In recent years, China has emerged as a key partner of Southeast Asia across trade, investment, and infrastructure development. Bilateral trade reached $395 billion in 2015, accounting for 15 percent of Southeast Asia's external trade and making China the region's top trading partner. The trade flows are strongly influenced by an extensive regional production network established across East Asia where China used to be the processing hub but now it is expanding its role to supply parts and components to Southeast Asia. China is the fourth-largest investor in Southeast Asia, although it only accounts for 7 percent of SEA's inbound FDI flows in 2011-2015. Its FDI flows to the region reached $6.4 billion in 2015. Infrastructure development is the most visible area of China's rising economic influence in Southeast Asia. Inadequate infrastructure is the major obstacle to accelerated and sustained economic growth in the region and China's infrastructure development initiative provides a new and unprecedented momentum for tackling this challenge.
External partners need 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 other foreign businesses and development partners, yet this may create more market opportunities and better infrastructure for everyone. External partners also need to pay greater attention to labor and environmental standards compliance in its FDI and infrastructure development in the region, taking lessons from some of the backlashes against China's investment activities. Finally, external partners and Southeast Asia share mutual interests in diversifying their economic relations away from over-dependency on China, as recent economic and security events have clearly suggested.