ASEAN–China Free Trade Area 3.0: Why Southeast Asia Matters?

At the sidelines of the 27^th ASEAN–China Summit in Vientiane, Lao PDR on 10 October 2024, both sides announced the ‘substantial conclusion of the ASEAN–China Free Trade Area (ACFTA) 3.0 Upgrade Negotiations’ which is expected to be finalised and signed by 2025. The ACFTA was established in 2002.The FTA between ASEAN and China covers over 2 billion people, with a combined gross domestic product of over US$ 20 trillion. At the 25^th ASEAN–China Summit in November 2022, the ACFTA 3.0 Upgrade Negotiations was launched in order to circumvent the growing protectionism in the world. It aimed to accelerate post-pandemic economic recovery through deeper economic integration and cooperation by tapping into future growth areas that includes digital and green economies.1

China’s Economic Statecraft in Southeast Asia

In the last two decades, there has been a considerable shift in China’s relations with the countries in Southeast Asia. Geographically, China shares maritime as well as land borders with Myanmar, Laos and Vietnam.2 China’s geographical proximity to Southeast Asia is a potent factor. Every Southeast Asian nation, moreover, has a sizable ethnic Chinese population which also aids in deepening China influence in the region. China has also deployed skillful economic and political diplomacy based on long-term strategic thinking and systematic execution.

The Asian Financial Crisis of 1997 was a turning point as it enabled China to become the most dominant economic and political-strategic power in Southeast Asia. The 1997 economic crisis which impacted development and growth across Southeast Asia intersected with the emergence of China’s economic modernisation fuelled by its manufacturing sector. China came forward with timely help that included bilateral loans which helped Southeast Asian countries avoid devaluing their currency. Since devaluation would have added to the region’s woes, refraining from such a policy enabled China to reap tremendous good will amongst the ASEAN countries. The emergence of China as a dominant power in the region is also attributed to its efforts towards further elevating its economic engagement with the Southeast Asian countries. In this regard, the ACFTA facilitated greater market access and helped solidify its preeminence and presence in the region.

Other trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) lowered tariffs rates and promoted the integration of supply chains, further accelerating bilateral trade. China is today ASEAN’s largest trading partner, while for Beijing, the region accounts for 15 per cent of its total trade and 14 per cent of its investment, at US$ 17.3 billion in 2023. China is the third-largest source of foreign direct investment after the US and the European Union. ASEAN’s trade in goods with China has increased substantially from US$ 89.3 billion in 2004 to US$ 696.7 billion in 2023.3 ASEAN’s exports to China has increased by more than 55 per cent, with major items like electronic equipment, metals such as ferronickel and stainless steel, coal, plastics, rubber and agricultural products such as palm oil and fruits. At the same time, imports from China has increased by 70 per cent from 2017 to 2022, creating a huge trade imbalance which is equivalent to 4 per cent of ASEAN’s total GDP.4

As trade between ASEAN and China in the 21^st century has surged, the region also faces increasing vulnerabilities stemming from its growing economic dependency. China in recent years has been undertaking a more aggressive push into Southeast Asia in order to maintain its position as the primary economic partner. These actions include taking the lead in establishing trade initiatives such as RCEP; deepening supply chain integration, as well as engaging in infrastructure investments under the Belt and Road Initiative (BRI).5

All of the ASEAN member states are formally part of the BRI. In terms of investments under the BRI, transport and logistic sector has been the major recipient followed by energy-related sectors. Under transport and logistics, there is huge BRI investment in the railway sector in Malaysia, Cambodia, Indonesia and Vietnam. In the energy sector, the China General Nuclear has made a US$ 5.9 billion investment in Malaysia, and Chinese energy entity Zhejiang Hengyi has invested US$ 3.4 billion in Brunei’s oil sector.6

Overall, the scale of infrastructure development and connectivity projects under the BRI has been well received. This is despite some of the ASEAN countries facing persisting issues with China such as frictions stemming from the ongoing contestations in the South China Sea to fear of debt servicing, loss of sovereign rights to Chinese companies, unfair financial and contract terms, and lack of local raw materials and workers being hired by Chinese companies for various projects.7

China’s Interest in Southeast Asia

ASEAN countries have a combined GDP of more than US$ 3.6 trillion, with its global trade projected to be one of the fastest growing sector.8 The region today is a major economic hub which is well integrated into the global value chains with strong links to production networks in China, Japan and Korea. Further, a robust manufacturing sector, a huge consumer market and a number of well-established free trade agreements reinforce ASEAN as an economic powerhouse.9 Therefore, in an unpredictable global economic environment on account of increasing protectionism, wars and conflicts, the region is relatively stable and is seen as an engine of growth. Southeast Asia is geographically located at the heart of the Indo-Pacific region where vital sea lanes makes the region essential for the free flow of trade and commerce.

