China’s Charm Offensive Signals a New Strategic Era in Southeast Asia

The just-completed tours of Southeast Asia by China’s president Xi Jinping and premier Li Keqiang had the feel of a new “charm offensive” and attracted significant media attention. Xi visited Malaysia and Indonesia, where he traveled to Jakarta and then attended the Asia Pacific Economic Cooperation (APEC) summit in Bali. Li, meanwhile, made stops in Brunei for this year’s East Asia Summit before traveling to Thailand and Vietnam.

These visits were not an attempt to take advantage of President Barack Obama’s absence in Asia because of the government shutdown in Washington. Although the Chinese leadership unarguably saw Obama’s absence as a not-to-be-missed diplomatic opportunity, their visits were primarily efforts to begin correcting Beijing’s policy missteps, especially in the disputed South China Sea, that created friction between China and the members of ASEAN in recent years. They signaled Beijing’s growing confidence in its ability to use economic leverage to craft policy toward ASEAN.

The new Chinese leadership duo demonstrated considerable diplomatic savvy, focusing on deliverables in two areas of great importance to Southeast Asia: trade and infrastructure. The overall message of the trips was one Xi highlighted in his key message at the APEC Leaders’ Meeting: China and the Asia Pacific need one another to grow more prosperous.

In Bali, Xi set a target of increasing annual China-ASEAN trade to $1 trillion by 2020, up from $400 billion in 2012. The Chinese president also proposed the formation of an Asian infrastructure development bank that, if realized, would help regional countries diversify away from the U.S.- and Japan-dominated Asian Development Bank. In Brunei, Li reaffirmed a pledge to complete negotiations by 2015 on the Regional Comprehensive Economic Partnership (RCEP) trade liberalization scheme, which includes ASEAN and the six countries with which it has free trade agreements.

In all the countries the Chinese leaders visited, Xi and Li set ambitious trade targets with their Southeast Asian counterparts and in return lobbied for Chinese companies to participate in large infrastructure schemes that would boost China-ASEAN connectivity. Regional leaders were highly receptive to the message, not least because governments across Southeast Asia have been struggling in recent years to maintain growth and attract more investment. In Indonesia, Xi oversaw the signing of business agreements worth $33 billion between Chinese and Indonesian companies.

The timing of Beijing’s new charm offensive is important. The last time China made a concerted overture to ASEAN was during the 1997 Asian financial crisis. China’s main contributions were its decision to not devalue the renminbi, its proposal to negotiate a China-ASEAN free trade agreement (FTA), and its support for the Chiang Mai Initiative, a currency swap arrangement that includes ASEAN, China, Japan, and South Korea. These gestures, which stood in stark contrast to the harsh medicine prescribed by the International Monetary Fund, ushered in a period of amicable relations between China and ASEAN. Some of that goodwill, however, had frayed in recent years as China became more assertive in the South China Sea, particularly toward the Philippines and Vietnam.

This time, China came knocking just as large ASEAN economies are facing structural problems that could hamper their long-term growth potential. But China is no longer a competitor with Southeast Asian countries for export markets, as it was in the 1980s and 1990s; it is now the market to which ASEAN countries want to be connected. Furthermore, escalating concerns within ASEAN about the ongoing dysfunction in Washington and the U.S. staying power in the region have prompted some countries in ASEAN to inch a little closer to Beijing.

Xi’s and Li’s initiatives reflect this reality: high-speed trains connecting China to Thailand and Laos, and potentially reaching as far as Malaysia and Singapore; a pledge to purchase 1 million tons of rice, along with other agricultural products, from Thailand in the next five years; and a promise to review the China-ASEAN FTA to address Southeast Asians’ concerns about their yawning trade deficits with China.

