In the past decade, China has emerged as a key partner of Southeast Asia across trade, investment, and infrastructure development. Southeast Asian economies have significantly benefited from the strong economic growth of China over the years, but the resulting dependency on China has created political and economic vulnerability in the region. The challenge is how to steer these relationships toward more mutually beneficial ones.
   Bilateral trade reached $395 billion in 2015, accounting for 15 percent of the region’s external trade and making China Southeast Asia’s top trading partner. Yet, cross-country variation in China’s share of exports to the total trade is huge, ranging from 5 to 38 percent among major countries, while China’s share of total trade with the region has been rather stable in recent years. Amid a marked expansion of trade, Southeast Asia’s trade deficits are rising fast since 2011. This coincides with the ASEAN-China Free Trade Area (ACFTA) entering into force and the onset of the new wave of investment in the region’s electronics sector, especially in Vietnam.
   Intermediate goods account for more than 50 percent for both Southeast Asia’s exports and imports with China, reflecting the establishment of a regional production network across East Asia. Among intermediate goods, the shares of semi-finished goods have risen in both Southeast Asian exports to and imports from China. At the same time the shares of parts and components, which usually are higher value-added than semi-finished goods, have declined in both directions. This may suggest that China may be producing more parts and components domestically, thus relying less on imports. China now has a strong electronic components industry, especially for commonly used and medium- and low-end components. On the other, the decline of parts and components of Southeast Asia’s imports from China also suggest that some Southeast Asian economies may be diversifying imports of parts and components away from China.
   Although relatively smaller in share to the total trade, agricultural trade is a strategic area for bilateral economic relations, especially in the form of Southeast Asian agricultural exports to China. Agriculture is a critical sector for most Southeast Asian countries, with a large share of employment and major political importance. With the demand rising in China, China’s food imports from and investment in the agricultural sector of Southeast Asia is likely to increase. This creates both opportunities and difficult challenges for the region’s countries. For trade in services, tourism is one of the key sectors between China and Southeast Asia. The growing number of Chinese tourists to Southeast Asia has created a tourism boom in local economies, but has also presented risks as well as challenges.
   China’s FDI in Southeast Asia is growing fast from a low base. Its FDI into the region reached $8.3 billion dollars in 2015, increasing more than 2.4 fold from $3.5 billion dollars in 2010. This makes China the fourth-largest investor in Southeast Asia, following the EU, Japan, and US, although its growth rates are higher than the top three investors. China is not a dominant investor in the wealthier countries of the region while its presence is overwhelming in lower income countries. The sectoral distribution of China’s FDI suggests that finance, real estate, and manufacturing are important sectors. The extent to which China, especially its private companies, invests in the region’s manufacturing will have a large impact on Southeast Asia’s development. China’s investment in the manufacturing sector of Southeast Asia is limited compared to other investor countries, but is still much larger than its investment in Africa and Latin America, which tends to be concentrated in natural resources and construction. China’ state-owned enterprises (SOEs) and policy banks are capturing global attention by their large infrastructure projects and massive loans. Nonetheless, it is Chinese private companies who will play a more important role in transforming the regional economic relations. China used to function largely as a major processing hub in the global value chain but has increasingly expanded into the role of a supplier of intermediate inputs for assembly operations in other developing Asian economies. Yet it may also be moving toward establishing its own production chains led by Chinese private firms.
   Although Cambodia is the key partner for China in the region, its small size and low level of development makes it difficult to be developed into a platform for China’s region-wide cooperation. China’s investment in the region is concentrated in Singapore, Malaysia, and Indonesia, but these economies are relatively developed and highly open to international competition, limiting China’s dominant influence. The Philippines is an interesting case where its political ties with China are expanding rapidly despite significantly weak preexisting trade and investment relations with China.
   Infrastructure development is the most visible area of China’s rising economic influence in Southeast Asia under the Belt and Road Initiative. Responding to huge demand for infrastructure development in the region using its large capital, China is implementing large-scale development projects in transport and energy infrastructure and developing special economic zones across the region. China is building a high-speed railway in Laos and Indonesia and participating in a project in Thailand. The “Pan-Asia Railway Network,” also known as the “Kunming-Singapore Railway,” is an ambitious transport infrastructure project now incorporated into the Belt and Road Initiative with an aim to integrate China’s Southwest with mainland Southeast Asia. The Asian Infrastructure Investment Bank, formally proposed in 2013 and established in 2015, is a major instrument for China’s Southeast Asia strategy focused on infrastructure development. The Thai-Chinese Rayong Industrial Zone in Thailand and the Sihanoukville Special Economic Zone in Cambodia are success cases of China-led SEZ development in the region. Chinese private companies, especially in the garment and footwear sector, are well represented in these SEZs.
   Korea needs to respond to the changing economic landscape in Southeast Asia proactively and constructively. China’s deeper engagement in Southeast Asia may place competitive pressures on Korean business interests, yet China’s expanding business networks and China-financed infrastructure improvement are likely to offer more business opportunities for everyone, including Korean firms. Korea needs to make greater efforts in the fields of innovation and productivity enhancement, in addition to paying greater attention to labor and environmental standards compliance in its FDI and infrastructure development, taking lessons from some of the backlashes against China’s investment activities. Finally, Korea and Southeast Asia have mutual interests in diversifying their economic relations away from over-dependency on China, as recent economic and security events have clearly suggested.