Waterscapes in the Mekong Region, Earthscan, 2009, pp. 29–41.

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by the Chinese hydropower projects in the event of political instability.36 The cooperation offered by China to build dams on the Lower Mekong mainstream should be seen as strategic. Not only does this act achieve its purpose of allaying fears and assuring lower riparian states that there will be cooperation and sufficient water flow, for otherwise Chinese investments in dams downstream would also suffer, it further projects China’s image as a good neighbor in the eyes of those riparian states who still cherish the historical aspiration to explore mainstream projects. The offer to collaborate opens up opportunities to reassess the viability and benefits of these past plans in enhancing irrigation and thus modernizing agriculture, which were dropped for a variety of reasons including lack of funding and concerns for environment and human security. Aside from direct collaboration on hydropower projects, China went to special lengths to strengthen the bilateral relationship with Cambodia. Sino-Cambodia relations entered a new phase in 1997 when China supported Hun Sen’s government by giving a US$10 million loan at a critical time when it faced isolation from the West. Since then the relationship has been consistently strengthened with investments, grants, aid and state visits by the countries’ top leaders.37 According to Xinhua News Agency, China invested US$5.7 billion, or more than 20% of Cambodia’s total foreign direct investment between 1994 and 2008. China’s interests in Cambodia have included mining, forestry, oil exploration, highways and bridges, biofuel and manufacturing. Chinese firms are the main investors in the new Special Economic Zone of Koh Kong near the southern port of Sihanoukville. In 2008, China was not only the biggest foreign investor in Cambodia, it was also the leading aid donor; its aid of US$257 million dwarfed the United State’s commitment 36

Ty Norin and S. Higgins, “Managing Through the Crisis — Strengthening Key Sectors for Cambodia’s Future Growth, Development and Poverty Reduction: Infrastructure and Energy to Support Cambodia’s Manufacturing Base,” Cambodian Development Review, 13(2009), 32. 37 Sirivudh Norodom, “ASEAN-China Relations amid Economic Crisis: Cambodian Perspective,” paper presented at ASEAN-China Regional and Sub-regional Cooperation Workshop, RSIS, October 1–2, 2009.

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which totaled just US$57 million. In 2005 and 2007, China donated naval vessels to Cambodia to help protect its interests in the South China Sea. Tourists can glimpse the massive new PRC Embassy taking shape on Phnom Penh’s bustling Mao Tse Tung Boulevard, and Chinese language schools are mushrooming across the country. The Cambodian government has recently made Mandarin Chinese part of the national university curriculum. It was during Chinese Premier Wen Jiabao’s official visit to Cambodia in 2006 that Hun Sen uttered his famous endorsement of China as Cambodia’s “most trusted friend.” Hun Sen has also repeatedly advised ASEAN neighbors to view China’s rapid economic rise as an opportunity rather than a threat.38 The offer to collaborate in building dams on the Lower Mekong mainstream and strengthening bilateral relationship with Cambodia are two cornerstone strategies in sealing China’s ability to allay fears and enhance collaboration in hydropower development on the Mekong. There are more than 100 dams under construction or in the planning stage on the mainstream and tributaries of the Lower Mekong Basin.39 But is the Mekong’s hydraulic potential able to sustain so many projects? This question also brings on the next issue: If not, what determines and who decides where to build the dams?

CHALLENGES AND UNCERTAINTIES IN SHARING HYDROPOWER COLLABORATION Weak Governance and Institutional Gap While the GMS serves as a platform to facilitate negotiations and cooperations, it does not have any direct functions or mandate in governance or managing water resources on the Mekong River.40 38

“China’s Cambodian Hegemony,” The Diplomat, May 7, 2009, http://the-diplomat. com/2009/05/07/chinas-cambodian-hegemony/, accessed on March 3, 2010. 39 Carl Middleton et al., “Old and New Hydropower Players in the Mekong Region: Agendas and Strategies,” in Francois Molle, Tira Foran and Mira Kakonen, eds., Contested Waterscapes in the Mekong Region, Earthscan, 2009, p. 34. 40 Milton Osborne, “River at Risk: The Mekong and the Water Politics of China and Southeast Asia,” Lowy Institute Paper 02, The Lowy Institute for International Policy, Sydney, 2004.

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This task is left to the Mekong River Commission (MRC), which is the successor to the previous Mekong Committee.41 In 1995, the original members of the Mekong Committee reconvened to sign a new agreement which commits the four countries to cooperate in all fields of sustainable development, utilization, management and conservation of water and water-related resources in eight key fields, namely irrigation and drought management, navigation, hydropower, flood management, fisheries, watershed management, environment and tourism on the Mekong. The MRC was established through this agreement.42 China and Myanmar chose not to participate and has to date remained as dialogue partners. As the interest in hydropower development intensifies, two functions of the MRC are paramount to facilitate cooperation: its ability to generate new objective scientific knowledge to provide more robust assessment and recommendation in water usage; and the ability to establish binding principles for cooperation. However, the MRC’s track record gives doubts on both counts. It is currently carrying out basin-wide assessments to study the impact, amongst other activities in relation to the newly proposed dams, and the words of current MRC Secretariat CEO, Jeremy Bird, sums up the situation: “The MRC is faced with perhaps its most important strategic challenge since the Mekong Agreement was signed in 1995 because of increased interest in building hydropower dams on the mainstream of the Lower Mekong River Basin.”43 The complication of current collaboration projects on the mainstream and tributaries is that most of them are not being pursued on a

41

Natalia Scurrah and Gary Lee, “The Governance Role of the MRC vis-à-vis Mekong Mainstream Dams,” Mekong Brief 10, Nov 2008, http://www.usyd. edu.au/mekong/documents/mbrief10_governance_role_mrc(engl).pdf, accessed March 3, 2010. 42 Mekong River Commission, “1995 Agreement,” http://www.mrcmekong.org/ agreement_95/agreement_95.htm, accessed on March 3, 2010. 43 “MRC to Evaluate Mainstream Dams,” MRC Newsletter, 1(2009), http://www. mrcmekong.org/mekongnews/issue20091_JanJun.htm, accessed on March 3, 2010.

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multilateral basis under the guidelines44 and recommendation of the MRC (nor through funding mechanisms through the GMS), but through uncoordinated bilateral agreements amongst countries. Even as this paper is being written, the lower riparian countries have yet to inform the MRC of their intent and plans on hydropower development on the mainstream although they were supposed to.45 Compounding the issue, studies have highlighted that proposals to develop the Don Sahong (by a Malaysian developer in Laos) and Sambor (by China Southern Power Grid in Cambodia) sites are expected to carry the threat of major damage to food security locally, but to a lesser extent in both Thailand and Vietnam.46 What sort of findings and recommendation would MRC give eventually — would it be objective? Or if an objective assessment recommends abandoning the projects, will the knowledge produced by the MRC inform the decisions of Laos and Cambodia? Concerns have been raised by civil societies about the transparency of the MRC’s knowledge generation process and its credibility as an organization providing objective scientific advice. This relates to two incidents which happened in 2004 and 2006. A MRC report which was used by a World Bank consultancy in 2004 had noted serious detrimental effects to fish production if hydropower development was sited on the mid to lower section of the Mekong mainstream. This report was made public at first but withdrawn by the Secretariat and made inaccessible at a later stage without reasons given. Subsequently, the MRC models were employed by the World Bank and ADB in their 2006 Mekong Water Resources Assistance Strategy (MWRAS) working paper. This paper had stated that there were no major risks related to large-scale

44

MRC guidelines include “Procedures for Information Sharing and Exchange,” “Procedures for Notification, Prior Consultation and Agreement” and “Procedures for Water Use Monitoring.” 45 Mekong River Commission, “MRC Position on Proposed Mainstream Hydropower Dams,” http://www.mrcmekong.org/ish/ish.htm, accessed on March 3, 2010. 46 Milton Osborne, “The Mekong: River Under Threat,” Lowy Institute Paper 27, The Lowy Institute for International Policy, Sydney, 2009.

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development plans on the Mekong and its tributaries; and suggested that hydropower development in the Lower Mekong region had been too cautious. But these models have not only received criticism from civil society, hydrologists and university-based groups; even some experts engaged by the MRC have themselves expressed concern about the robustness of the modeling due to the small number of bases and selection of sites where data were collected.47 The MRC’s inadequacy is thus being scrutinized by various observers and an assortment of analyses has come forth. It has been noted that due to its structure, the MRC is caught in a myriad of different understandings and expectations of its role by donors, civil society and member governments. This makes its contribution to sustainable river basin management and the promotion of regional cooperation, peace and security rather ambiguous. Member governments expect the MRC to identify opportunities for basin development, yet donors feel that the MRC should be prioritizing food security and seek participatory development instead of mainly serving the economic interests of states; and civil society groups have called on the Secretariat, expecting the MRC to intervene and address concerns or resolve grievances arising from developments with trans-boundary impacts.48 A weak MRC whose advice is not deemed credible by all parties does not bode well for hydropower development and cooperation. Oliver Hensengerth questioned whether participatory governance would lead to the avoidance of conflict, better resource management, and thus the creation or maintenance of a regional public good — a value proposition that MRC might carry.49 In the end he attributed the 47

Mira Kakanen and Philip Hirsch, “The Anti-Politics of Mekong Knowledge Production,” in Francois Molle, Tira Foran and Mira Kakonen, eds., Contested Waterscapes in the Mekong Region, Earthscan, 2009, pp. 339–341. 48 Natalia Scurrah and Gary Lee, “The Governance Role of the MRC vis-à-vis Mekong Mainstream Dams,” Mekong Brief 10, November 2008, http://www.usyd. edu.au/mekong/documents/mbrief10_governance_role_mrc(engl).pdf, accessed March 3, 2010. 49 Oliver Hensengerth, “Transboundary River Cooperation and the Regional Public Good: The Case of the Mekong River,” Contemporary Southeast Asia, 31(2009), 326–349.

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“soft regionalism” practised by the GMS as the factor for its success, and pointed to the MRC’s mandate of integrated water resource management and legally binding ways of operating coupled with a historical image of extra-regional interests as a hindrance, preventing it from making headway in facilitating cooperation. Participatory governance is nearly impossible, since the lower riparian countries are concerned with national economic considerations. One possible path for the MRC to take would be to align itself with the riparian states and be “hydropower-focused” and “hydropower-friendly.” He is almost right in his arguments, except that it is precisely without the difficult task of basin-wide water governance that the GMS has seen better success with the riparian governments. Marko Keskinen’s analysis focused on listing the current limitations in coordinating and integrating various impact assessment tools within the MRC, and suggested that the way forward should be an expansion of information collection, taking a multilevel and interdisciplinary approach in impact assessments and to address transparency issues and facilitate agreements on trade-offs.50 Going along this track, it implies that a greater amount of funding is needed for scientific knowledge generation, and greater coordination and participation in knowledge generation within and beyond the MRC institutional ambit on a long-term basis. Bennett Bearden focused on analyzing the legal strength of the 1995 Agreement and argued that a more comprehensive legal regime such as that embodied in the previous 1975 Joint Declaration of the Interim Mekong Committee and the 1997 UN Convention is needed to manage and shift the paradigm of the current legal regime toward sustainable development.51 The 1995 Agreement has a number of 50

Marko Keskinen, “Water Management and Impact Assessment in the Mekong Basin: Analyzing the Linkages between Local, National and Regional Levels,” CAIWA 2007 International Conference on Adaptive and Integrated Water Management,” November 12–15, 2007, http://www.newater.info/caiwa/data/ papers%20session/D4/CAIWA-fullpaper-keskinen.pdf, accessed on March 3, 2010. 51 Bennett Bearden, “The Legal Regime of the Mekong River: A Look Back and Some Proposals for the Way Ahead,” Water Policy, Uncorrected Proof, December 3, 2009, 13–20, http://www.iwaponline.com/wp/up/pdf/wp2009060.pdf, accessed on March 3, 2010.

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deficiencies that should be corrected. These include its lack of (1) a basin-wide scope (China and Myanmar are not parties);52 (2) specific legal principles and mechanisms regulating development on tributaries (thus allowing parties to circumvent legal requirements for cooperative trans-boundary governance of the Lower Mekong tributaries which is the reason for the wide proliferation of projects);53 (3) transparency or a legal framework for stakeholder participation and access to information; and (4) detailed dispute resolution provisions. The wide range of views and recommendations on what should change for the way forward reflects the complexity and differing priorities of state and non-state actors have surrounding hydropower development on the Mekong; which is what makes trans-boundary water governance exceptionally difficult. They highlight the inherent deficiencies in the current institutional apparatus to facilitate holistic sustainable development and cooperation amongst the lower riparian states, but also converge on the point that the MRC is handicapped by China’s refusal to commit as a full member.54 Changing the legal regime and improving acquisition, transparency and the use of scientific knowledge will take a lot more time and effort to effect. In the 52

Although not a member, in 2002 China and the MRC signed an agreement on technical cooperation, which became operational in 2004. It mainly deals with data sharing from two hydrological stations on the Upper Mekong. 53 In other words, development on the Mekong tributaries can be dealt with unilaterally or bilaterally, rather than multilaterally in the current legal regime. 54 Milton Osborne, “River at Risk: The Mekong and the Water Politics of China and Southeast Asia,” Lowy Institute Paper 02, The Lowy Institute for International Policy, Sydney, 2004. Oliver Hensengerth, “Money and Security: China’s Strategic Interests in the Mekong River Basin,” Chatham House Briefng Paper, June 2009. Marko Keskinen, “Water Management and Impact Assessment in the Mekong Basin: Analyzing the Linkages between Local, National and Regional Levels,” CAIWA 2007 International Conference on Adaptive and Integrated Water Management,” November 12–15, 2007, http://www.newater.info/caiwa/data/papers%20session/D4/CAIWA-fullpaper-keskinen.pdf, accessed on March 3, 2010. Bennett Bearden, “The Legal Regime of the Mekong River: A Look Back and Some Proposals for the Way Ahead,” Water Policy, Uncorrected Proof, December 3, 2009, 13–20, http://www.iwaponline.com/wp/up/pdf/wp2009060.pdf, accessed on March 3, 2010.