China has always looked at Southeast Asia as an integral part of its security environment. In the current decade, given its strategic position in the wider Indo-Pacific framework characterised by intensifying geopolitical competition with the US, Beijing has adopted concerted efforts towards strengthening its primacy in Southeast Asia. China’s security interests in the region are also leading to expanding cooperation in the military domain through high-level dialogues, military training and bilateral naval exercises.10 In the post-pandemic period, China’s defence diplomacy activities in Southeast Asia have increased as part of its Global Security Initiative. Through its expanding military engagement in the region, China is attempting to show that it can step up and be an alternative to the US in providing regional security goods.11

As per the latest findings from the 2024 State of Southeast Asia survey, there has been a notable surge in China’s influence. Majority of the respondents say that China has the most influence and strategic power in Southeast Asia. However, given the overlapping maritime claims between China and five other ASEAN countries in the South China Sea and assertive and aggressive tactics by the former has led to deep apprehensions.

Given China’s expanding influence, there remains strong distrust as to whether Beijing would uphold the rules-based order and international law.12 While there are still major pockets of distrust against China within Southeast Asia, their governments remain keen on strengthening economic interactions with Beijing by engaging in projects under the BRI to upgrading the trade agreements such as the ACFTA. At the BRI forum for international cooperation held in October 2023, all leaders of ASEAN member states, except Myanmar and Brunei, attended. The overwhelming participation is indicative of their pragmatic thinking since the region sees developmental initiatives such as the BRI as an enormous opportunity that would help in realising their move towards establishing the ASEAN Economic Community.

Over the decades, Southeast Asian countries have been pragmatic in their approach towards the rise of China by intensifying their economic interactions. This stems from the fact that Southeast Asia is willing to pay a premium for economic security which remains indispensable for their national growth and stability. It is important to note that China sees Southeast Asia not only as a key element in its Global Development Initiative but part of its security-led order through its defence diplomacy.

Conclusion

Southeast Asia in recent decades has been developing rapidly with a huge market growth potential along with a prominent role in the global value chain. This has resulted in Beijing prioritising its outreach to the region especially at a time when there is growing erosion of the global international trade system that has offset its growth. The upgradation of the ACFTA is aimed at mitigating the fall-out of the economic environment which is becoming more complex on account of various external factors. Despite the trust deficit which prevails, the increasing ASEAN–China economic interdependence ensures both sides have a stake in maintaining stability.

Given that the region is at the centre of the highly contested Indo-Pacific, Southeast Asian countries through ASEAN have to navigate through the complex geopolitical environment. Responding to the heightened geopolitical competition, Southeast Asia for regional stability is forced to remain non-aligned and broaden its partnerships with other major powers. While Beijing considers the region to be its backyard and natural sphere of influence, given the primacy it enjoys in Southeast Asia, in recent years, other regional powers along with the US are also imposing their presence in the region by enhancing bilateral and multilateral partnerships. Going forward, the renewed engagement of the US and other major regional powers in Southeast Asia will be critical towards diversifying and re-balancing trade ties, which will reduce the over-dependency on China.

Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.

• 1. “Joint Statement on the Substantial Conclusion of the ASEAN-China Free Trade Area (ACFTA) 3.0 Upgrade Negotiations”, ASEAN, 10 October 2024.
• 2. Javier Gil Perez, “China’s Bid for Leadership in Southeast Asia”, CIDOB, November 2023.
• 3. Ibid.
• 4. Shay Wester, “Balancing Act: Assessing China’s Growing Economic Influence in ASEAN”, Asia Society Policy Institute, 8 November 2023.
• 5. “ASEAN-China FTA Almost Upgraded, Says Singapore PM Wong”, The New Indian Express, 10 October 2024.
• 6. Jinny Yan, “The Belt and Road Initiative in Southeast Asia”, in China’s Belt and Road Initiative (BRI) and Southeast Asia, CIMB ASEAN Research Institute, October 2018.
• 7. Tan Sri Munir Majid, “Conclusion- If Truly Collaborative the BRI Can Work for All”, in China’s Belt and Road Initiative (BRI) and Southeast Asia, CIMB ASEAN Research Institute, October 2018.
• 8. “Prioritizing Southeast Asia in American China Policy”, Centre on U.S.–China Relations, Asia Society, 1 August 2023.
• 9. Shay Wester, “Balancing Act: Assessing China’s Growing Economic Influence in ASEAN”, Asia Society Policy Institute, 8 November 2023.
• 10. “Prioritizing Southeast Asia in American China Strategy”, Hinrich Foundation, 10 October 2023.
• 11. Ian Storey, “China’s Military Exercise in Southeast Asia Belie Lack of Trust”, Fulcrum, 8 September 2023.
• 12. “The State of Southeast Asia: 2024 Survey Report”, ASEAN Studies Centre, ISEAS Yusof Ishak Institute, 2 April 2024.