China wins the South China sea

With preparations for Chinese President Xi Jinping's September visit to Washington, DC, underway, officials in both countries are predictably playing down their differences over China's outsize territorial claims, backed by the construction of military facilities on previously uninhabited islands and atolls, in the South China Sea. And this diplomatic de-escalation, following months of recriminations and veiled threats, suits Southeast Asian leaders just fine.

Of course, no one in Southeast Asia is ignoring China's strategic designs. The region's defense spending has increased by more than 50 percent in the last decade, and some $60 billion has been earmarked for new weapons, especially naval hardware, over the next five years. The white paper on military strategy that China released in May, which touted plans to expand the country's defense perimeter, intensified neighbours' concerns, making even more military spending likely. Leaders in the region are now welcoming a stream of US military officials and defense manufacturers to see what America's Asian “pivot” has to offer.

Beyond new frigates and security guarantees, however, Southeast Asian leaders have refrained from reacting too strongly to China's offshore ambitions. The economic facts on the ground demand prudence.

In only two decades, China has become Southeast Asian countries' leading economic partner, boosting its influence throughout the region. Chinese leaders' constant effort to expand economic cooperation stands in stark contrast to America's approach to the region.

Consider trade. Since 2000, bilateral trade between China and the ten members of the Association of Southeast Asian Nations has grown tenfold, from $32 billion to $350 billion last year, and could reach $500 billion in 2015. As China has risen to become Southeast Asia's largest trading partner, the US has slipped to fourth place, with only $206 billion in total trade with ASEAN last year.

Given Southeast Asia's growing economic importance, the implications of this trend could not be weightier. The ASEAN countries' combined annual GDP is already $2.4 trillion and growing fast, owing to their rapidly expanding middle class, highly skilled workers, and increasingly upscale markets. If the current trend holds, China's trade with ASEAN could reach $1 trillion by 2020.

The picture for direct investment – the financial flows that support the construction of factories, offices, warehouses, mines, and farms – is equally striking. From 1995 to 2003, Chinese companies invested a mere $631 million in ASEAN countries; in 2013, they invested $30 billion. Though China remains well behind Japan, Europe, and the US on this front, it certainly has the potential to catch up, as Chinese private-equity firms increasingly look abroad. Indeed, from agriculture to information technology, the Chinese are diversifying their stakes across the region and embedding their companies in ASEAN's advanced and frontier economies.