Trans-Pacific View

How the US Is Losing to China in Southeast Asia

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Trans-Pacific View

How the US Is Losing to China in Southeast Asia

As Trump prepares to travel to Southeast Asia next month, China is already beating him to the punch where it counts.

How the US Is Losing to China in Southeast Asia
Credit: Official White House Photo by Shealah Craighead

On October 18, President Xi Jinping opened China’s 19th Party Congress by delivering a speech heralding the dawn of a “new era” that would see China moving “closer to center stage and making greater contributions to mankind.” He pointed to the growth of Chinese soft power and declared that the “Chinese nation now stands tall and firm in the east.”

Next month, U.S. President Donald Trump will travel to China and meet Xi as part of a 12-day trip to the region. Following a bilateral meeting with Xi, Trump will travel to Vietnam and the Philippines. Although the agenda for these meetings has not been detailed, Trump will likely try to assure America’s Southeast Asian allies, while also signaling to China, that the United States continues to stand equally tall and firm in the region militarily and economically.

Doubts remain, however, about the Trump administration’s commitment to Southeast Asia, and whether it has a comprehensive plan for engaging the region at all. China, on the other hand, is aggressively courting Southeast Asia with seemingly blank checks for infrastructure projects while Chinese tech giants shrewdly position themselves to capitalize on an expected boom in ASEAN’s digital economy in the coming decade. As Trump readies himself to visit the region, reflecting on some of the key ways China is outflanking the United States in its consolidation of power and influence in Southeast Asia will illuminate important implications for U.S. policy in the region.

Underwriting Infrastructure

The most obvious front is China’s “One Belt, One Road” initiative, Xi’s ambitious plan to finance around $100 billion per year of infrastructure projects around the world. The objective is to deepen economic ties with Europe, Africa, and Asia by underwriting a network of global trade with China at its center. If this sounds similar to the Marshall Plan, the U.S. initiative that rebuilt post-war Europe and shaped the global economic landscape in a way that benefitted American interests for decades, that is because the logic and desired outcomes are very similar.

The initiative was announced in 2013, and has been steadily moving forward. Last year, $30 billion in Chinese investment and construction contracts flowed into ASEAN member states, where demand for infrastructure is booming in rapidly developing economies like Thailand, Indonesia, and Vietnam. All 10 ASEAN states are also members of the Asian Infrastructure Investment Bank, a Chinese-led multilateral financial institution that issued $1.7 billion in loans in 2016. Fearing that the AIIB might undermine the existing global financial architecture, the United States tried unsuccessfully to freeze it out in 2015, but ended up excluding itself from what is likely to be an important and influential institution in the Asia-Pacific.

The Trump administration has continued and intensified this tone-deafness with regards to constructively engaging the region, repudiating beneficial trade and investment initiatives and reducing its footprint. On Trump’s first day in office he abandoned the Trans-Pacific Partnership, a regional trade bloc designed to exclude China. The Trump administration’s most recent budget proposal makes it clear the spigot in Washington is closing for overseas infrastructure investment – funding for the Asian Development Bank was cut by 50 percent, and the administration is currently feuding with the World Bank. This signals that the Trump administration sees relatively little economic or strategic advantage in financing overseas projects and is willing to cede that ground to China. While there are doubts about the sustainability of its massive infrastructure gambit, China is succeeding at deepening and strengthening its economic ties in the region in ways that will likely enhance its influence while the United States shrinks from the same. This is evident in more than just development assistance and infrastructure loans.

Chinese Tech Giants Are Cornering High-Growth Markets

Chinese tech giants Alibaba and Tencent, both with market capitalizations of over $400 billion, are currently on buying sprees in Southeast Asia. Crucially, these companies appear to understand the unique challenges and opportunities of Southeast Asian markets better than tech companies or VC firms in Silicon Valley. This has allowed them to start aggressively cornering growth industries in the region — like transportation, e-commerce, and digital cash transfer services — faster than their American counterparts.