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meantime, unless the lower riparian governments themselves are persuaded that hydropower development on their section of the mainstream could have detrimental effects to national economic development or domestic political stability, collaboration plans will still proceed. To illustrate the point, one can refer to Osborne’s account of how NGO protests, the MRC’s intervention and even Hun Sen’s visit in March 2008 to Laos, concerning the impact of the Don Sahong project on fisheries-based livelihood in Cambodia and beyond, had not stopped its progress.55 While the MRC’s mandate in resource governance does not seem to guide decisions yet, a serious drought happening in Southwest China and northern parts of Thailand and Laos may perhaps persuade the lower riparian countries to re-evaluate the attractiveness of hydropower development on the mainstream. If this happens, there is the possibility to press for better water governance to guide collaborations, where the pressure will then be on China to join the MRC or demonstrate greater cooperation. The next section looks at the uncertainties that climate change brings to hydropower development and collaboration.

Uncertainties Brought by Climate Change and Other Considerations In early 2010, Yunnan and China’s Southwestern provinces of Guizhou, Sichuan, Guangxi Zhuang Autonomous Region and Chongqing Municipality, and northern parts of Laos and Thailand experienced one of their worst droughts in decades.56 According to the Yunnan provincial climate center, the drought which started in September 2009 will persist until May 2010.57 Hardship and 55

Milton Osborne, “The Mekong: River Under Threat,” Lowy Institute Paper 27, The Lowy Institute for International Policy, Sydney, 2009. 56 “Drought Conditions Cause Low Mekong Water Flow,” February 26, 2010, http://www.mrcmekong.org/MRC_news/press10/drought-condition26–210.htm, accessed on March 3, 2010. 57 “Drought Continues to Wreak Havoc in Southwestern China,” March 17, 2010, http://news.xinhuanet.com/english2010/china/2010–03/17/c_13214842.htm, accessed on March 3, 2010.

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economic loss has brought attention back to the dams built on the Upper Mekong, sparking a scientific debate on whether the dams upstream in China were the cause of water shortage.58 NGOs based in Thailand were quick to point out that this was not the first time that low water on the Mekong has coincided with drought and dambuilding activities in China, alluding to the recent completion of the Xiaowan Dam.59 The concerns of the downstream riparian states, in particular Thailand, have not been lost on China.60 In response, China has extended invitations to Mekong country representatives to visit the Jinghong Dam,61 and even extended data sharing beyond the flood season as stated in the 2002 Agreement.62 But to be more precise, the concern while focused on the seriousness of the immediate situation also goes beyond it. For that matter, the worry is also that if floods and droughts are going to become a more common feature in the Mekong in the near future, how will China act in controlling water flow? Will it live up to its promise in regulating river flow? A study by the Intergovernmental Panel on Climate Change (IPCC) predicted that apart from a long-term decline in water availability, “there could be increased flooding risks in the Mekong region during the wet season, and an increased possibility of water shortages in the

58

Richard Stone “Severe Drought Puts Spotlight on Chinese Dams,” Science 327 (2010),1311, http://www.sciencemag.org/content/vol327/issue5971/, accessed March 20, 2010. 59 Earth Times, “Low Level of Mekong Raises Concerns over Water Management,” March 14, 2010, http://www.earthtimes.org/articles/show/313967,low-level-ofmekong-raises-concerns-over-water-management-feature.html, accessed on March 20, 2010. 60 “PM Seeks Mekong Answers from China,” Bangkok Post, March 9, 2010, http://www.bangkokpost.com/news/local/34116/pm-seeks-mekong-answersfrom-china/page-1/, accessed on March 20, 2010. 61 “China Asks Mekong States to Visit Dam,” Bangkok Post, March 10, 2010, http://www.bangkokpost.com/news/local/34170/china-asks-mekong-states-tovisit-dam, accessed on March 20, 2010. 62 Mekong River Commission Press Release, “China Ready to Share Data,” March 26, 2010, http://www.mrcmekong.org/MRC_news/press10/China-ready-to-sharedata-26-mar-10.htm, accessed on March 27, 2010.

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dry season.”63 Seasonal water shortages are expected to arrive abruptly in approximately 20 to 30 years, and water flow will be dramatically reduced in the dry season as melted glaciers on the Tibetan Plateau disappears.64 With neat timing, the MRC held its inaugural summit in April 2010. The event, hosted by Thailand, was attended by the prime ministers of member countries and representatives from China and Myanmar, including Chinese Deputy Foreign Minister Song Tao and Myanmar’s Minister of Foreign Affairs U Nyan Win. Apart from seeking answers to the dilemmas and challenges in river basin management, the summit aimed to address the long-term effects of climate change.65 Previously the Chinese officials had repeatedly said that the end result of having constructed its Lancang Cascade would be beneficial to its Indochina neighbors in terms of regulating the Mekong’s flow; its diplomacy at this juncture is critical: What will China promise? It is not difficult to imagine that climate change will transform the rules of the game in the Mekong. What is more difficult to discern is the direction of that transformation, which could be either towards much higher levels of cooperation and even water governance in pursuit of environmental stability, or towards much higher levels of conflict. Apart from the uncertainties brought by climate change, there are signs that sedimentation is occurring faster than expected at China’s Manwan Dam. After just three years of operation, the loss of effective storage at its reservoir due to silt accumulation has reached the level 63

Scott Moore, “Climate Change, Water and China’s National Interest,” China Security 5(2009), 26. 64 “Asia’s Next Challenge: Securing the Region’s Water Future,” Asia Society, April (2009), 33. 65 Summit goals include aiming for reaffirmation of commitment by member countries to the Mekong Agreement, and strengthening the MRC’s working relationship with China and Myanmar, and increasing cooperation between the MRC and the GMS, ADB, World Bank, ASEAN and other development partners. Mekong River Commission Press Release, “China Ready To Share Data,” March 26, 2010, http://www.mrcmekong.org/MRC_news/press10/China-ready-to-share-data-26mar-10.htm, accessed on March 27, 2010.

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expected after 15 years of operation.66 This reduction of effective storage capacity has two challenging implications. One being that the cost of hydropower production will increase since expensive dredging operations might be required or the lifespan of the dam is shortened — this brings into question the viability and cost-effectiveness of developing hydropower for trade in the long term. The other being that the dams will have lesser capacity to store water if big floods come suddenly and unexpectedly; conversely, when a drought occurs, they will have stored much less water during the wet season than they can afford to release for downstream use. Sedimentation problems, if extended to the Xiaowan and Nuozhadu Dams, may imply that China could have difficulties meeting its claims and desire to benefit flow regulation in the future. As if the long-term challenges posed by Nature were not enough, China will also have to assess and navigate the more immediate complications brought by the renewed interest of the US and step-up efforts by Japan in the Mekong — whether these will further enhance, dilute, or spoil China’s cooperation interest in hydropower development with the Indochina countries. Hillary Clinton participated in the first ever US-Lower Mekong Ministerial Meeting in Thailand on July 23, 2009, and delivered a carefully crafted Mekong Initiative where the centerpiece of this initiative was the signing of a Letter of Intent for a new Mississippi-Mekong “sister river” agreement with the MRC Secretariat.67 The significance of this initiative is 66

Tyson Roberts, “Downstream Ecological Implications of China’s Lancang Hydropower and Mekong Navigation projects,” International Rivers Network Paper, 2001, http://www.internationalrivers.org/files/tyson%20roberts%20paper%20on %20yunnan.pdf, accessed on March 20, 2010. 67 Details of US engagement are still being worked out; these include the sharing of US expertise and best practices in fields such as climate change adaptation, management of floods and droughts, hydropower and impact assessment of other hydrological interventions, water consumption and food security, the management of water resources. See Richard Cronin, “Mekong Dams and the Perils of Peace,” Survival, 51(2009), 156. Joint Press Statement of the US-Lower Mekong Ministerial Meeting, July 23, 2009, http://www.state.gov/r/pa/prs/ps/2009/ july/126377.htm, accessed on March 3, 2010.

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that apart from giving the US a platform to be involved in sharing water management and climate change adaptation best practices, it will also give the US access to indirectly shape trans-boundary governance through the Secretariat. Two months after Clinton’s visit, Carol Rodley, Ambassador to Cambodia, hosted a conference on energy development in the Greater Mekong Subregion. That conference made a pitch for new technologies in electricity generation, with an intonation to dissuade hydropower development; reminding the Lower Mekong riparian states that there is no need to use primitive technology of the past which does not consider the impact of environmental damage and climate change.68 Following US advances, Japan hosted the first Mekong-Japan Summit in November 2009, where prime ministers of the four lower riparian countries participated. The meeting also focused on cooperation in water resource management and addressing climate change, although there was also a much wider context of collaboration. It cumulated in an adoption of a comprehensive plan of 63 actions called the Mekong-Japan Action Plan 63.69 Explicitly stating Japan’s support for the construction of power lines near the Mekong River and Delta in the CLV countries, and welcoming institutions including the Economic Research Institute for ASEAN and East Asia (ERIA), ADB and the ASEAN Secretariat in developing a matrix of cooperation initiatives in the Mekong region — the plan has the tone of supporting hydropower development, acknowledging regional interests and expressing cooperation. It becomes interesting to see how China and Japan will engage with each other and the Indochina countries in shaping hydropower development and cooperation — in the context of both countries jockeying for a different preferred model of regional cooperation, wherein China favors ASEAN+3 and 68

Carol Rodley, “Opening Remarks by Ambassador Carol Rodley at GMS Energy Conference,” Phnom Penh, September 29, 2009, http://cambodia.usembassy.gov/ sp_092909.html, accessed on March 3, 2010. 69 Joint Press Conference by the Leaders of Japan and the Mekong Region Countries following the Mekong-Japan Summit Meeting, November 7, 2009, http://www. kantei.go.jp/foreign/hatoyama/statement/200911/07mekong_e.html, accessed on March 3, 2010.

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Japan prefers a wider East Asian Community.70 Vice President Xi Jinping has been quick to visit Japan, South Korea, Myanmar and Cambodia in late December 2009, in an attempt to consolidate friendly relations with its East Asian partners and Southeast Asian neighbors. To the leaders of Myanmar and Cambodia, Xi went as far as to emphasize that it has been a fixed policy of the Chinese government to develop relations with their country no matter how the world situation might change.71 Xi’s visits demonstrate that with the new interest from external powers in the GMS, rather than shying away, there is a good likelihood that China will increase its commitment and cooperation. Finally, it is difficult to miss the escalating interest in the pursuit of nuclear energy amongst ASEAN states — where Thailand and Vietnam appear determined to realize their nuclear goals. The question to ask is this: What is the potential of nuclear energy replacing hydropower as a fuel for large base load power generation plants providing for regional energy cooperation? It must be noted that the total planned capacity of nuclear energy production slated for operation by 2020 is still very small in Thailand and Vietnam, at 4,000 MW in each country.72 Not only are high capital outlays needed to develop nuclear energy, there are regional concerns on site choice, safe waste disposal and security and prevention of misuse have yet to be resolved.73 This implies that nuclear energy development is something that will not happen in a big fashion to affect hydropower collaboration in the near future.

70 Jian Junbo, “Why an East Asian Community Matters,” Asia Times Online, October 22, 2009, http://www.atimes.com/atimes/China/KJ22Ad03.html, accessed on March 3, 2010. 71 Xinhua News (Beijing), “Xi’s Asian Tour Enhances Good-neighborliness, Mutual Trust,” December 22, 2009, http://news.xinhuanet.com/english/2009–12/23/ content_12690334.htm, accessed on March 3, 2010. 72 NTS-ASIA Secretariat, “The Nuclear Gravy Train: An Update on Southeast Asia,” June 01/09. 73 Andrew Symon, “Southeast Asia’s Nuclear Power Thrust: Putting ASEAN’s Effectiveness to the Test?,” Contemporary Southeast Asia, 30 (2008), 118–139.

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CONCLUSION Contradictory as it may seem, the reality is that the Lower Mekong riparian states are keen to develop hydropower, even at the prospect of bearing significant trade-offs in fisheries loss amounting in excess of US$2 billion per year.74 In particular for Laos and Cambodia, who have seen neighbors prosper quickly while their own development lags domestically, the opportunity to harness their river sections for hydropower provides a practical lever to modernize, industrialize and even more so to reap income. Civil society and NGOs enjoy varying degrees of political space in the Indochina countries, and in Laos and Cambodia, they have relatively less space to lobby for causes compared to their Thai counterparts. Food security concerns, even if proven, are deemed an issue that can perhaps be mitigated by the practice of aquaculture or through international aid programs. Despite the years of investments by donors in institutional capability building, unfortunately the MRC has not quite been able to guide decisions and shape cooperation through water governance. Under these circumstances, collaboration for hydropower development is welcomed and almost a given to proceed. However the recent drought and considerations of the long-term impacts of climate change have cast serious doubts over China’s willingness and ability to ensure water flow. Coupled with the temporary slowdown of Thailand’s economy and thus postponed planned purchase of power,75 this gives countries time to reassess the technical and economic viability of their hydropower plans. The MRC Secretariat has understood the essence of this momentous opportunity to strengthen and bid water governance as the best policy in guiding cooperation. Besides seeking recommitment from the Lower Mekong leaders to the 1995 Agreement, it also made connections 74

Milton Osborne, “The Mekong: River Under Threat,” Lowy Institute Paper 27, The Lowy Institute for International Policy, Sydney, 2009. 75 Watcharapong Thongrung, “Implementation of Power Plan Likely in April,” The Nation, December 30, 2009, http://www.nationmultimedia.com/worldhotnews/ 30119458/Implementation-of-power-plan-likely-in-April, accessed on March 3, 2010.

