Southeast Asia embraces China trade, but how's the relationship? It's complicated.

As the United States grapples with China’s trade policies, barriers to Chinese exports are falling across Southeast Asia, spurring an increase in trade and investment. But a backlash may be brewing in a region that has much to gain – and lose – from integration with China’s giant, export-led economy.

In Thailand, a Chinese plan to build a $1.5 billion wholesale market in Bangkok has become a lightning rod for criticism as Thai producers fret over competition from cheap imports. Hackles have also been raised in Indonesia over an influx of low-cost Chinese garments and other items since a regional free-trade pact took effect a year ago.

The rows illustrate the push and pull of China’s courtship of its Asian neighbors, including traditional US allies like Thailand and Singapore. As in other regions, China’s trade diplomacy is sweetened by soft loans and aid, including support for infrastructure such as a planned high-speed railroad between southwest China and mainland Southeast Asia.

Thai executives say closer ties with China spell opportunity but also expose Thailand’s failure to keep pace with Chinese industries, in part because of political instability. Pimoljit Thammasarnsoonthorn, an importer of chemicals from China and Europe, says Thailand has no choice but to embrace China. “We have to catch the wave and take advantage,” she says.

Trade liberalization with China

Tariffs have been slashed on 90 percent of goods traded between China and the six largest economies in the Association of Southeast Asian Nations under a 2002 free-trade pact. The China-ASEAN Free Trade Agreement mandates tariff-free status on goods, with exemptions granted until 2015 on certain items. Four other, poorer ASEAN countries have agreed to follow suit in order to create the world’s largest free-trade zone by population.

In 2008, China-ASEAN trade hit a peak of $231 billion before the global recession in 2009 led to an 8 percent contraction. Trade recovered last year and rose 50 percent in the first seven months of the year to $161 billion.

Indonesia, which has the largest economy in ASEAN, has questioned the pace of trade liberalization with China. Last year, it unsuccessfully sought to delay tariff cuts on over 200 items, including textiles, machinery, and iron and steel, amid disquiet more than cheap Chinese imports. Unlike the US, Indonesia runs a large trade surplus with China, due to its abundant coal, natural gas, and other commodities.

For Thailand, China has become a key trade partner. It is the largest single market, buying around $40 billion worth of goods in 2010, putting it ahead of the US, Japan, and Europe. The Thai government has forecast that the value of exports to China could double within three years, fueled by low tariffs.

Last month, a Chinese company, Ashima Group, unveiled plans for a 2-million-square-meter "China City Complex" outside Bangkok. The project, due to open by the end of 2012, is modeled on Yiwu International Trade City, a wholesale market in China’s Zhejiang Province that advertises itself as the world’s largest such outlet and has become a magnet for foreign importers of low-end Chinese products.

In a promotional book, Ashima said the China City Complex represented the “globalization of the Yiwu model” and would create a “Southeast Asia distribution center of small goods.” Dong Hongqi, the chairman of Ashima Group, told the state-owned China Daily in Beijing that the Thai complex was aimed at Chinese tenants selling made-in-China goods.

Chinese investors are also building smaller wholesale markets in two other Thai cities, said Wang Ar-Chern, a Chinese businessman based in Bangkok who is in an investor in one of them in Phuket. It is due to open next month and will sell only Chinese goods. “Thailand has the land. China has money to invest,” he says.

Benefits of China's investment in smaller countries?

Thai companies are asking what they stand to gain from such investments. Manufacturers have complained that China City Complex will undercut local products and divert business from existing Thai-run wholesale markets in downtown Bangkok.

“Our product is quite good. However, the price compared to China means we cannot compete,” says Tanit Sorat, vice chairman of the Federation of Thai Industries.

A Thai deputy minister told reporters last month that 30 percent of rental spaces in the new market would be offered at discounted rates to Thai companies. He said that China’s government had also agreed to help Thai agricultural producers to sell their goods at the Yiwu market, effectively a reciprocal benefit for Thailand’s open-door policy.

Mr. Tanit said such assistance would be useful for Thai exporters but criticized the 30 percent quota as inadequate, given the potential impact on Thai companies who distribute Chinese-made goods. “If we have a shopping complex owned by Chinese businessmen, the question is what should Thai businessmen do? They could lose their [distribution] business,” he says.

Boonchai Limsuksrikul, a Thai official in the ASEAN-China Economy and Trade Promotion Association, defended the market as a modern distribution hub for Thai and Chinese producers. “This will be the biggest and best for logistics,” he says, noting its location near Bangkok’s international airport and its main seaport.

RELATED: Why some economists see a looming US-China trade war