Uber flopped in China, and has been outflanked in Southeast Asia by home-grown ride-hailing apps like Indonesia’s Go-Jek, which just received a $1.2 billion round of funding led by Tencent. Alibaba invested over $2 billion to acquire regional e-commerce giant Lazada while Amazon has struggled to get up and running at all. And both Tencent and Alibaba are in a race to buy as many cashless payment start-ups as they can. This reflects China’s knowledge of what kind of services emerging markets actually need, and how to leverage technology to deliver those services and scale them up quickly.

The story of cashless payment systems helps illustrate this advantage as American tech companies have been slow to catch onto the potential for e-wallets and other forms of mobile cash transfers in Southeast Asia. This is a function of divergent experience, as in America mobile transfer services are very seldom used thanks to the ubiquity of bank accounts, debit cards, and retail banking branches. In an emerging economy like Indonesia’s, which suffers from poor infrastructure and where less than 40 percent of the population has a bank account, the demand for mobile banking and e-wallets is acute. Chinese companies, drawing on their own experiences catering to a developing domestic economy, have so far proved better suited to recognizing and seizing such opportunities in the region.

This is important because Southeast Asia appears poised for a boom in domestic consumption, and this consumption is likely to be driven by e-commerce and digital transactions conducted on mobile devices. A recent report from Google and Temasek Holdings predicts that the digital economy — including transportation, e-commerce, and entertainment — in Southeast Asia will balloon to $200 billion annually by 2025.  GDP growth in the region is steady, incomes are rising, and populations are young and becoming increasingly digitally connected. Chinese tech conglomerates are using their $400 billion balance sheets and knowledge of local market conditions to position themselves to take advantage of this growth. Their American rivals are meanwhile struggling to carve out a foothold in these markets, and are in danger of being left behind.

What This Means for the Region

There is already some indication that countries in the region are recognizing the limits of U.S. power, and are beginning to revise their strategic calculus accordingly. It is no surprise that countries like Laos, Myanmar, and Cambodia are especially receptive to Chinese finance, have become increasingly integrated in Chinese supply chains, and to varying degrees function as proxies for China’s strategic interests in the region. Other indicators should be cause for mild concern. Although Thailand has long been closely aligned with the United States, the military junta ruling the country has shown signs of receptiveness toward Chinese overtures, particularly in financing big infrastructure projects. But what should really alarm officials in Washington is that public attitudes in the Philippines, a long-time stalwart U.S. ally, are also slowly but steadily shifting toward China and away from the United States. China has also been aggressively courting Philippine President Rodrigo Duterte, and earlier this year ASEAN, with Duterte holding ASEAN’s rotating chairmanship, backed away from taking a hard line on China’s territorial claims in the South China Sea.

With all of these dynamic pieces in motion, the United States has remained strangely complacent. The administration has articulated no clear plan for engaging with Southeast Asia, and has actively stoked doubt about its commitment to the region. This leaves countries to wonder uneasily about whether they can rely on the United States. Although many ASEAN member states are weary of China (and China has its own potential spoilers to consider, such as unsustainable debt), given the vacuum created by America’s apparent indifference it is not hard to understand why the strategic calculus of leaders in the region might be changing. If long-time American allies in Southeast Asia begin to bandwagon with China, this will significantly alter the balance of power in the Asia-Pacific and reduce America’s strategic options.

All of this has opened the door wide for China to exploit American policy lethargy. Chinese conglomerates are positioning themselves to reap gains from an expected digital boom in one of the world’s fastest growing regional economies. Easy credit from China is helping to build the ports, roads, and railways driving that growth, while creating an influential role for Chinese-backed development banks and businesses. U.S. tech companies, meanwhile, have been outmaneuvered in establishing a strong presence in the region, while their government shows little interest in deepening economic ties or doing much to prevent China from shaping economic conditions in a way that maximizes its own benefits. This is a complacency that may quickly morph into regret if growth proceeds according to projections. By the time America realizes it has been caught flat-footed, it may be too late.

James Guild is a Ph.D. Candidate at the S. Rajaratnam School of International Studies in Singapore. Follow him on Twitter: @jamesjguild