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with the key drivers of hydropower cooperation, namely the GMS, multilateral banks, ASEAN and other developmental partners, to anchor its cause at the inaugural MRC Summit in April 2010. Postsummit, ASEAN issued a Leaders’ Statement on Joint Response to Climate Change, which expressed support for cooperation with the GMS and MRC.76 Following which, the MRC published a first-time comprehensive report on preliminary findings on the impacts of hydropower developments in the Lower Mekong mainstream. The report highlighted serious food security issues if dams are constructed on the mainstream in Cambodia, and cautioned on the uncertainty and challenges of maintaining mainstream dams in the face of climate change.77 In this context, it is expected that there will be more discussions between actors and that new mainstream projects will not proceed in the near future. Will climate change breed more conflict or cooperation in hydropower development? Notwithstanding its reluctance to join the MRC, China has been demonstrating increasing willingness to collaborate, even at its own cost. It may be said that this is in part spurred by external interest in the Mekong. At an MRC-run dialogue meeting that took place in Laos on July 29, 2009, just days after Hillary Clinton’s visit, China had pledged new commitments including sharing information on the day-to-day operations of the Lancang-Mekong dams, and participation by Chinese experts in Strategic Environmental Assessment that the MRC is carrying out on the proposed 11 mainstream hydropower projects in the Lower Mekong Basin. Part of this assessment includes developing design guidance that must be adhered to so that they minimize or mitigate environmental problems.78 China has also decided to postpone 76

“ASEAN Leaders’ Statement on Joint Response to Climate Change,” April 9, 2010, http://www.aseansec.org/24515.htm, accessed on June 10, 2010. 77 “MRC SEA Impact Assessment Discussion Draft Report,” May 14, 2010, 10–31, http://www.mrcmekong.org/ISH/SEA-Baseline/SEA_impacts_assessment_ report_Discussion_Draft-15May.pdf, accessed on June 10, 2010. 78 “China Re-affirms Commitment to Mekong/Lancang Cooperation and Sharing Information,” MRC Newsletter (2), July–December 2009, http://www.mrcmekong. org/mekongnews/issue20092_JulDec.htm#mek7, accessed on March 3, 2010.

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indefinitely the plan to build the Mengsong Dam to protect four species of migratory fish from the Lower Basin, although the Chinese local government and community have a strong desire to build it.79 However, it is also evident that China’s increased cooperation actually comes through its inherent wisdom and understanding of the strategic importance in managing water resources use to maintain peace in both domestic and regional settings. The Tibetan Plateau is not only the source of the Mekong, but also the source of the Yellow, Yangtze, Salween, Brahmaputra, Ganges and Indus Rivers. Holding the source of so many rivers, China does realize and views seriously the consequences of water-related climate change impacts for both domestic and regional stability. By looking at China’s choice of response towards Nu-Salween projects as early as in 2004,80 and its agreements with Russia and Kazakhstan in recent years,81 one can expect that given the pursuit by civil societies to alert Beijing and the existence of strategic interests, China will consider increasing collaboration. In the case of the Mekong, the GMS holds special significance for China in that it is the first Southeast Asian regional cooperative mechanism in which China participated.82 In addition, China has inherent interests in navigation and other non-water collaborations in the GMS. Xi Jinping’s visit covering both Indochina and East Asian 79

Richard Stone, “Severe Drought Puts Spotlight on Chinese Dams,” Science 327 (2010), 1311, http://www.sciencemag.org/content/vol327/issue5971/, accessed March 20, 2010. Shichun Zhou, “Lancang River Hydropower Development, Environmental Protection, and Economic Contribution,” presentation at MRC’s Basin Development Plan 2nd Regional Stakeholder Forum, October 15–17, 2009, Chiang Rai, slide 27, http://www.mrcmekong.org/download/Presentations/2ndBDP-reg-stakeholder-forum/3.1.1-Lancang-River-Hydropower.pdf, accessed on March 3, 2010. 80 Darrin Magee and Shawn Kelley, “Damming the Salween River,” in Francois Molle et al., eds., Contested Waterscapes in the Mekong Region, Earthscan, 2009, pp. 117–119. 81 “Asia’s Next Challenge: Securing the Region’s Water Future,” Asia Society, April (2009), 33. 82 Li Chenyang, “China’s Participation in GMS Cooperation,” ASEAN-China Regional and Sub-regional Cooperation Workshop, RSIS, October 1–2, 2009.

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partners thus shows that China perceives the Mekong’s importance and its critical linkage to the bigger regional collaboration in ASEAN and East Asia. His pledge that “China would follow the path of sustainable development under the guidance of the scientific outlook and would keep on building a harmonious society domestically while committing to constructing a harmonious Asia and world” indicates that there is a future for further collaboration.83 In June 2010, the MRC and Lower Mekong government officials visited the Xiaowan and Jinghong Dams. China further provided the MRC with information on the planning, design and hydrological flow regime of upstream hydropower projects, which is very similar in principle to what has already been agreed to among Lower Mekong countries under the procedures of the 1995 Agreement, although China is not a member of the MRC.84 Hydropower development and cooperation on the Mekong reflects in-progress liberal institutionalism emerging in the region.

83

Xinhua News (Beijing), “Xi’s Asian Tour Enhances Good-neighborliness, Mutual Trust,” December 22, 2009, http://news.xinhuanet.com/english/2009–12/23/ content_12690334.htm, accessed on March 3, 2010. 84 “Mekong Commission Visits China Dams and Will Discuss Future Cooperation,” June 7, 2010, http://www.mrcmekong.org/MRC_news/press10/MekongCommission-visits-China-dams.htm, accessed on June 10, 2010.

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7 China-ASEAN Relations after CAFTA Yang Mu and Heng Siam-Heng

The implementation of the China-ASEAN Free Trade Agreement in January 2010 marks an important milestone in their relations. The CAFTA builds on and extends the growing economic relationships between the two sides. The agreement is expected to further promote China-ASEAN trade along with intra-regional direct investment and extra-regional FDI. However, as a result of the 2008 financial crisis, global economic conditions have changed significantly from those prevailing at the time of drafting the agreement. This may present new opportunities and challenges. This agreement’s future success depends on whether its signatory members can work together to overcome the challenges and make good use of the opportunities. Further down the road, ASEAN and China can build on the CAFTA to enhance their economic cooperation and integration through coordination in monetary and fiscal policies as well as industrial policies.

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RAPID GROWTH OF CHINA-ASEAN TRADE IN CAFTA PREPARATORY YEARS Ever since ASEAN collectively established official contact with China in 1991, the two sides have made remarkable progress in forging a strategic partnership for peace and prosperity. This is manifested in their cooperation in trade, investment, and other issues of mutual interests ranging from maritime security to non-traditional security challenges (Table 1). Trade and economic ties have enjoyed robust growth after the signing of the Framework Agreement on Comprehensive Economic Cooperation in November 2002 to establish the ASEAN-China Free Trade Area.1 China and ASEAN adopted an incremental approach to the FTA. Both sides started to implement the CAFTA Trade in Goods Agreement with import tariff reductions from July 2005, with the five-year tariff reduction schedule entirely phased in starting in January 2010. The average tariff on ASEAN exports to China was slashed to 0.1% in 2010, while the average tariff on China exports to older ASEAN-6 members was slashed to 0.6%. Currently, around 7,000 items traded between China and ASEAN are zero-rated. By 2015, the policy of zero-tariff rate for 90% of traded goods is expected to apply between China and the remaining four ASEAN members. Because of such tariff lowering measures, many tariffs were already very low before 2010.2 The CAFTA may therefore be seen as a formalization of what has been going on for a decade. The CAFTA is an initiative to enhance economic regional integration, and like other such initiatives, it has its economic and political background. The economic imperatives presented themselves in the form of the 1997 Asian Financial Crisis and the changes brought about by China’s accession to the World Trade Organization. Relatively unaffected by the 1997 crisis, China was able to continue doing business with Southeast Asian countries badly affected by the crisis. More importantly, it kept its promise not to devalue the 1 “ASEAN-China Dialogue Relations,” http://www.aseansec.org/5874.htm, accessed May 10, 2010. 2 “Asia’s Never Closer Union,” The Economist, February 4, 2010.

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Table 1. Major Activities Leading Up to CAFTA Implementation 1991

1995

1996 1997

2000 2001 2002

2003

2004

2004–5

2006

Chinese Foreign Minister Qian Qichen attended the opening session of the 24th ASEAN Ministerial Meeting in Kuala Lumpur. China expressed its keen interest to forge cooperation with ASEAN for mutual benefit. ASEAN and China established the ASEAN-China Joint Science and Technology Committee to plan, approve, coordinate, monitor and evaluate joint cooperative programmes and activities. Since then, there have been many joint programmes and activities convened. China was accorded full Dialogue Partner status at the 29th ASEAN Ministerial Meeting in Jakarta, Indonesia. Chinese President Jiang Zemin and ASEAN leaders had their first informal summit and issued a joint statement to establish a partnership of good neighborliness and mutual trust oriented towards the 21st century. Chinese Premier Zhu Rongji proposed setting up an FTA with ASEAN. ASEAN and China formally agreed to set up an China-ASEAN Free Trade Agreement in 10 years’ time. Signing of the Framework Agreement on Comprehensive Economic Cooperation in November 2002 to establish the ASEAN-China Free Trade Area (ACFTA). Since then, trade and economic ties between ASEAN and China have been growing rapidly. Signing of Joint Declaration of the Heads of State/Government of the ASEAN Nations and China on Strategic Partnership for Peace and Prosperity at the 7th ASEAN-China Summit. Adopted five-year (2005–2010) Plan of Action to implement the Joint Declaration at the 8th ASEAN-China Summit. The Plan has served as the master plan to broaden and deepen ASEAN-China dialogue relations in a comprehensive and mutually beneficial manner with the view to strengthen the strategic partnership for regional peace, development and prosperity. The Agreements on Trade in Goods and Dispute Settlement Mechanism between ASEAN and China were signed in November 2004, and implemented in July 2005. ASEAN and China celebrated 15 years of dialogue relations with the Commemorative Summit Marking the 15th Anniversary of ASEANChina Dialogue Relations in Nanning, China. The Summit issued a Joint Statement to further strengthen ASEAN-China relations towards an enhanced strategic partnership. (Continued)

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2009

2010

The Agreements on Trade in Services and Dispute Settlement Mechanism between ASEAN and China were signed in January and came into force on 1 July. The ASEAN-China Investment Agreement was signed during the 41st ASEAN Economic Ministers Meeting. This completes the ASEANChina negotiation processes on the FTA as set out in the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China. Implementation of the CAFTA in January.

Source: Official website of the Association of Southeast Asian Nations, http://www.aseansec. org/index2008.html, accessed May 12, 2010.

Chinese currency. These factors gave ASEAN countries a positive impression of China which stood in stark contrast to the bullying behavior of the IMF which was widely believed to be a proxy of Washington.3 The political lesson was easy to learn. The 1997 Asian Financial Crisis prompted East Asian economies to increase their cooperation, and they sought common ground to guard against future crises. In 2000, ASEAN, China, Japan and South Korea launched a multilateral pact of currency swaps known as the Chiang Mai Initiative to pool their foreign reserves to help crisis-ridden East Asian countries. With China joining the WTO in 2001, more transnational companies set up their production facilities in mainland China. Happening soon after the 1997 financial crisis, it made a lot of sense for Southeast Asian countries to broaden and deepen their trade with China. Besides being attracted to the economic potential of China’s rapid growth and liberalization, they could become suppliers to feed the global production network centered in China. The final manufactured goods are exported mainly to Europe and the US from China. All these occur within the context of globalization, with regional

3

Lam Peng Er, “The Asian Financial Crisis and Its Impact on Regional Order: Opening Pandora’s Box,” The Journal of Pacific Asia, 6(2000), 57–80.

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cooperation as part of the “game.” Three crucial rationales are identified by Kevin Cai.4 First, the CAFTA is a response to intensified regionalism elsewhere. Second, the FTA helps to cement the growing economic ties between ASEAN and China. Third, the FTA helps to coordinate government policies — a point made very clear in the Asian Financial Crisis. From the Chinese side, there is an acute recognition that its economic well-being depends critically on a peaceful and stable global environment. Its embrace of globalization means the need to do more business with the outside world, especially its neighbors. It is also keen to ensure a reliable source of raw materials. The end of 2001 was a good time for China to broach the idea of FTA with ASEAN: “The timing is ideal, as the United States is distracted by the war on terror, Iraq, Iran, and North Korea, while Southeast Asia is still grappling with the aftermath of the 1997–8 Asian Financial Crisis.”5 With America distracted and Japan weakened by its long recession, China’s pragmatic approach of increasing trade and investment has won much goodwill in the region.6 Moreover, by excluding Taiwan, the CAFTA benefits China by isolating Taiwan, a bonus point for China’s long-term project of reunification. In August 2009, China and ASEAN ratified the China-ASEAN Investment Agreement during the 41st ASEAN Economic Ministers Meeting. This, together with the already-signed China-ASEAN agreements on trade in goods and services, completed the CAFTA negotiation process. It paved the way for the implementation of the CAFTA, starting in January 2010 for China and the older ASEAN members (i.e. Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand). The FTA between China and the newer ASEAN 4 Kevin G. Cai, “The ASEAN-China Free Trade Agreement and East Asian Regional Grouping,” Contemporary Southeast Asia, 25(2003), 387–404. 5 Vincent Wei-cheng Wang, “The Logic of China-ASEAN Free Trade Agreement: Economic Statecraft of ‘Peaceful Rise’,” paper presented at the China in the World, the World in China International Conference, Kuala Lumpur, August 5–6, 2007. 6 Joshua Kurlantzick, Charm Offensive: How China’s Soft Power is Transforming the World, New Haven: Yale University Press, 2007.

