Source: Wall Street Journal

The West is obsessively asking how China's economic rise will affect it. The less-asked—but equally significant—question is what China's meteoric growth will do to the rest of Asia.

The answer to this question has changed in the last decade. In the late 1990s, as Asia was coming out of its financial crisis, the consensus view held that China was a threat. Asian powerhouses such as South Korea and Thailand, with their battered economies, couldn't compete with the unscathed Middle Kingdom. But as these countries revived, the region learned that all could benefit from China's demand for specialized components and primary products.

Today China remains an opportunity to many of its neighbors. Bilateral trade figures illustrate the emerging differences. China helped Japan, Taiwan and South Korea earn an annual trade surplus of $210 billion in 2010, up from $30 billion in 2000. These countries export technology-intensive components to China, which possesses the scale required for assembling them into finished products finally sold to the West.

The story for Southeast Asia is more complex, since its natural resources and labor skills duplicate China's, instead of complementing them. To wit, the Philippines and Malaysia have cheap labor to offer, but no advanced technology. This region experienced a trade deficit with China in the late 1990s, which swung into a surplus some years later, which has now again weakened. This means Beijing is contributing less to Southeast Asia's growth.

The politically charged issue for countries such as Thailand, the Philippines, Indonesia and Malaysia is how China's development has affected wages. Beijing's exceptional investment rates upgraded its technological capacity, solidified infrastructure and bettered skills, all of which ensure that industrial labor productivity increased by 10%-15% annually since the mid-1990s.

Meanwhile, real wages in China surged, but because productivity surged faster thanks to investment, the world preferred China as its factory floor. Real wages have continued to increase rapidly, but since productivity increases have moderated recently, unit labor costs have started to rise. This is only now affecting some labor-intensive product lines.

In contrast, real wage growth in Thailand, the Philippines, Malaysia and Indonesia was in line with GDP growth for much of the 1990s but then fell off sharply and either declined or stagnated over most of the past decade. China's declining unit labor costs put pressure on these countries, which weren't investing enough to expand productivity anyway, to limit wage increases. That was the only way to stay competitive.

Most observers of Southeast Asia's economies initially thought they were suffering for country-specific reasons, but it was their position in relation to China in the global production chain that really mattered. Multinationals today decide the location of their production based on the relative productivity of labor and wage costs along with other logistical advantages—all of which China offers.

Over the last two years, Chinese manufacturers, most famously Foxconn, have raised wages, but that doesn't detract from China's overall strengths. Location considerations within China also matter, and some firms are moving inland, where costs are cheaper than on the coast.

China could steal more business from Southeast Asia, thanks to surging energy prices and the complexities of a dispersed supply chain. The Middle Kingdom already boasts research and development facilities, as well as the linkages that come as technology companies like Huawei expand globally. This encourages firms to integrate all their production inside the country.

China used to be the place where countries could export their components and raw materials, have them processed, and import them back. Now process-related imports have fallen to 30% of China's total imports from 40% over the past decade, and exports to 40% from 55%.

So China may now be growing at the expense of Southeast Asia, but the latter could take a leaf out of Beijing's playbook, increase investment, and learn to play to its own comparative advantages.

This article was originally published in the Wall Street Journal.