Beijing has good reason to be confident that its diplomatic offensive will pay off. ASEAN desperately needs better infrastructure to achieve higher economic growth, and Beijing has established itself as ready to deliver on that front. ASEAN will need roughly $60 billion a year over the next decade to address its infrastructure problems. The ASEAN Infrastructure Fund, formally launched in 2012, had a starting capital of only $485 million. Li’s offer to potentially let Bangkok pay for railway projects with agricultural products could be seen as a way to accommodate ASEAN’s funding gap.

By skipping the Philippines, which has angered China by taking its maritime claims to a UN arbitration tribunal, and sidelining the South China Sea issue at regional meetings, Beijing conveyed its willingness to use both sticks and carrots in dealing with its neighbors. And it did so without resorting to heated rhetoric or overplaying its hand, as occurred at the 2012 ASEAN Regional Forum in Phnom Penh. Gone are statements such as those by former foreign minister Yang Jiechi, who in 2010 famously told his ASEAN counterparts that “China is a big country and other countries are small countries, and that’s just a fact.”

During the last leg of his ASEAN tour, Li announced several agreements with Vietnam on trade, infrastructure, and maritime security. These were admittedly smaller than the agreements reached in Malaysia, Indonesia, and Thailand. But the premier extended an important olive branch, recommitting China to a 2011 agreement with Vietnam to manage tensions in the South China Sea and pointing out that the maritime dispute remains the only historical issue standing in the way of closer bilateral ties.

These developments should not be seen as part of a zero-sum game between Washington and Beijing for regional primacy. But U.S. policymakers should be cognizant that China’s shift necessitates smart responses and strategic planning on their part.

For Washington, it should be encouraging that Beijing is coming up with tangible ways to boost regional connectivity in Southeast Asia, a policy the United States also supports. But U.S. businesses should not, and cannot, afford to be absent from large regional infrastructure schemes. U.S. companies no longer compete with their Japanese and Korean rivals in the construction of roads and railroads in Southeast Asia. But U.S. companies still have a competitive advantage in telecommunications, the advanced recovery of oil and gas, energy projects, and the design and construction of airports and ports. Infrastructure projects will carry political and strategic implications well into the future. For instance, a transnational railway connecting mainland Southeast Asia to China promotes integration in a different fashion than a future economic corridor linking one end of mainland Southeast Asia to another.

Over the next decade or two, the U.S. private sector has a tremendous opportunity to help shape and plan regional infrastructure so that Southeast Asia is more connected both internally and with the rest of the world. If the U.S. government is serious about rebalancing its interests to Asia, making sure that its private sector effectively taps this opportunity should be a top priority.

For Washington to reassure Asia that the U.S. rebalance to the region is alive and well despite the president’s forced absence at this year’s key summits, it is important that Obama visit the region early in the new year. If he cannot bring a delegation of business leaders with him, he should urge leading cabinet members, including Secretary of Commerce Penny Pritzker, to take American CEOS on trips to key ASEAN countries to promote trade and investment in areas where U.S. companies have an advantage. The United States should also ratchet up project financing through the Export-Import Bank (Ex-Im Bank) and move quickly to add Myanmar to the list of countries eligible for Ex-Im funds. 

Developments in Asia over the past week show that the trade agenda will forge ahead, with or without the presence of a U.S. president. Negotiations for the 16-member RCEP are getting under way, while China has its own mechanisms for expanding commerce with major ASEAN economies. In this context, it becomes more necessary than ever for the United States and the other 11 negotiating parties of the Trans-Pacific Partnership to conclude their agreement by the year-end target and for Washington to deliver on its intention to make trade the building block of its engagement in Asia.

The coming decade will see different visions for the future of trade and geopolitics in Asia play out, with Southeast Asia at the center of it all. Beijing’s new charm offensive is the latest move in that game, and the United States must offer a strategic answer without overreacting to China’s laudable initiatives.

(This Commentary originally appeared in the October 17, 2013, issue of Southeast Asia from the Corner of 18th & K Streets.)

Phuong Nguyen is a research associate with the Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies in Washington, D.C.

Commentary isproduced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2013 by the Center for Strategic and International Studies. All rights reserved.

Phuong Nguyen