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members (Cambodia, Laos, Myanmar and Vietnam) will only take effect from January 2015. As a free trade agreement, the CAFTA is pretty comprehensive as it covers trade in goods and services as well as investments. The new agreement has created the largest FTA in terms of population (1.9 billion), with a combined GDP of US$5.6 trillion and a total trade volume of US$4.5 trillion. It is the third largest trading block after the European Union and North American Free Trade Agreement region in terms of GDP.7 The CAFTA is expected to boost China-ASEAN trade, expand intra-industry trade and increase investment flow between the two sides.8 Because of the enlarged market, it is likely to attract more FDI to the region. Since 1991, China-ASEAN trade has experienced significant growth. From 1991 to 2000, China-ASEAN total trade volume grew at an annual rate of more than 15% from US$8 billion to US$40 billion. After China joined the WTO in 2001, China-ASEAN total trade volume grew at an even faster pace. During the period from 2001 to 2008, China-ASEAN trade ballooned at an annual rate of over 20% from US$42 billion to over US$230 billion. China is now ASEAN’s third largest trading partner. To a certain extent, the rapid expansion of China-ASEAN trade since 2001 was sparked by the CAFTA’s “early harvest” program which liberalized China’s agricultural market to ASEAN countries. While working towards the CAFTA, ASEAN redoubled its efforts to create not only free trade amongst its members, but also an ASEAN Economic Community by 2015 in which goods, skilled labor and capital can move freely. The 2008 financial crisis gave this another boost.9

7

Keynote speech by ASEAN Deputy Secretary-General, January 7, 2010. “China-ASEAN Free Trade Area (CAFTA) — Implications for Hong Kong’s Merchandise Exports,” March 8, 2010, http://www.hktdc.com/info/mi/a/ef/ en/1X06OJ4B/1/Economic-Forum/China-ASEAN-Free-Trade-Area-CAFTA%E2%80%93-Implications-for-Hong-Kong%E2%80%99s-Merchandise-Exports.htm, accessed April 22, 2010. 9 “Asia’s Never Closer Union,” The Economist, February 4, 2010. 8

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CHINA-CENTRIC REGIONAL PRODUCTION NETWORK A strong factor behind the growth of China-ASEAN trade was the integration of ASEAN economies into the China-centric regional production network. The China-centric regional production network was formed towards the end of the 1990s when China began to assume the region’s traditional position of manufacturing and assembly hub (mostly for labor-intensive and lower-value-added products). Some of the conditions that allowed China to take on this role included its limited exposure to the Asian Financial Crisis of 1997, its ability to attract FDI away from the ASEAN region, and its large pool of cheap labor. To regain their competitiveness, ASEAN economies leveraged China’s newfound role by aligning themselves more closely with the processing phase of China’s production. This is illustrated by ASEAN’s changes to its exports to China from the late 1990s onwards. Instead of manufacturing goods, intermediate products and raw materials became the primary composition of ASEAN’s exports to China. This economic arrangement between China and ASEAN complemented the export-oriented strategy of both sides. ASEAN economies supply the raw materials and intermediate products for China’s manufacturing, while China exports the finished product to third countries. Based on ASEAN and China’s economic performance in recent years, it seems that this production network was able to usher in a period of strong growth for both sides. However, this changed after the financial meltdown in September 2008. The global financial crisis has cut back Western demand for Chinese exports, which in turn reduces ASEAN export of processing materials to China. This has an immediate impact on the economic growth of both ASEAN and China. It is likely that global demand, especially from the Western economies, will remain weak despite improvement in the global economy. This is because the improvement was mainly due to aggressive government stimulus packages and a correction in private sector inventories. There has yet to be a firm or sustainable rebound in

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private spending. This is not a surprising development as unemployment rates remain high and the credit market continues to remain tight in developed economies. High-spending consumers in the United States and developed Europe are now saving money and paying down debt, while banks are building reserves and hoarding cash. The change in consumer behavior in the developed markets has in turn affected the global economy. Thriftiness on the part of Western consumers has led to a collapse of the appetite for goods made from components and raw materials from Asian, African and Latin American countries and assembled in China. Facing this changing world order, it is necessary for China and ASEAN to revise their role in the global economy in order to ensure a continuation of their economic development. The launching of the CAFTA brought new hope to this area. However, we can not neglect some challenges. On April 21, 2010 China’s Vice Minister of Commerce Yi Xiaozhun said China-ASEAN bilateral trade had grown rapidly in the first three months this year compared with the same period last year. China’s exports to ASEAN increased 46.7% while ASEAN’s exports to China grew even higher to 76.6%.10 This does not mean that the high growth of two-sided trade is totally due to the launching of the CAFTA at the beginning of the year. To illustrate this point, let us look at China’s trade figures with non-CAFTA countries. China’s imports from Australia increased by 64%, Japan by 56% and South Korea by 61% in the same period.11 The numbers would have been smaller had it not been for the slump in previous trade due to the recent financial crisis. For example, ASEAN exported 8.8% less to China in 2009.12

10

“CAFTA Passes First Test, Registers Higher Trade with Asean,” Bernama, April 21, 2010, http://www.bernama.com/bernama/v5/newsbusiness.php?id=492464, accessed April 22, 2010. 11 “An Appetite that Changes the World,” International Herald Tribune, April 27, 2010. 12 “CAFTA Passes First Test, Registers Higher Trade with Asean,” Bernama, April 21, 2010, http://www.bernama.com/bernama/v5/newsbusiness.php?id=492464, accessed April 22, 2010.

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SOME CHALLENGES Like any other FTA, the CAFTA has its winners and losers, its opportunities and challenges. Success brings with it some problems which need to be handled rationally and carefully. Concretely, the CAFTA has revealed the following issues: trade deficits, pressure felt by some ASEAN industries, market size constrained by income, and competition from other FTAs.

Trade Deficits in Asian Countries From 2001 to 2006, at a time when the volume of ASEAN-China trade was booming, there was more or less trade balance, with ASEAN enjoying some surplus. The situation began to change in the last few years. Vietnam and Indonesia were showing trade deficits, and the gap seems to be increasing. According to data provided by ASEAN, ASEAN showed a trade deficit of US$21.5 billion in 2008. According to the Chinese Ministry of Commerce, China’s trade deficit with ASEAN decreased from more than US$20 billion in 2004 to US$2.8 billion in 2008. During the first three quarters of 2009, China had a surplus of US$90 million in its trade with ASEAN. Almost half of ASEAN’s exports to China are resources and agricultural products. Compared to the manufacturing products ASEAN imports from China, its exports to China have low valueadded content and less potential for future development. Moreover, there is the issue of exchange rates. So far this year, the Malaysian ringgit is up 7.5% against the dollar, and Indonesia’s rupiah is up 4%. As long as the yuan is pegged to the dollar, appreciation of ASEAN currencies makes their products more expensive for Chinese importers. Such exchange rate movements may accentuate the trade deficits. The dollar and yuan are now equally important in Asia. It could be expected that ASEAN countries will have more trade deficits with China if there is no drastic step taken to reverse the trend. Additionally, most ASEAN countries do not have a big buffer of foreign reserves. Trade deficits, especially when they show signs of rapid increase, weaken the capacity to import. At the same time, it

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increases currency risks and lowers the ability to cope with the flow of hot money.

Pressures Experienced by Some ASEAN Industries The economic structures of ASEAN countries and China have both complementary as well as competitive aspects. Having a huge population of 1.3 billion, China has the task of providing employment for its vast pool of labor force. At its existing level of modernization, its labor-intensive industries will remain a mainstay of employment for the foreseeable future. Unlike Japan and South Korea, China cannot afford to relocate all its labor-intensive industries like home appliances manufacturing to ASEAN countries. In early January, soon after the CAFTA came into force, its impacts were covered by newspapers in Indonesia, the Philippines, Malaysia, Thailand and Singapore. While reporting on the positive aspects, they expressed concern that cheap Chinese products like textile products, footwear, headgear and bags might drive such industries in ASEAN to the wall. There are voices in Indonesia and the Philippines which champion the cause of such industries, especially textiles.13 The association of textile industry in Indonesia said that the past two years have witnessed the closure of 271 textile factories due to competition from China. The spokesperson of the Indonesian Ministry of Industry revealed that the Indonesian government had written to ASEAN to ask for a postponement to 2011 of the zero-tariff policies for textile, steel and chemicals to give Indonesian enterprises more time to adjust. The Indonesian Minister of Trade, while assuring that Indonesia would abide by the CAFTA, would also set up a government agency

13

“The China-ASEAN Free Trade Area: Propaganda and Reality,” http://opinion. inquirer.net/viewpoints/columns/view/20100114-247344/The-China-ASEANFree-Trade-Area-Propaganda-and-Reality, accessed April 24, 2010. “Is China-ASEAN Free Trade Agreement — CAFTA Necessary to Renegotiate?” http://en.voi.co.id/voi-dignitorial/773-is-China-ASEAN-Free-Trade-AgreementCAFTA-Necessary-to-Renegotiate.html, accessed April 24, 2010.

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to follow closely the impacts of the FTA on Indonesian industries. The hint is that Indonesia may resort to non-tariff measures to safeguard its enterprises, such as complicated and time-consuming import procedures and quality control. In fact, Indonesia has imposed the requirement that China’s products can only be imported via ten specified ports.

Market Size Constrained by Income Though ASEAN has a vast population, their purchasing power is relatively weak. The average annual income is slightly above US$2,000. The older ASEAN-6 countries fare better with an average annual income of US$4,000–5,000. During their best years of economic development from 2004 to 2008, the GDP registered an annual growth of 5.8% while the level of consumption increased more slowly. The low rate of increasing consumption is due to the low rate of income growth which in turn is due to low productivity and employment opportunities. The traditional approach to boost employment was through export-oriented industrialization. However, with the current recession, technological advances and production overcapacity worldwide, it has become much more difficult for latecomers to rely on export-oriented and labor-intensive industries to provide employment. To raise productivity, it is necessary to develop basic infrastructure and to speed up the transfer of technology and skills to ASEAN, especially to the new members. This means FDI from the advanced countries. Take the case of Indonesia with its workforce of 110 million and population of 230 million. The unemployment rate is 8.1%, which in itself is not high. But of those employed, only 30% are in government and corporate firms. The remaining 70% work in the agricultural sector, as taxi drivers, or are self-employed as small business people. From 1995 to 2008, labor supply increase exceeded employment increase by 2%. It is estimated that 17% of the people are in absolute poverty, surviving on less than US$1.5 per day. In the Philippines, the situation is worse. According to official statistics, the unemployment rate in July 2009 is 7.6%, and underemployment is 19.8%. The total number of unemployed and

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underemployed is 12 million. The country suffered from an export slump, reduced remittance from Filipinos working abroad, and a drop in FDI. At the same time, its population of 90 million increases at 2.4% per year, the fastest growing in Asia and higher than the government target of 1.9%.

Competition from Other FTAs ASEAN has signed FTAs with its various partners. All of them aim at tariff reduction. The CAFTA is the first to come into force. The other FTAs are with Japan, South Korea, India, Australia and New Zealand. In its trade relations with ASEAN, China has to compete with these countries. In 2007 and 2008, China’s trade volume with ASEAN exceeded Japan’s with ASEAN, but in 2009, Japan’s trade volume with ASEAN overtook China’s. China’s imports from Singapore, Malaysia, Indonesia and Vietnam are more than Japan’s but its imports from the Philippines and Thailand are less than Japan’s. The main items in both China’s and Japan’s exports to ASEAN are electronic/electrical goods and machinery, but Japanese goods are of higher quality. Japanese cars have captured a stable market in the ASEAN region. Japanese corporations have a longer history of trade with and investment in ASEAN and enjoy much goodwill. Recently Japan initiated the Japan-Mekong Region Ministerial Meeting and convened the Japan-Mekong Summit. To counter China’s influence in Southeast Asia, Japan proposed the ASEAN-Japan Comprehensive Economic Partnership. The agreement was signed by both sides in April 2008 and came into effect in December 2008. While ASEAN countries want to gain from the rapid economic development in China and India, they are also cautious of the implications of new rising powers. They therefore see value in the institutions and mechanism of 10+8 (the 10 ASEAN members plus China, Japan, South Korea, India, Australia, New Zealand, Russia and the US) as a check and balance and a means to reduce the adverse impacts of deepening cooperation among China, Japan and South Korea in Northeast Asia.

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As part of this trend, Brunei, Chile, New Zealand and Singapore set up the Trans-Pacific Strategic Economic Partnership (TPP) in 2005.14 Since then, the TPP has expanded to include the United States, Australia, Peru and Vietnam. The TPP is now one of the Obama administration’s main trade policies with its five-year goal of doubling US exports. At the same time, America is intensely aware of China’s dominance in East Asian trade and the TPP provides a platform for the US to respond to it.15

CREATING NEW OPPORTUNITIES The CAFTA features in many discussions on how China and ASEAN should respond to the 2008 financial crisis. Much of these revolve around the reality of shrinking Western markets and the need to increase the intra-regional trade. The CAFTA means a bigger market, as producers have a larger and more integrated market, leading to better economies of scale, higher efficiency and economic growth. Product differentiation and economies of scale are expected to grow over time and the role of the region as an integrated production base for the global supply chain will also be strengthened. While the CAFTA members are naturally expected to benefit from trade creation, trade with non-members might decline. The CAFTA’s impact on individual non-member economies could vary drastically, depending on how well a non-member is linked individually to signatory members in terms of trade, supply chains and other business arrangements.16 14

Trans-Pacific Strategic Economic Partnership Agreement, http://www.mfat.govt. nz/Trade-and-Economic-Relations/Trade-Agreements/Trans-Pacific/index.php, accessed May 13, 2010. 15 Bernard K. Gordon, “America Misses Another Asian Opportunity,” The Wall Street Journal, April 23, 2010. 16 “China-ASEAN Free Trade Area (CAFTA) — Implications for Hong Kong’s Merchandise Exports,” March 8, 2010, http://www.tdc.com/info/mi/a/ef/en/ 1X06OJ4B/1/1Economic-Forum/China-ASEAN-Free-Trade-Area-CAFTAImplications-for-Hong-Kong-S-Merchandise-Exports.htm.

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The CAFTA opens up new avenues for ASEAN and China’s business communities to expand their business. Prior to the global financial crisis, economic growth and development in the ASEAN and China region benefited the MNCs more than ASEAN’s business community. In fact, intra-ASEAN investments only accounts for a small percentage of ASEAN’s total FDI. Of the US$63 billion of FDI coming into ASEAN in 2007, intra-ASEAN FDI only amounted to US$10 billion, or about 15% of ASEAN’s total FDI inflow. China’s investments in ASEAN are even less. In 2007, China’s investments in ASEAN only made up around 1% of ASEAN’s total FDI inflow, while ASEAN’s investments in China made up around 10% of total FDI inflow into China in the same year. There is a need for China and ASEAN to encourage their SMEs or even state-owned enterprises (SOEs) to take advantage of the investment mechanisms in the CAFTA to increase their investments across borders. For instance, China should take advantage of its growing overseas investments brought about by its “going global” strategy to not only increase its investments in the ASEAN region but also to diversify the investment areas. Currently, the areas in which China’s enterprises are investing are mostly in energy, resource gathering and infrastructure. Other than facilitating greater integration between China and ASEAN, an increase of intraregional investment can lead to growth of the business community in the CAFTA region as well as a better distribution of development. This will, in turn, contribute to the emergence of a broader-based middle-class and the maintenance of a sustainable regional market.

