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China has accorded special importance to its relations with Southeast Asia and the China-ASEAN Free Trade Agreement (FTA) launched at the beginning of the year reflects this. Over the last decade ASEAN-China trade has grown exponentially, from US$39.5 billion in 2000 to US$231.12 billion in 2008, an increase of 13.9 per cent year-on-year despite the global financial crisis.

This FTA, covering a population of 1.7 billion, eliminates barriers to investment and tariffs on 90 per cent of products between China and the six founding ASEAN states (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand). By 2015, it is expected that this policy of zero tariffs will be extended to the four new ASEAN states (Cambodia, Laos, Myanmar and Vietnam) as well. The average tariff rate in China on ASEAN goods will be cut to 0.1 per cent from 9.8 per cent while average tariffs imposed on Chinese goods by ASEAN states will fall to 0.6 per cent from 12.8 per cent. Once the FTA is fully implemented, annual bilateral trade volumes are expected to reach US$1.2 trillion, making the area the third largest market in the world after the European Union and the North American Free Trade Area.

The China-ASEAN FTA is one of many initiatives taken to consolidate China’s engagement with Southeast Asia. In April 2009, Chinese Premier Wen Jiabao announced the setting up of a US$10 billion “China-ASEAN Fund on Investment Cooperation” to support infrastructure development in the region. Over the next three to five years China plans to offer credit of US$15 billion to ASEAN countries which includes loans of US$1.7 billion at preferential terms for cooperative projects. An additional US$39.7 million is made available as “special aid” to Cambodia, Laos and Myanmar.
 
China’s role in the Chiang Mai Initiative (CMI), that is expected to become operational in March 2010, is also important. The CMI includes China, Japan, South Korea and the ASEAN states and is aimed at creating a pool of foreign exchange reserves worth US$120 billion in which China is the single largest contributor. The CMI is expected to mitigate the problems like those faced by ASEAN during the Asian Financial Crisis of 1997. It is worthwhile to remember that China helped shore up ASEAN states during the 1997 financial crisis through the International Monetary Fund (IMF) as well as bilateral loans. Refusal to devalue the Renminbi enabled ASEAN economies to recover through active exports. Short term monetary assistance along with long term financial monitoring and assistance programs undertaken in Southeast Asia have helped establish China as a reliable partner, unlike the United States (US) that insisted on attaching  conditions to the aid it provided.

To ally fears of economic competition and diversion of international investment from ASEAN to China, ASEAN has been granted preferential import duties (before other WTO members), special access to Chinese markets and reduced duties on 600 agricultural goods. Chinese scholars have also stated that in the future, investment can be expected to flow from China to ASEAN and Chinese manufacturers will seek to establish production plants closer to their markets in Southeast Asia. Presenting itself as a partner willing to address the concerns of ASEAN, interested in mutually beneficial economic growth, China is laying the groundwork for leadership in the region.

China is also pursuing other forms of cooperative aid. This includes an offer of 2,000 scholarships funded by the Chinese government and 200 Master’s scholarships for public administration students over the next five years from developing ASEAN countries. In addition, China has made provisions for imparting training to 1,000 agricultural technicians. It also donated 300,000 tons of rice to an emergency East Asia reserve to ensure food security and proposed a China-ASEAN scheme for high-quality and high-yield demonstration farms to be set up in ASEAN countries. It is estimated that Chinese aid to Southeast Asia has now surpassed that from the United States.

China’s participation in multilateral regional forums such as the ASEAN Regional Forum (ARF), the Asia-Pacific Economic Cooperation (APEC) forum, ASEAN Plus Three mechanism, the Asia-Europe Meeting (ASEM) among others, has helped gain trust in the region. By signing the Treaty of Amity and Cooperation with ASEAN China indicated its willingness to resolve territorial disputes peacefully and restated its respect for state sovereignty. Subsequent signing of the treaty by India, South Korea, Japan and Russia is attributed by ASEAN to the first step taken by China.

The benefits of these policies for China are not only financial but also political. Majority of China’s trade, including oil imports, passes through the region; better ties will not only safeguard these but also help secure access to natural resources; political capital may well be used by China to present itself as an alternative to the US in the future. Also, regional economic and political institutions that do not include Taiwan will invariably weaken the prospects of Taiwanese independence. This is not to suggest that issues of contention do not remain between China and ASEAN countries, indeed the fears of a hegemonic China, one that may unilaterally settle its territorial disputes in the region, continue to fester. The point is that China, cognizant of these fears, is making a concerted effort to entrench itself in the region and slowly but surely, enhance its soft power.