People's Republic of China and Its Neighbors: Partners or Competitors for Trade and Investment?

Abstract

The very rapid economic growth of the People’s Republic of China (henceforth PRC), its dramatic success in world export markets and its heavy receipts of foreign direct investment (FDI) have generated much thought and debate in policy and business circles in different parts of the world, but most particularly amongst its neighbors in East and South East Asia. Here we report on research by ADB Institute staff and Visiting Fellows conducted over the last two years that sheds light on these issues. The broad conclusion that emerges is that whilst there may be risks to individual sectors in all countries concerned, the pattern of regional trade and investment that is emerging is mutually beneficial, provided enterprises and governments in PRC’s regional partners respond effectively to the adjustments required. Falling trade costs (import tariffs, transport and freight charges, time in transit, the cost of information and of managing international supply chains) have facilitated rapid regional integration in trade and capital flows within the East-South East Asian region. Added to this, PRC’s rapid expansion provides an opportunity for regional partners to both export to and invest in its large domestic market. However, PRC is also an export rival in third country markets (and a country’s own domestic market) in a range of goods from simple labor-intensive products to the more technologically complex (for the latter principally because of its large FDI sector). If FDI to the region is treated as a fixed sum then higher inflows to PRC will be at the expense of other economies and there will be FDI diversion as an additional possible negative effect that will have consequences for trade flows.