Beneficial Nature of Trade Trade is by its very nature an economic activity that is voluntary and mutually beneficial. Where two sides have the same industries producing similar goods, then there is competition. Even though it may not be pleasant for the industries concerned, competition benefits consumers in terms of price and quality as well as choices. In the short term, governments are likely to be called upon to assist the

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weaker party to cope with the new situation.17 Though there are concerns about the short-term difficulties, it is heartening to note that the prevalent attitude in ASEAN is to face up to the challenges and to emerge stronger in the long term: Southeast Asian governments and firms have increasingly viewed China and its companies as formidable competitors for markets — in Southeast Asia itself and elsewhere — and for foreign direct investment. … Competition is basically good for economies and companies. In the face of fair Chinese competition, ASEAN countries have to strengthen the competitiveness of their own economies as well as their companies.18

Competition is the market mechanism favored by those who believe strongly in the workings of the free market. But unbridled competition can also lead to unnecessary waste, and, in adverse economic conditions, it may lead to friction. This can happen if one side chooses to use loopholes or resort to non-tariff measures to protect its own industries. This is certainly not a distant possibility as it has already been suggested by Indonesia. The situation can lead to disputes, and it can severely test the dispute mechanism signed in 2004. This is an issue that should engage the attention of both ASEAN and China at the ministerial level. It is therefore important for China that the CAFTA demonstrate positive results for its ASEAN partners. For example, China unilaterally lowered the import tariff of agricultural products and let its trading partners reap the benefits of the “early harvest.”

Investment in Production and Infrastructure It would be useful for the CAFTA members to identify areas of cooperation that will deliver benefits to all concerned. China must also 17

“Is China-ASEAN Free Trade Agreement — CAFTA Necessary to Renegotiate?” http://en.voi.co.id/voi-dignitorial/773-is-China-ASEAN-Free-Trade-CAFTANecessary-to-Renegotiate.html, accessed April 24, 2010. 18 Rodolfo C. Severino, “ASEAN-China Relations: Past, Present and Future,” paper presented at the Third China-Singapore Forum, Singapore, April 17, 2008.

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address the concerns of trade deficits as experienced by some ASEAN members. It can increase imports of raw materials, agricultural produce (including seafood), and increase its direct investment especially in the area of natural resources. There are win-win situations in investment in critical infrastructures, value-adding activities based on local human and natural resources. If done well, these will lead to employment, income growth, export and import growth, and a higher standard of living. One simple example is the Indonesian province of Gorontalo with its fertile soils, poor physical infrastructure, and potential fishery industries.19 There are no canneries to process the catch from the sea and no stable power supply. Lack of infrastructure can also be found in landlocked Laos where China will provide a long-term loan of US$4 billion to finance a railway network.20 There are challenges faced by China in investing in the ASEAN region. Because of historical reasons, ASEAN countries still hold some reservations about Chinese investment.21 Moreover, China has not accumulated vast experiences and built extensive business networks there. As the service center of Southeast Asia, Singapore can play a useful role. With more than a few centuries of experience and accumulated skills in functioning as a financial center and service center, it can assist China with advice, networking and partnerships in creating win-win situations for all the parties involved. Another point to note is that Chinese MNCs operating in ASEAN regions must not only abide by the best practices of their Western counterparts, but must try to do even better. This is especially so in the area of exploitation of natural resources, which has negative impacts on the physical environment. The matter has to be handled well in order not to result in a counterproductive situation. It has been observed that Chinese firms have been 19

“Little-known Province Seeks Star Turn,” The Straits Times, April 23, 2010. “China ‘to Help Develop Laotian Rail Network’,” The Straits Times, May 1, 2010. 21 In the Cold War, China was on the side opposing America and was for decades seen by the old ASEAN-6 as keen on supporting communist movement in their countries. It was accused of having a hand in the coup in 1966 in Indonesia. 20

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occasionally enmeshed in cases of corruption in some ASEAN countries.22

Coordination in Industrial Policies, Fiscal and Monetary Policies Trade is the most natural solution for wealth creation for two parties which have complementary products. Complementary economic activity can be a direct consequence of natural endowment, e.g. Malaysia and Indonesia exporting rubber and palm oil. But it can be also a result of history, technological capability, indigenous market size and FDI. This suggests that there is a role for industrial policy formulation, so that different countries and subregions can develop different areas of comparative prowess and competitive advantage. Here we can see clearly the benefits for ASEAN and China to strive towards coordination and mutual consultation in formulating their industrial policies. It is a kind of regionalism based on the mutually beneficial division of “labor” without creating a situation favorable for monopolistic control of the market. In the long term, economic growth is driven by productivity. This is an important factor that should be considered in formulating industrial policies. If we think beyond trade and consider the broader picture of economic relations, the CAFTA members may do well to explore the issue of coordinating their fiscal and monetary policies. Of the two, monetary policy coordination is more important for the obvious reason that exchange rate is often implicated in trade disputes. Currently, Asian financial markets are more closely bound to the global market than to each other.23 This has its historical reasons but the increasing volume of trade amongst the CAFTA members may

22

Rodolfo C. Severino, “ASEAN-China Relations: Past, Present and Future,” paper presented at the Third China-Singapore Forum, Singapore, April 17, 2008. 23 “Asia’s Never Closer Union,” The Economist, February 4, 2010.

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provide imperatives for them to move towards closer integration of their financial sectors. Before concluding, one last point may be added. Unlike Europe which has seen a retreat of nationalism, Asia must still cope with nationalism as a very powerful political force. And since nationalism is not going to fade away soon, those striving for regionalism have to bear this in mind. By its sheer size, the CAFTA is a phenomenon worth studying — all the more so now that economic power is shifting from West to East. It is likely to yield interesting insights into FTA performance, regional cooperation and globalization.

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Chapter

8 China’s Growing Economic Gravity in Southeast Asia: An Opportunity for Economic Statecraft? Kalyan M. Kemburi

This chapter is about the rise of China as a key source of demand and investment for Southeast Asia and the institutional capability of Beijing to leverage this economic prowess to influence policies in the region. The chapter has two objectives: (1) investigate whether China can serve as an engine of growth and recovery for the Southeast Asian countries, which are suffering from the loss of markets in the West, and (2) evaluate the institutional capacities in China that would allow Beijing to use the growing engagement with Southeast Asia as an instrument of economic statecraft to win friends and influence policies. I undertake a macro-level analysis to answer the first hypothesis without foraying into the various sectors for two reasons: the impact of the crisis and recovery differs across intra- and intersectors and there is lack of post-crisis data at the sectorial level. In 143

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answering my second question, I shall not indulge in crystal ball gazing to foresee whether China will actually engage in economic statecraft or not. I shall evaluate the institutional arrangement and capacities that could assist or inhibit Beijing in undertaking such statecraft. The chapter is organized into two sections. The first section analyzes whether China can emerge as a growth engine for Southeast Asia. It includes a discussion of the discourse on China as a growth engine including performance indicators that support the discourse. The second section revisits the concept of economic statecraft and delineates a theoretical framework for evaluating China’s case. I conclude that China will be a key source of growth for the ASEAN countries in this decade. China has the institutional structures to carry a long-term economic engagement, a requisite for economic statecraft, with Southeast Asia; however, due to the “fragmented authoritarianism,” Beijing will display “dualism” in the implementation of its foreign economic policy.

CHINA EMERGING AS A GROWTH ENGINE Discourse Supporting China as a Growth Engine Starting from mid-2009, the international community was treated with a range of analyses and statements from various national governments, international governmental organizations, think tanks, and industry about the rise of China as an alternate source of demand and investment. I will briefly recapitulate some of these statements to give a flavor of the “China as a growth engine” discourse. In September 2009, Robert Zoellick (president of the World Bank) noted during his visit to Beijing that “China has steered a steady course through the stormy seas of the economic crisis,” and “through its massive stimulus and strong lending program, China has contributed to the early signs of a global recovery by keeping its growth rate up.” He also highlighted that this recovery in the Chinese economy is primarily due to strong domestic demand, a demand that is

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also boosting imports.1 Later in November during the APEC Summit, US Treasury Secretary Geithner showered praise on China by noting, “If you look at the broad thrust of policy from China, it is playing a major role in helping contribute to recovery.”2 This buoyant sentiment was carried on by the managing director of the International Monetary Fund (IMF) Dominique Strauss-Kahn during his visit to China. StraussKahn discussed with his hosts the “leadership role China can play to sustain the recovery” in a post-financial crisis world and noted that due to the timely and significant stimulus package being implemented by Beijing, “China’s recovery is now increasingly well established and is a source of strength for the rest of Asia”3 (emphasis added). John Makin, a Wall Street economist and visiting scholar at the American Enterprise Institute, underlined that “no one can still doubt the power of Chinese policy measures to boost the economy and financial markets of China, Asia and the G-7 economies.”4 This sentiment was further strengthened with the recently released economic indicators for China that showed growth in GDP, trade, and domestic consumption. As Frederic Neumann, an economist at HSBC, noted, “Going into this crisis we never thought that, if China recovered, it would suck in imports from other Asian countries on a scale that could play a serious role in generating regional economic recovery, but that seems to be what is happening.”5 1

“China Playing Important Role in Steadying World Economy, Zoellick Says,” Press Release, Beijing: World Bank Office, September 2, 2009, http://web.worldbank.org/ WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/ 0,,contentMDK:22298312~menuPK:50003484~pagePK:2865066~piPK:2865079 ~theSitePK:318950,00.html. 2 “Apec Looks to China for Recovery,” Al Jazeera, November 13, 2009, http:// english.aljazeera.net/news/asia-pacific/2009/11/20091113502720291.html. 3 “Statement by IMF Managing Director Dominique Strauss-Kahn at the Conclusion of His Visit to China,” IMF Press Release No. 09/411, November 17, 2009, http://www.imf.org/external/np/sec/pr/2009/pr09411.htm. 4 “China’s Stimulus Powers Up Economies; U.S. Too Late to Lead Way,” The Washington Times, September 8, 2009. 5 Kevin Brown and Justine Lau, “Chinese Demand Drives Regional Recovery,” Financial Times, January 7, 2009, http://www.ft.com/cms/s/0/22c077fe-fb4311de-94d8-00144feab49a.html.

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The main driver of this discourse is the resilience shown by the Chinese economy. Although, China did feel the heat from the crisis, the RMB 4 trillion (US$586 billion) stimulus package provided respite and led to the subsequent rebound. China is the only major economy to maintain a relatively high growth rate, as well as high levels of investment and consumption; this stellar performance has led to the discourse that China — the second-largest economy — could emerge as an independent source of demand. The following paragraphs discuss some of the main indicators that highlight the rebound of the Chinese economy in the last three quarters of 2009, a rebound that also assisted in the expansion of export and investment opportunities for Southeast Asia. Among the major economies, China registered the fastest and sharpest rebound. As Ma Jiantang, commissioner of the National Bureau of Statistics (NBS), noted, “China has become the first, on the whole, to achieve recovery and stabilization in its economy.”6 The NBS announced that in the last quarter of 2009, China’s economy registered a 10.4% growth.7 Overall, 2009 recorded growth rates of 8.7% only slightly below the 9.7% recorded in 2008, albeit lower than the average 11% growth rate posted in the first half of last decade.8 In China, the Purchasing Managers Index (PMI) measures the activity within the manufacturing sector.9 According to the China Federation of Logistics & Purchasing (CFLP), the PMI increased to 56.6 in December 2009 from 55.2 points in November 2009 (after declining below the 45 point mark in 2008 Q4).10 This indicates an 6

“China’s Growth Accelerates to 10.7 p.c.,” The Hindu, January 21, 2010, http:// beta.thehindu.com/news/international/article83449.ece. 7 Ibid. 8 “Chinese Growth Climbs to 10.7%: How Strong is the Recovery?” Roubini Global Economics, January 2010. 9 According to the Li & Fung Research Center, the CFLP China Manufacturing Purchasing Managers Index provides an early indication each month of economic activities in the Chinese manufacturing sector. Li & Fung Research Center, “PMI Improved to 56.6% in December,” PMI Report on China Manufacturing, January 2010, http://www.lifunggroup.com/research/pdf/PMI_january10.pdf. 10 Li & Fung Research Center, “PMI Improved to 56.6% in December.”

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expansion of the economy. Initially, heavy industry, which benefited the most from stimulus, led the revival; but recent data indicate that light industry is catching up.11 One of the major drivers for the revival of heavy industry is the plethora of infrastructure-related projects that amount to over US$750 billion, which include high-speed rail network, urban metro lines, and expressways.12 There are numerous opportunities for foreign firms from these projects, including provision of services. Southeast Asia can tap into these opportunities through investments, providing services (financial and IT-related), and exporting raw materials. Although the crisis hit Chinese imports, there was a stronger trade “rebound” in China than in the EU, Japan and the US. A World Bank report released in November 2009 noted that China emerged as “a key factor in East Asia’s and the world’s foreign trade rebound.”13 In January, China’s General Administration of Customs (GAC) announced that in December 2009, Chinese exports grew by 17.7% year-on-year (yoy) and imports surged by a massive 55.9%. This surge in imports suggests that the “economic stimulus policies are effectively boosting domestic demand, which also helps to drive the global economic recovery.”14 Between 2001 and 2007, China’s domestic consumption was on average only a fourth of the G-3’s consumption, albeit with a steady increase. During the crisis period, China not only held its consumption steady, but, in 2009, also registered a positive performance compared to the sharp decline in G-3 (the EU, Japan, and the US) consumption. An important aspect of this trend is that the impetus for this growth was mostly from the inland and lower-tier cities; this

11

“PMI Shows Continued Expansion of Chinese Manufacturing,” Roubini Global Economics, January 5, 2010. 12 “Trouble Down the Track,” The Economist, January 16, 2010. 13 East Asia and Pacific Update, Washington DC: World Bank Office, November 2009, p. 9. 14 “China Trade Rebound Aids Global Economic Recovery,” Bloomberg, January 11, 2010, http://www.bloomberg.com/apps/news?pid=20601087&sid=aMAoFaBre SUw&pos=1.

