Introduction

China's growing economic clout is increasingly felt in Southeast Asia. Competition has intensified in trade and foreign direct investment (FDI). Many companies in the region are finding it hard to compete against the lower prices offered by Chinese competitors. At the same time, China's voracious appetite for imports and the growing numbers of Chinese tourists have also brought good news. Just as the region is adjusting to China's growing economic presence, it is also now evident that India is also casting a potentially competitive shadow over Southeast Asian economies — it is beginning to attract more FDI and it is clearly highly competitive in several service activities.

This chapter will argue that the emergence of China and India will precipitate substantial policy and micro-level changes to the region. These adjustments will help Southeast Asian economies to respond to the growing competition and so permit them to find their own niches in the emerging new division of labour. In the process, there will be many winners and quite a few losers in the region. Whether the balance is a net positive or a net negative will depend on how effectively each country adjusts to the more competitive world that China and India create. It is argued here that the winners will be those countries that have the political will to reinvent policies and the entrepreneurial capacity to adapt and re-engineer the microeconomy.

This chapter will begin with a review of how China and India have affected the regional economies in trade, investment and other economic areas. It will then review how these countries are adjusting to this new world and conclude with an assessment of what the net impact would be on economic growth and development in the region.

Recent Economic Trends

Goods Trade: China's Increased Share of Exports not at Region's Expense

Recent trends in global exports of merchandise goods and of services are presented in Figures 1 and 2 and Table 1. A number of important features stand out:

1. • Both China and Southeast Asia increased their share of global merchandise exports in 1990–2002.[…]