China?s free trade agreement (FTA) with neighbouring ASEAN since 2001 and the China-ASEAN Free Trade Area (CAFTA) since 2010 has been widely feted as a win-win two-in-one strategy. China has strengthened its diplomatic footing in the region via ?soft? engagements. At the same time, economic benefits have started to flow. And yet, as academic Ian Storey has noted, China?s continued ?diplomatic missteps?less charm, more offensive? over the South China sea are driving the point that China has to work on balancing its strategy.

In the past few years, China has been steaming ahead, cementing ties with countries or regions with bilateral FTA arrangements, so much so that this has been called China?s FTA strategy. For example, the China-Chile FTA was signed in 2005, China-Pakistan FTA was signed in 2006, and China-Peru, China-New Zealand China-Singapore FTAs concluded in 2008. Currently, feasibility studies for China and the Republic of Korea and the China-India FTA are under way. Six other FTAs are in the pipeline, with negotiations under way with the Gulf Cooperation Council, Australia, Iceland and Norway.

With respect to ASEAN, diplomatically, China?s ?soft? engagement has won it brownie points. This has allayed fears of China?s ?rise?, attesting to China?s long-touted ?peaceful rise? theory. Economically, China, with increasing bilateral trade, is a stakeholder in the region. On its part, China has diversified its market for exports, from the earlier dependence on Europe and the US to ASEAN, which is now China?s fourth largest trading partner (after the EU, the US and Japan). The bilateral trade

target, $200 billion for 2010, has been achieved well in advance.

In fact, CAFTA is the first FTA in Asia for the ASEAN six (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand). CAFTA was envisaged to boost trade and investment in the region by lowering trade barriers. By 2015, this will include Cambodia, Laos, Myanmar and Vietnam. CAFTA ranks as the third largest free trade area after the EU and North America FTA.

China?s foray is visibly causing ripples. On the positive side, it is said that ASEAN?s smaller countries may stand to gain by being able to engage China as an equal party. Others speak of the ?mutual accommodation? that will prove mutually advantageous. John Wong, a senior economist at Singapore?s National University says that CAFTA provides an effective means for smaller ASEAN states to overcome their disadvantage in smallness by pooling resources and combining markets. Wong predicts that after a short process of adjustment, there would be mutual gains as both trade and FDI are expected to grow under the impact of CAFTA.

Singapore-based economist Sarah Tong has noted that bilateral trade between China and ASEAN has been steadily growing. Between 2001 and 2008, bilateral trade grew by around 30% a year on average, relative to 15% for the years between 1995 and 2001. Tong estimates that CAFTA has a combined GDP of $6.6 trillion, a market of 1.9 billion people and a total trade of $4.3 trillion (2010).

In recent years, the bulk of Chinese exports head to the EU and the US, accounting for nearly 40% of exports. Today, ASEAN has emerged as an important secondary market for China. Currently, export to ASEAN constitute about 8% of China?s total exports, while around 10% of China?s imports come from ASEAN. China is now ASEAN?s third-largest trading partner and China?s direct investment in ASEAN was about $2.2 billion in 2008, more than twice the accumulated amount by 2000.

However, China?s trade deficit with ASEAN has been ballooning, from $4.8 billion in 2001 to more than $20 billion in 2004. According to Tong, this trade imbalance that explicitly favours ASEAN may reach a point where ASEAN?s heavy dependence on the Chinese market might provide China with more leverage in the bilateral relationship.

China?s economic largesse has not gone unnoticed. For example, academics Lam Peng Er and Narayan Ganesan have noted that China plans on establishing a China-ASEAN investment cooperation fund totalling $10 billion to promote infrastructure development aimed at enhancing connectivity between China and ASEAN. China also plans to offer $15 billion worth of credit to ASEAN countries, and $39.7 million in ?special assistance? to Cambodia, Laos and Myanmar to meet urgent needs.

China is now the largest foreign investor in Cambodia. Despite having invaded Vietnam 17 times in recent history, China boasts good economic links with Vietnam. China has cancelled the debts of Laos. And Burma has attested to a ?paukphaw relations? (fraternal relations) between the two.

Little wonder that academic Li Mingjiang says that China?s ?accommodative diplomacy?, a combination of economically shrewd policies and diplomatic savvy has enabled China to surpass Japan in terms of regional influence.

CAFTA has indeed enabled smaller ASEAN countries to engage with China, to their advantage. ASEAN countries are tapping into China?s vast domestic market for consumer goods and capital equipment. Tourism has also received a boost across borders.

CAFTA has also indirectly pressurised stakeholders Japan and Korea to look closely at the region. Japan, sensing a proactive China, concluded the ASEAN-Japan Comprehensive Economic Partnership in 2008. Korea signed the ASEAN-Korea Free Trade Area in 2005. Japan has also signed a joint declaration with ASEAN to draw up a general framework for an FTA in 10 years, which would comprise Japan?s bilateral FTA arrangements with individual ASEAN countries.

And yet, despite all this, the terrain is tricky. Last year in July, Chinese foreign minister Yang Jiechi?s inappropriate remark, ?China is a big country and other countries are small countries and that is a fact,? muddled diplomatic waters, more so as the South China Sea dispute has been festering. Six ASEAN countries claim sovereignty over all or part of the South China Sea. Malaysia, Philippines, Taiwan and Vietnam have all made aggressive claims over the South China Sea, which could contain oil and mineral deposits.

In the face of China?s intransigence, Philippines went ahead and called a disputed area in the South China sea as the West Philippine Sea. Vietnam has chosen to look past China and granted oil exploration rights to India?s ONGC Videsh. China?s Global Times called this ?serious political provocation?, but obviously such aggressive posturing is falling on deaf ears. India is hosting Vietnamese President Truong Tan Sang, and analysts opine that both countries are poised on taking their ?new strategic partnership? further. Analysts predict that India has its eye on access to naval facilities at Cam Ranh Bay (opens in 2013). America has also jumped into the fray, claiming ?freedom of navigation?. Incidentally, America concluded joint naval drills with Vietnam and Philippines recently, honing its diplomatic and military presence in the region.

All in all, it is hard to discount China?s presence in ASEAN or that China?s stars are on the ascendant, what with substantial holdings ($1.1 trillion) of American debt. But, if China imagines itself as the shining star in the long haul, it could pick a card or two from the ASEAN jumble. China?s offensive posturing has come to naught, and has dealt a severe blow to claims of spearheading the ?Asian renaissance? and has reinforced the diplomatic supremacy of other actors in the region. How this issue is resolved could decide the future direction of China?s relations with ASEAN, and vice-versa.

The author is a Singapore-based sinologist and is currently visiting fellow, Institute of Chinese Studies, Delhi. Views are personal