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is a positive sign, given that the major cities in coastal areas are primarily export-driven.15 The above-mentioned indicators not only highlight the resilience of the Chinese economy but also underline the potential of the Chinese consumer to replace, at least partially, the consumption lost in the West. For Southeast Asia, these “replacement consumers” could re-energize the declining exports, expand cross-border investments, and utilize various financial and tourism-related services.

Empirical Evaluation of the Hypothesis that China Can Emerge as a Key Growth Engine for ASEAN Trade Table 1 shows the growing importance of China in ASEAN’s external trade. In 1993, China’s share in ASEAN external trade was only 2.1%; by 2008, it rose to 11.3%, making China its third largest external trading partner. The onslaught of the financial crisis on the developed economies resulted in the relative decline of the G-3 Table 1. Top ASEAN Trade Partner Countries/Regions (In Percentage Terms; as of 15 July 2010)16

Japan European Union (EU-25) China China (including HK) USA Australia India

1993

2008

2009

20.2 NA 2.1 NA 17.6 2.1 0.7

12.4 11.8 11.3 12.8 10.6 3.0 2.8

10.5 11.2 11.6 16.0 9.7 2.9 2.5

15 James Kynge, “Chinese Tap an Inner Dynamic to Drive Growth,” Financial Times, May 11, 2009, http://www.ft.com/cms/s/0/5864a2fc-3dc2-11de-a85e00144feabdc0.html. 16 Compiled from “External Trade,” ASEANstats, Jakarta: The ASEAN Secretariat, http://www.aseansec.org/22122.htm.

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compared to China as a source of trade for ASEAN. This relative decline of the G-3 coupled with the initiation of the China-ASEAN Free Trade Agreement (CAFTA) propelled China into its position as ASEAN’s largest trading partner. A 2007 report by the US Federal Reserve highlighted an expanding complementarity between China and East and Southeast Asia (ESA). The report further noted that only the advanced economies of the region are benefiting by feeding the Chinese assembly line, with less advanced countries “gaining little.”17 However, in 2009, a report by the Asian Development Bank (ADB)18 provided a positive outlook for the less advanced countries also, especially for the commodityexporting economies. In fact, these economies maintained a positive trade balance with China even at the height of the 2008 financial crisis (refer to Table 2). The ADB report further notes that in recent years “the share of parts and components (P&C) in China’s imports has been falling while the share of P&C in exports has been rising,” an emerging trend that signals China climbing the value chain and a possible shift of low-end manufacturing and assembly to the neighboring countries. The increasing trade deficit of Vietnam with China in P&C could be derived as empirical evidence for this new trend. Additionally, from 1996 to 2008, “the share of P&C in China’s imports from ESA has decreased substantially from 43.6% to 33.8% and the share of final goods has increased appreciably from 43.6% to 54.7%;” denoting a possible increase in demand from the Chinese domestic market, a trend that was further accelerated by the global financial crisis. Recent media reports note this trend. In the aftermath of the financial crisis, China registered a sharp rebound in imports among 17 Jane T. Haltmaier et al., “The Role of China in Asia: Engine, Conduit, or Steamroller,” US Federal Reserve: International Finance Discussion Papers Number 904, September 2007. 18 Donghyun Park and Kwanho Shin, “Can Trade with the People’s Republic of China be an Engine of Growth for Developing Asia?” ADB Economics Working Paper Series No. 172, Manila: Asian Development Bank, October 2009.

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Total

Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

Basic Products

Parts & Components

Final Goods

2007

2008

2007

2008

2007

2008

2007

2008

−0.13 0.83 0.23 0.09 −11.04 1.32 −15.62 12.16 −10.67 8.69

0.05 1.06 2.83 0.12 −10.75 1.33 −10.41 12.20 −10.11 10.80

−0.23 0.11 −5.45 −0.06 −4.40 0.08 −0.24 0.46 −3.60 −0.13

−0.07 0.16 −7.63 −0.11 −5.64 −0.37 0.29 −2.18 −4.41 −0.24

0.03 0.53 2.12 0.01 −2.48 0.53 −1.34 −0.19 −1.44 3.90

0.05 0.63 4.12 0.02 −2.45 0.09 −0.74 0.67 −0.66 4.73

0.07 0.15 3.44 0.14 −4.31 0.80 −14.14 11.67 −5.78 4.79

0.06 0.22 6.08 0.19 −3.01 0.61 −10.10 13.47 −5.24 6.13

Note: Trade in construction materials is excluded.

the major economies, and exports from Asia to China “soared,” suggesting the emergence of China as an engine of growth for the region.20 During the recently concluded 9th China-ASEAN Economic Ministers’ Meeting, the Chinese commerce minister Chen Deming announced that trade value between China and ASEAN “went up 49.6% yoy in the first seven months [of 2010] to USD 161 billion, with ASEAN enjoying surplus of USD 7.54 billion.” The minister further noted that during the same period, “ASEAN exported USD 84.27 billion to China, up 56.1% yoy, while it imported USD 76.73 billion, up 43.2% over the same period last year.”21 19

Ibid., pp. 24–25. “ASEAN Official’s Visit Expected to Boost Trade Relations,” China Daily, March 17, 2010, http://www.chinadaily.com.cn/world/2010-03/17/content_ 9600024.htm. 21 “China, ASEAN See Robust Trade in First Seven Months,” People’s Daily Online, August 26, 2010, http://english.peopledaily.com.cn/90001/90776/90883/ 7119280.html. 20

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To summarize, China is becoming a major, if not an independent, source of demand. The Southeast Asian region will increasingly rely on and benefit from China because of its robust commodities market (potential beneficiaries: Brunei, Cambodia Laos, Thailand, Indonesia and Vietnam); its role as a consumer of final goods (potential beneficiaries: ASEAN-5); and its role as a supplier of parts and components (potential beneficiaries: Vietnam and Indonesia).

Investments Initially, China was accused of diverting the foreign direct investment (FDI) destined for ESA. Although raw data do support this hypothesis, a closer examination gives a different perspective. Taking a cue from the publications of John Ravenhill, and Friedrich Wu and Puah Kok Keong, I analyze the issue using the following indicators.22 The Inward FDI Performance Index ranks countries by the FDI they receive relative to their economic size (Table 3). During Table 3. Inward FDI Performance Index 1988–1990

1998–2000

2005–2007

0.8 5.9 2.6 1.0 13.5 1.5 1.0 0.0 0.4

0.9 10.6 1.0 0.3 3.3 0.5 1.4 0.2 0.6

0.9 8.6 1.3 0.7 5.3 1.5 2.1 0.0 0.1

China Hong Kong Malaysia Philippines Singapore Thailand Vietnam Japan South Korea Source: UNCTAD.

22 Unless otherwise noted, information regarding the indicators is sourced from John Ravenhill, “Is China an Economic Threat to Southeast Asia?” Asian Survey, 46(2006), 653–674, and Fredrich Wu and Puah Kok Keong, “Foreign Direct Investment to China and Southeast Asia: Has ASEAN Been Losing Out?” Journal of Asian Business, 19(2003), 89–105.

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1988–1990, the Southeast Asian countries performed far better than China; however, the 1998 crisis did dent their performance. If the hypothesis that China diverts FDI is true, an increase in China’s FDI index should have been registered. However, during all the three time periods noted in the table, China consistently registered as an average performer. In fact, relative to their economic size, ASEAN countries performed better than China in attracting FDI in the last 20 years, but for the 1998 crisis. Also, FDI into China may be overestimated because of roundtripping, a practice through which Chinese companies invest their funds as FDI into China through Hong Kong and other foreign tax havens to benefit from tax incentives. Although it is difficult to quantify these funds accurately, various scholars estimate that in 1992 it amounted to around 25% of the FDI inflows. A more recent estimate by Geng Xiao from the ADB put this figure as high as 46%.23 Ravenhill argues that China and Southeast Asia are not engaged in a zero-sum competition for foreign investment. He states that as China’s industrialization proceeds apace, it develops a huge appetite for minerals and raw materials — spurring inflows of FDI into countries with the resource endowment to feed this appetite, which, of course, includes several in ASEAN… [Furthermore] an increase in FDI in China for component assembly, for instance, may stimulate complementary investments in manufacturing [components] elsewhere in the region.24

Apart from trade, China is also emerging as an important source of outward FDI (ODI). During 2001–2008, China’s ODI averaged US$15.7 billion annually and by 2008 it had an ODI stock of US$147.9 billion, one of the largest within developing countries. In 2008, while the US, EU and Japan have all taken a beating, China was the only country (with substantial ODI) to increase its value of 23 Starting from 2005, the government started to take corrective measures. For example, SAFE initiated several regulations in foreign exchange management to address “round-tripping” (UNCTAD Investment Brief 2-2006). 24 John Ravenhill, “Is China an Economic Threat to Southeast Asia?” Asian Survey, 46(2006) 653–674.

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FDI net inflow to ASEAN.25 According to the latest statistics released by China’s Ministry of Commerce (MOFCOM), “China is now the fifth largest investing nation worldwide and the largest among the developing nations” (compared to a ranking of the 12th largest global investor in 2008). The vice minister of commerce was bullish on the future by noting that “this is just a beginning” and “the growth rate (for ODI) in the next few years will be much higher than previous years.” In case of ASEAN, the first two quarters of 2010 witnessed a 125.7% yoy increase in Chinese ODI into the region.26

China as a Growth Engine: Domestic Roadblocks and Regional Concerns There is a latent threat to Beijing’s sharp rebound since mid-2009 from the following speed bumps, which require structural adjustments (expanding the social security net, increasing domestic consumption and reducing reliance on investment- and export-led growth). Investments contribute around 40% of GDP growth in China, the same contribution that consumption makes. Further, over the last decade, consumption declined from 46.8% to 37.1% in 2007. In contrast, before the financial crisis, consumption made up 70% of GDP in the US.27 Moreover, in the first quarter of 2009, of the 7.1% real GDP growth, 6.2% was due to investments.28 The main question is whether Beijing can sustain a high growth rate that is predominantly investment-led, without creating nonperforming loans, volatile property and stock markets, and industrial overcapacity. 25

“Foreign Direct Investment,” ASEANstats, Jakarta: The ASEAN Secretariat, http://www.aseansec.org/22122.htm. 26 Ding Qingfen, “China Surges to 5th Largest Global Investor,” China Daily, September 6, 2010, http://www.chinadaily.com.cn/china/2010-09/06/content_ 11258388.htm. 27 Dexter Roberts and Chi-Chu Tschang, “Global Economy: No Help from China’s Consumers,” Business Week, November 26, 2008, http://www.businessweek.com/ magazine/content/08_49/b4111062897930.htm. 28 “China: Economic Profile,” Roubini Global Economics, December 22, 2009.

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Starting with the stimulus package in 2008, Chinese banks have been proactive in lending new capital to instill consumption, which has crossed 9.5 trillion yuan (US$1.4 trillion), almost double compared to 2008. As Ardo Hansson (World Bank economist) notes, “there’s too much liquidity in the system,”29 which could potentially result in volatility in the housing market and excess capacity in manufacturing. Investments in property markets accounted for “about a quarter of China’s fixed-asset investment last year, which in turn made up about 90% of its economic growth.”30 Thus, bursting of the housing bubble could have a domino effect. An issue related to excessive liquidity is overcapacity in key sectors. For example, in 2008 China had an installed steel production capacity of 660 million tons against a demand of 470 million tons, a difference that is equivalent to the EU’s total production.31 However, “there are currently 58 million tonnes of new capacity under construction in China.”32 Apart from the domestic roadblocks that could stymie China’s rise as the growth engine for ASEAN, Beijing is increasingly facing the “China threat” theory in the context of the recently initiated free trade agreement from various sections of industry in Southeast Asia, with businesses in Indonesia calling for protectionist measures against Chinese imports. Although the precise impact of the FTA is hard to fathom at this moment, calls for protection from Chinese imports are also echoed in Malaysia, Thailand and the Philippines, albeit to a lesser extent.33 It should be pointed out that compared to other major regional FTA regimes, the China-ASEAN FTA 29 Xin Zhiming, “Rocky Road to Recovery for China,” China Daily, January 12, 2009, http://www.chinadaily.com.cn/china/2010-01/12/content_9304294.htm. 30 Ibid. 31 “The Cost of China’s Excess Capacity,” Financial Times, November 29, 2009. 32 Overcapacity in China: Causes, Impacts and Recommendations, Beijing: The European Chamber of Commerce in China, November 2009, http://www. euccc.com.cn/images/documents/marketing_department/beijing/publications/ overcapacity_en.pdf. 33 Lynn Lee, “FTA Worries Some,” January 6, 2010, The Straits Times, http:// www.straitstimes.com/BreakingNews/SEAsia/Story/STIStory_474038.html.

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(CAFTA) has faced relatively less “vocal opposition,” partly because of an already low-tariff regime.34 Moreover, scholars note that the non-competitiveness in the region mainly arises from policy impediments and infrastructural bottlenecks. Rodolfo C. Severino, former secretary-general of ASEAN, downplays the hysteria created by the CAFTA by underlining that tariffs were cut even last year and this year they were merely being reduced from 5% to zero. In Indonesia’s case, it has the largest number of items on which tariffs are to be eliminated only by 2012.35

The Prospect of China Becoming a Regional Engine of Growth Despite these roadblocks and concerns, there is much evidence to suggest that the Chinese economy will be a key source of growth for the ten ASEAN countries in a time when the Western economies are suffering from the effects of a relative decline. Cognizant of the roadblocks, Beijing has initiated measures to overcome the obstacles. Along with the short-term stimulus “steroid” to boost the economy, the government is also undertaking a long-term medication: increasing disposable income (land reforms to revitalize rural incomes, reformation and expansion of government role in health and education to decrease the need for households to save) and increasing domestic consumption (through tax rebates).36 Moreover, it is pertinent to note that the impetus to ASEAN from the Chinese economy stems not only from the above-discussed sources (such as rising domestic consumption, increasing investments, growing tourist numbers, and a massive fiscal stimulus) but also derive from the following areas.

34

Liz Gooch, “In Southeast Asia, Unease over Free Trade Zone,” New York Times, December 28, 2009, http://www.nytimes.com/2009/12/29/business/global/ 29trade.html?_r=1&emc=eta1. 35 Rodolfo C. Severino, “China-Asean FTA: Why the Anxiety Now?” The Straits Times, February 23, 2010. 36 China Quarterly Update, Beijing: World Bank Office, November 2009, pp. 12–20.

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First, the CAFTA in goods, services (with select ASEAN countries having an advantage in financial services), and investment would assist ASEAN in relying on the Chinese growth engine in spite of the above-mentioned roadblocks. The agreement in goods ends tariffs on 93% of China’s imports from ASEAN this year. This is a particularly important point, because coupled with the relative financial decline of the G-3 due to the crisis and the positive performance of China, the FTA (an agreement that increases opportunities for ASEAN members to tap the huge market in their backyard) does give a hint of stronger economic, and possibly political, dependency of ASEAN on China. Although ASEAN has signed or is in the process of concluding FTAs with Japan, India, and South Korea, their political and economic impact will be relatively limited compared to China. Japan is still recovering from the financial crises and has yet to recover from its “lost decades.” Although India (2.8%) and South Korea (4.4%) have the potential, they still lag behind China in absolute trade figures (11.3% of total ASEAN trade). In the long term India can leverage its domestic market and investment potential vis-à-vis ASEAN, but currently the FTA is moving at a snail’s pace. Although qualitatively the preferential trade agreements concluded by the US with some Southeast Asian countries (Brunei and Singapore) are better than the CAFTA, the latter scores in the comprehensiveness of engaging the entire region. Second, there are positive spins-offs from the sub-regional cooperation between China and the neighboring Southeast Asian countries, such as the Greater Mekong Subregion (GMS) and PanBeibu Gulf (PBG) Cooperations. The GMS cooperation is aimed at accelerating sub-regional infrastructural development, trade promotion and investment facilitation. For example, firms from Yunnan, a landlocked southwestern province in China, are involved in the sale of electricity to Northern Vietnam, construction of a hydropower station in Myanmar and several agricultural projects in the neighboring GMS countries. The PBG cooperation, a more recent initiative involving maritime Southeast Asia, aims to emulate the GMS cooperation.

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Third, Beijing has also instituted policies that will have a direct impact on trade and investment in Southeast Asia. Primary among them is the increased role for the RMB.37 In 2009, China agreed to set up currency swaps of US$95 billion with several countries including Malaysia and Indonesia, which would eventually “promote greater circulation and convertibility of the renminbi.” Thailand is also reportedly considering a similar swap agreement. Moreover, the regions bordering China are increasingly involved in RMB-denominated transactions.38 Pieter Bottelier, from the Johns Hopkins University, notes that the “increased regional use of the RMB for invoicing, transaction and settlement purposes will probably also enhance its potential use as a store of value.”39 Additionally, Beijing also allowed some Chinese companies in select cities (on a pilot basis) to conduct trade in RMB with the ten ASEAN countries. China also facilitated these economies to “buy or borrow in RMB from mainland lenders to settle trades and mainland lenders to provide trade finance to overseas firms.”40 These measures would promote trade and protect the traders from the vagaries of a depreciating dollar and hassles of cross-border trade and exchange rate procedures. Lastly, China has set up two funds for financing infrastructural and developmental projects in the ASEAN region. The size of the fund is no small feat. The Chinese government proposed a fund of US$10 billion to build infrastructure and a loan of US$15 billion for other developmental projects in the region over the next three to five years.41 37

China Quarterly Update, Beijing: World Bank Office, June 2009, pp. 15–16. Russell Hsiao, “Is Renminbi Becoming Asia’s Currency and Decoupling from the West?” Jamestown China Brief, 9(2009), http://www.jamestown.org/single/?no_ cache=1&tx_ttnewspercent5btt_newspercent5d=35631. 39 Pieter Bottelier, “International Monetary Reform and the Future of the Renminbi,” Jamestown China Brief, 9(2009), http://www.jamestown.org/programs/chinabrief/ single/?tx_ttnewspercent5btt_newspercent5d=35039&tx_ttnewspercent5bbackPid percent5d=459&no_cache=1. 40 China Quarterly Update, Beijing: World Bank Office. 41 Wang Xinyuan, “China-ASEAN Ink Investment Agreement,” Global Times, August 17, 2009, http://business.globaltimes.cn/china-economy/2009-08/458080. html. 38

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ECONOMIC STATECRAFT: WHAT COULD CHINA DO? Economic Statecraft, Revisited In his classic work The Twenty Years’ Crisis, 1919–1939: An Introduction to the Study of International Relations, E.H. Carr noted that the “illusion of a separation between politics and economics has ceased to correspond to any aspect of current reality.” He further asserted that “power is indivisible” and that “the military and economic weapons are merely different instruments of power;”42 albeit globalization has resulted in the relative utility and viability of one instrument over the other. Moreover, a statesman has many other tools/techniques to carry out influence attempts in a target country to achieve their foreign policy objectives. For the purpose of this paper, I use Harold Lasswell’s classification of techniques of statecraft pursued by foreign policy mandarins to influence a target state:43 • • • •

propaganda (relies primarily on manipulating verbal symbols), diplomacy (relies primarily on negotiations), economic statecraft, and military statecraft.

As David Baldwin noted in his seminal work, Economic Statecraft, the “utility of a technique of statecraft is a function of the situation and not a quality intrinsic to the particular technique;” however, given the context of a globalizing world that is becoming “less coercible,” economic statecraft warrants a revisit.44 Baldwin further underlines that relative to other techniques, “economic measures are likely to exert more pressure than either diplomacy or propaganda, and are less likely to evoke a violent response than military instruments.”45 42

Michael Mastanduno, “Economics and Security in Scholarship and Statecraft,” International Organization, 52(1998), 830–831. 43 David A. Baldwin, Economic Statecraft (Princeton, NJ, Princeton University Press, 1985), pp. 13–14. 44 Ibid., pp. 119–126. 45 Ibid., p. 110.

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Although economic tools are more expensive than diplomacy or propaganda, they are less costly financially and politically as well as in terms of collateral damage compared to military means, especially in a world under the shadow of nuclear weapons. After the Second World War, the literature on economic statecraft was mostly in the realm of negative sanctions, with the first exception being Albert O. Hirschman’s seminal work on the “political consequences of asymmetric economic relationships,”46 titled National Power and the Structure of Foreign Trade.47 Hirschman showed how during the interwar period German trade strategy influenced the manner in which its major trading partners defined their national interest, which in turn affected international politics. He highlighted that foreign trade has two effects: a positive effect and a powerrelated coercive effect, i.e. the larger trading partner has the ability and means to disrupt the trade. Though it affects both the trading partners, the smaller country will be more severely affected.48 In an interconnected and interdependent global village, Hirschman’s coercive effect has limitations. However, National Power also put forth the implications of the influence effect, according to which the pattern of “international economic relations affects domestic politics, which in turn shapes national interests,” especially in asymmetric economic relations.49 To explain with an illustration, an FTA between Country A and Country B will create opportunities for both the economies, opportunities that create stakeholders (firms and sectors) who are interested in the continued engagement between the two countries. These opportunities could also possibly lead to asymmetrical economic relations, i.e. Country B could be more dependent because of much narrower economic capabilities, limitations in diversification, or inability to find 46

Cited in Rawi Abedal and Jonathan Kirshner, “Strategy, Economic Relations, and the Definition of National Interests,” Security Studies, 9(1999). 47 Albert O. Hirschman, National Power and the Structure of Foreign Trade, Berkeley: University of California, 1980. 48 Ibid., pp. 14–17. 49 Abedal and Kirshner, “Strategy, Economic Relations, and the Definition of National Interests,” 120.

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alternative markets. This asymmetry in dependency creates a differential in “stakes” for sectors, firms, and regions involved in the trade. In this case, whereas firms in Country A are bearers of influence, firms in Country B could become conduits for A’s influence in B. As incentives for firms in Country B are dependent on the continued engagement with A, they will strive for that goal. As Hirschman noted, “...these regions or industries will exert a powerful influence in favor of a ‘friendly’ attitude toward the state [Country A] to the imports of which they owe their interests.”50 This demand for a “friendly” attitude and emergence of new domestic constituencies (empowered by trade gains) could possibly reshape the interests of the government in Country B, a realignment that could also affect foreign policy choices. To sum up in the words of Mastanduno, the unconditional expansion of trade will “enhance a sanctioning state’s security by restructuring the choices, the incentives, and ultimately, the behavior of a target state.”51 This section evaluates whether ASEAN’s expanding economic interdependence with China could be used as a tool of statecraft by Beijing; in other words, will “economics become the continuation of politics by other means” for China?52 China-ASEAN economic relations are at an early stage compared to those with Southeast Asia’s other traditional partners like Japan, the EU, and the US, albeit expanding rapidly; a emerging process that makes it difficult to ascertain whether the deepening economic relations are having a “clear and present” impact on the foreign policy relations. Although fathoming the intentions of Beijing might be difficult at this stage, ascertaining its capabilities to carry such statecraft is within the realm of possibility. I specifically examine the capacity of the public institutions to carry a long-term economic engagement (a requisite for economic statecraft) with Southeast Asia and to involve the private sector in this 50

Ibid., p. 121. Cited in Patricia Davis, The Art of Economic Persuasion: Positive Incentives and German Economic Diplomacy, Ann Arbor: University of Michigan Press, 1999, p. 10. 52 Ibid., p. 20. 51

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engagement. This evaluation is important because the strategy of using economic means to achieve foreign policy goals is difficult to implement as it “requires both the mobilization of private economic interests and their long-term subordination to political consideration;”53 an ability that is dependent on the institutional capacity. To undertake this evaluation, I draw the theoretical postulates from The Art of Economic Persuasion: Positive Incentives and German Economic Diplomacy by Patricia Davis. In this work, Davis shows how West Germany in the postwar period was able to “reassure” and “persuade” Poland through the instrument of economic statecraft (economic inducements). This political reassurance and economic persuasion led Poland to acquiesce to German unification. A key feature of economic statecraft is the ability of the sending state in providing economic incentives to the target state. This ability is dependent on two institutional factors:54 • •

managed foreign economic policy, reward power.

According to Davis, managed foreign economic policy (FEP) constitutes “a large degree of coordination and autonomy within the bureaucratic process in conjunction with a cooperative relationship with the private institution of capital.”55 Coordination is critical for continuity of the policy, thereby the effectiveness of the statecraft; coordination between different government agencies is achieved with a clear demarcation of jurisdiction and functional autonomy. Additionally, for continuity in the policy, apart from coordination and functional autonomy, bureaucracy should also be shielded from the vagaries of domestic politics. The second institutional factor — reward power — is dependent on the cooperative links between the bureaucracy and the private sector, preferably an “organized capitalism.” According to Davis, 53

Ibid., p. 47. Ibid., pp. 150–155. 55 Ibid. 54

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organized capitalism has the following features: concentration, tolerated cartel-like arrangements, centralized semi-official trade associations, and a tutelary banking system.56 This feature allows the government to extract private resources in pursuit of national interest as well as allowing the private sector to transmit their views directly to the policy makers. These cooperative links enable the bureaucrats to gauge the cost of engaging the private sector in pursuit of national goals, i.e. to quantify the reward power. Thus, reward power is not only the capacity of the state to provide incentives, but also the ability to “tap into the vast resources of the private sector.”57

Evaluation of China’s Institutional Capacity to Undertake Economic Statecraft Kenneth Lieberthal characterizes the domestic decision-making process in China as “fragmented authoritarianism,” a framework in which decisions are top-down, but are arrived at based on the inputs provided by different ministries and agencies. These inputs are provided through a process that involves “extensive bargaining and coordination” with emphasis on “achieving consensus and narrowing differences.”58 Another well-known China analyst Michael Swaine points out that within China’s decision-making structure, “Actors at any level but the highest have very little influence over decisions involving grand strategy.”59 However, during implementation, many a times, the policy initiatives are altered according to the preferences of the local agencies.60 56

Ibid., p. 36. Ibid., p. 151. 58 Kenneth G. Lieberthal, Governing China: From Revolution Through Reform, W.W. Norton, 2004. For more information regarding different actors within China’s foreign policy arena refer to Linda Jakobson and Dean Knox, “New Foreign Policy Actors in China,” SIPRI Policy Paper No. 26, Stockholm International Peace Research Institute, September 2010. 59 Ibid. 60 Ka Zeng and Andrew Mertha, “Introduction,” in Ka Zeng, eds., Chinese Foreign Trade Policy, Routledge, 2007, pp. 4–5. 57

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In analyzing Beijing’s institutional capability to carry a long-term foreign economic engagement, I draw upon the framework developed in the preceding paragraphs. I will evaluate whether China has the following two institutional features: •

•

managed FEP:
coordination,
functional autonomy,
de-politicization; reward power:
organized capitalism: — concentration, — tolerated cartel-like arrangements, — centralized semi-official trade associations, and — tutelary banking system.

In the Chinese decision-making structure, the leading small groups (LSGs) play “the role of the core of leadership”61 by building consensus and establishing coordination among different agencies. In the case of FEP, the Central Foreign Affairs LSG (FAWLSG) has a pivotal role owing to its composition. It is the only forum at the apex that not only brings in the security and foreign policy establishment but also involves the ministry responsible for foreign trade and investment: MOFCOM. Although some scholars note that the Central Financial and Economic LSG (CFELSG) is increasingly becoming the “locus” for the formulation of China’s foreign economic decisions and their coordination,62 its current composition inhibits this task (according to Alice Lynn Miller, from the Hoover Institute, the only ministry represented in the CFELSG is the Ministry of Finance).63

61

Constitution of the Communist Party of China, http://www.china.org.cn/english/ features/49109.htm#10. 62 Lu Ning first noted this point and later Jean-Pierre Cabestan and Raviprasad Narayanan restated it in their papers. 63 Alice L. Miller, “The CCP Central Committee’s Leading Small Groups,” China Leadership Monitor, 26(2008).

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An outward departmental review of MOFCOM and the Ministry of Foreign Affairs (MFA) denote that these ministries have overlapping thematic and regional jurisdiction; however, a closer examination dispels this suggestion and establishes that functional specialization does exist to a certain degree. Both MOFCOM and the MFA have departments focusing on Asian Affairs; in the case of the former, the department focuses on assisting “Chinese enterprises in acquiring market entry into foreign markets”64 while the latter is more involved in enhancing the bilateral diplomatic ties with the countries of the region. In addition, MOFCOM has the sole authority on regulating the Chinese companies abroad (including issues related to trade and outward FDI) and for formulating and concluding policies pertaining to foreign aid. For Beijing, the Party is politics. In China, we find democratic centralism not a democratic polity, i.e. policy formulation goes through the process of internal consultations, not public debate or voting. This depoliticization shields bureaucrats and policy formulation from the vagaries of domestic politics as seen in other countries with a democratic polity and multi-party system. In the past two decades, illustrations of depoliticized decisions include Beijing’s decision not to devalue the currency in 1998, to join the Information Technology Agreement in 1997 and later the WTO as well as to engage in an FTA with ASEAN. In the political arena, a recent illustration is President Hu Jintao’s attendance of the Nuclear Security Summit organized by the US in April 2010 in spite of domestic reservations over US arms sales to Taiwan and President Obama’s meeting with the Dalai Lama. The Depoliticization of economic relationships with China’s politically sensitive partners like Taiwan, Japan and the US should also be noted in understanding Beijing’s ability to undertake FEP. After 30 years of its open-door policy, China boasts a diverse mix of industrial ownership, albeit with elements of concentration and cartel-like arrangements in strategic industries within the tight 64

The Government of the People’s Republic of China MOFCOM website, http:// www.prcgovernment.org/mofcom_list_3.html#a1.

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embrace of the state. As of 2004, the major state-owned enterprises (SOEs) amount to 38% of all the industrial output by above-scale industry. A more interesting aspect is that the SOEs under the central government, though numerically fewer, own almost 50% of all SOE assets in China. From 2003, control of these centrally owned firms (the largest and most highly capitalized in China) were transferred over to the State-owned Assets Supervision and Administration Commission (SASAC).65 In 2003, these enterprises under SASAC earned around RMB 300 billion in profits. In four years, profits rocketed to over RMB 1 trillion, amounting to 4% of the GDP;66 with deeper pockets, these SOEs have a farther overseas reach. In 2002, the Chinese government initiated its “go out” policy, which involves selection of around 50 “national champions” from the most promising or strategic SOEs in China. These firms were provided a range of benefits including “information-sharing networks, domestic tax breaks, cheap land, and low-interest funding from stateowned banks.”67 In fact, a survey of firms investing in Africa indicate that government support is the second most important factor for investing overseas, a fact that could also be true in the case of Chinese investments in Southeast Asia.68 Apart from the SOEs, large private firms also venture into foreign territories with substantial governmental support in the form of preferential tax treatment, low-interest bank loans and foreign exchange access.69 The small- and mediumsized town and village enterprises (TVEs) move overseas mostly on their own initiative. Although China does not have the kind of para-public industrial associations that Germany has, Beijing does have centralized 65

Barry Naughton, The Chinese Economy: Transitions and Growth, Cambridge, MA: MIT Press, 2007. 66 Barry Naughton, “SASAC and Rising Corporate Power in China,” China Leadership Monitor, 24(2008). 67 Bates Gill and James Reilly, “The Tenuous Hold of China Inc. in Africa,” The Washington Quarterly, 30(2007), 37–52. 68 Ibid. 69 Linda Jakobson, “China’s Diplomacy toward Africa: Drivers and Constraints,” International Relations of the Asia-Pacific, 9(2009), 403–433.

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semi-official trade associations: the All-China Federation of Industry and Commerce (ACFIC), the China Council for the Promotion of International Trade (CCPIT), and China International Contractors Association (CHINCA), which play a valuable role given their wide membership profile. To illustrate this, during the recent 11th National Committee of the Chinese People’s Political Consultative Conference (China’s top political advisory body), the ACFIC provided several policy proposals including those concerning helping the private enterprises to go overseas.70 Similarly, members from the CCPIT regularly accompany China’s national leaders on their foreign trips. In the case of CHINCA, apart from the usual roles of representing industry views to the government and assisting member companies in their overseas ventures,71 the association also acts as a conduit for MOFCOM to “loosely regulate the overseas activities of Chinese companies.”72 Another important channel of communication between the government and the private sector is the China-ASEAN Business Council, “a semi-official body dedicated to enforcing economic and trade relations between China and ASEAN,” which was established in 2001.73 One area in which Beijing has a great advantage in framing its FEP is the tutelary banking system, a key component of organized capitalism. As of 2003, the big four state-owned commercial banks (55%) and the three policy banks (7.7%) together control around 62.7% of total banking assets in China. The three policy banks — China Development Bank (CDB), China Eximbank and Agricultural Development Bank — were specifically established to support government policy objectives.74 Of the three, the CDB and China 70

“ACFIC to Make 24 Proposals to CPPCC Session,” ACFIC Press Release, March 11, 2010, http://www.chinachamber.org.cn/publicfiles/business/htmlfiles/ qleng/s2570/201003/18574.html. 71 China International Contractors Association website, http://www.chinca. org/en/. 72 Jakobson and Knox, “New Foreign Policy Actors in China,” p. 10. 73 “China-ASEAN Business Council Holds 4th Meeting in Nanning,” People’s Daily Online, October 19, 2005, http://english.peopledaily.com.cn/200510/19/ eng20051019_215115.html. 74 Naughton, The Chinese Economy, pp. 454–458.

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Eximbank75 are involved in FEP, with the former being the sole window for providing foreign concessional loans and aid, and the latter supporting overseas infrastructure projects by Chinese companies. Although the CDB lost its status as a policy bank in December 2008, owing to its involvement in several international projects, the bank still has a critical role in FEP.76

75

Since 1994, Eximbank has funded more than US$6.3 billion for various projects in Southeast Asia. A recent illustration of the bank’s involvement in Southeast Asia: According to a press release from MOFCOM in October 2006, Li Ruogu, president of China Eximbank, disclosed that the bank is involved in providing a US$5 billion preferential loan to the ASEAN countries. This announcement closely followed Premier Wen Jiabao’s speech at the China-ASEAN Business and Investment Summit stressing the government’s commitment to provide “preferential loan and actively support Chinese enterprises to invest in ASEAN countries, and encourage them to set up a set of trade and economic cooperative zones.” The press release further notes that China Eximbank is the “political bank to support Chinese enterprises participating in international economic cooperation.” The bank also secured an important role in the recently initiated China-ASEAN Investment Cooperation Fund by contributing the initial seed money of US$300 million. The fund is based on private equity with an initial capital of US$1 billion that will be eventually increased to US$10 billion. The fund will mainly invest in, though not limited to, infrastructure-related projects in ASEAN countries including the development of transport and communication networks. For more information refer to “ExportImport Bank of China Promise to Decide Preferential Loan Projects for ASEAN Countries,” MOFCOM News Release, November 3, 2006, http://english.mofcom. gov.cn/aarticle/newsrelease/commonnews/200611/20061103616321.html; “Export-Import Bank of China to Lend Up to 5 Bln USD for ASEAN Investment — Report,” AFX Asia, November 1, 2006; and China-ASEAN Fund on Investment Cooperation, International Finance Corporation, http://www.ifc.org/ifcext/ spiwebsite1.nsf/1ca07340e47a35cd85256efb00700cee/EA30D66D3BCEE0F9852 576BA000E3309. 76 By the end of 2007, there were 180 international projects supported by the CDB with a total loan balance of US$18.189 billion. Recently, the CDB has started to expand overseas on behalf of the Chinese government to provide loans for infrastructure projects in Africa, Southeast Asia, and South America. For more information refer to Moon Ihlwan, “China Cleans Up Policy Bank,” Bussiness Week, December 31, 2007, http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2007/12/china_ cleans_up.html.

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Potential Obstacles for Beijing’s FEP First, the issue of the principal-agent dilemma arises when the objectives of the principal differ from that of his appointee — the agent. For example, most of the time the MFA would be interested in achieving broader foreign policy objectives through China’s aid and outward FDI, whereas MOFCOM and SASAC are more interested in profit maximizing for the Chinese companies.77 Second, lack of horizontal exchange of information inhibits coherence and continuity in policy implementation. Though the higher echelons display clarity and direction, the lower levels of the bureaucratic pyramid are compartmentalized and are driven by their own turf wars.78 Third, often the interests of the local governments and firms differ from that of the central government; if the former is driven by profits, the latter is conscious of power and politics. To summarize, in implementing FEP, China has to contend with a certain degree of dualism in the short term. In other words, Beijing might launch a policy blitzkrieg (i.e. a coordinated, swift and concentrated approach), but at the operational level, it has to deal with the trench warfare among its “agents.” One of the main reasons is that China has organizations that have yet to mature into institutions. Lieberthal defines organizations as coherent, interdependent, functional structures and institutions as practices and relationships.79 China has the institutional structures to carry a long-term economic engagement with Southeast Asia and to subordinate the interests of industry and banking (especially the state-owned) to this engagement. However, due to the evolving nature of the institutional practices and relationships, the region has to contend with policy disjointedness during implementation, as evident from Beijing’s involvement in Africa.

77

Jean-Pierre Cabestan, “China’s Foreign- and Security-policy Decision-making Processes under Hu Jintao,” Journal of Current Chinese Affairs, 38(2009), 63–97. 78 Ibid. 79 Lieberthal, Governing China: From Revolution Through Reform, p. 206.

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CONCLUSION Five years ago, in a US Congressional testimony, Christopher Hill underlined that “China’s most dramatic diplomatic, political, and economic gains of the past few years have been in Southeast Asia.”80 These gains were possible because Beijing had initiated a process of political reconciliation that led to economic engagement, which is reaping diplomatic gains. The political reconciliation was achieved through three important measures: settlement of border disputes, and signing of the Treaty of Amity and Cooperation and the Declaration on the Conduct of Parties in the South China Sea; measures that led to the establishment of the “ring of political friendships.”81 This paved the way for economic engagement starting from China’s decision not to devalue its currency during the Asian Financial Crisis and helping the crisis-affected ASEAN countries to the recently initiated FTA. Beijing is conscious that to “exercise power and influence in Asia or the world, it must be able to do so in its own backyard;”82 political power that can be achieved through economic seduction not through military coercion. Although it is difficult to forecast the intentions of China, recent events could be a preview of the future plot. China’s acquiescence to an “early harvest” during the negotiations of the CAFTA shows Beijing’s ability to use economic diplomacy. Moreover, there were also instances of using economic power to coerce and/or to reward, like the suspension of rail service to Mongolia in November 2002 to retaliate for the Dalai Lama’s visit and the increase in aid to Cambodia for repatriating Uyghur refugees in 2009. This chapter has endeavored to answer three questions to ascertain Beijing’s economic and institutional capabilities: Why would China be a key source of demand and investment for Southeast Asia? What are the institutional structures that assist Beijing in initiating

80

Cited in Michael A. Glosny, “Heading toward a Win–Win Future? Recent Developments in China’s Policy toward Southeast Asia,” Asian Security, 2(2006), 24. 81 Ibid 4. 82 Ibid.

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policies of economic persuasion? Why do the current set of institutional practices and relationships stymie these initiatives (at least in the short term)? The chapter establishes that despite the domestic roadblocks and regional concerns, there is much evidence to suggest that the Chinese economy will be a key source of trade and investment for ASEAN due to its robust commodities market, growing consumption of end-goods, and increasing outward FDI. I also conclude that Beijing has the institutional structures to carry a long-term economic engagement with Southeast Asia, i.e. the capability to mobilize domestic businesses and subordinate their interests to political consideration. However, due to the fragmented authoritarianism and evolving nature of the institutional practices and relationships, Beijing is likely to display “dualism” in the implementation of its policy in the short term, a dualism that will inhibit a consistent and effective exploitation of economic means to achieve foreign policy goals.

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Index ASEAN Power Grid, 103 ASEAN Regional Forum, 28 ASEAN+3, 1, 119 ASEAN-Mekong Basin Development Cooperation, 15 Asian Development Bank or ADB, 15, 16, 20, 27, 28, 35, 38, 50, 54, 80, 84, 86, 100, 101, 102, 104, 105, 107, 111, 119, 149, 152 Asian Financial Crisis, 17, 81, 126, 128, 129, 131, 169

FDI, 60, 62, 65, 66, 70, 72, 73, 90, 125, 130, 131, 135, 136, 138, 141, 151, 152, 164, 168, 170

Chiang Mai Initiative, 128 China-ASEAN Expo, 7, 29, 43 Chinese central government, 2, 6, 7, 8, 9, 10, 17, 20, 21, 26, 29, 32, 34, 35, 57, 58, 63, 69, 73, 76, 165, 168

Kunming Declaration, 19 Kunming Import and Export Commodities Fair, 22 Kunming-Bangkok Highway, 19, 23, 28

GMS Ministerial Meeting, 18, 31 GMS Summit, 17, 18, 19, 32, 101 Guangxi Academy of Social Sciences, 8 Hu Jintao, 164 Hun Sen, 108, 109, 115 Jiang Zemin, 18, 127

Malacca Strait Dilemma, 6 Mekong Committee, 104, 105, 110, 113 Mekong Delta, 30, 98 Mekong Initiative, 118

East Asian regionalism, 4 East Asian Summit, 1 East-West Economic Corridors, 1, 41 171

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172 Index Nanning-Singapore Economic Corridor or NSEC, 1, 8, 9, 11, 39, 42 National Lancang-Mekong Development Coordination Group, 17 North-South Economic Corridor, or North-South Corridor, 20, 32, 35 One Axis and Two Wings, or One Axis, Two Wings, 9, 22, 29, 42, 53 Pan-Asian Railway, 23 Pan-Beibu Forum, 8, 38, 39, 43, 48, 49

Pan-South China Sea, 9, see also South China Sea South China Sea, 5, 8, 39, 40, 43, 44, 48, see also Pan-South China Sea Trans-Pacific Strategic Economic Partnership, or TPP, 137 Two Corridors and One Circle, 7, 29, 42, 52, 53 Wen Jiabao, 19, 40, 55, 167 World Bank, 100, 105, 107, 111, 144, 147, 154 Zhu Rongji, 18, 127