The ensuing Sino-US trade war and the Covid-19 pandemic has accelerated the moving of global value chains out of China into other regional states such as Malaysia, Thailand and Vietnam. ASEAN countries should not squander the historic opportunity to grab a bigger market share in such chains.
The double whammy of the US-China trade war and Covid-19 pandemic has sparked a serious rethinking of global trade. More than half of the world’s trade are routed through global value chains (GVCs) and much of these chains are centered on China. Thus, the unhappy experience of countries that experienced bottlenecks in obtaining deliveries, especially of medical supplies, has sped up the reconsideration of the trade model that has underpinned much of global trade growth for decades.
Some hold that GVC itself, as a business strategy, will stay because reshoring all production activities is not only inefficient, but also poses greater risk. But GVCs that are centered and highly dependent on China will likely be reconfigured, with some production activities reshored and others shifted to other country locations. Some may remain in China but with alternative supply chains that run parallel. The present US administration is insisting on keeping some vital supply chains in America while the EU is reconsidering some China investments. Apple, Amazon, Microsoft and other hardware manufacturers are already hunting for alternative facilities, including in ASEAN countries, especially in Vietnam and Thailand.
Already, some USD 2.1 billion of greenfield FDI projects relocated from China to other economies in East Asia during the trade war (specifically, in the last 15 months ending in December 2019). Part of this was likely a trade-rerouting strategy aimed at evading the punitive tariffs imposed by the US on China products. However, it is also likely that this is the beginning of a medium- to long-term response to the uncertainties regarding the sustainability of China-centered GVCs. Vietnam has emerged as an important recipient of greenfield FDI relocations from China. Malaysia and Thailand too received the bulk of FDI relocations, particularly in automotive components.
To put this trend in context, reducing dependence on China through diversification of supply networks was already under way before the pandemic. One major reason is that China’s labour has become more expensive, so did other logistics and operational costs. Another reason is technology. Automation and other innovative technologies have reduced the need for large pools of cheap labour and are abetting the reshoring or relocation of some production activities closer to the final consumer. But the twin phenomena of trade war and pandemic have likely accelerated the reconfiguration plans of multinational GVCs. Pundits hold that value chains will become regional instead of global, closer to large consumer markets. Further, since automation and digital technologies are replacing the comparative advantage in labour, countries’ ability to adopt new technologies will instead determine their comparative advantage in being part of future value chains.
A full pivot away from China-centered GVC is, however, not going to be easy, and will not be immediate. GVCs entail an entire ecosystem and network of multi-tier suppliers. For decades, China has carefully cultivated such a developed GVC ecosystem. Final assembly may be moved to other countries but China still has entrenched itself in components manufacturing. For example, China supplies 40 per cent of intermediate goods for Vietnam’s exports. The same goes for other East Asian countries which have supply chains that are closely intertwined with China’s. Moving component manufacturing outside China will take time because building manufacturing capacity takes time. China also continues to have an advantage in labour despite rising wages. Its total labour force of more than 800 million is double that of the combined labour force in ASEAN. Dependence on raw materials from China is another consideration. Likewise, China’s increasing competitiveness in technology is another factor to reckon with in competition for GVCs.
A full pivot away from China-centered GVC is, however, not going to be easy, and will not be immediate. GVCs entail an entire ecosystem and network of multi-tier suppliers.
The key to the reconfiguration of GVCs lies in multinational enterprises. When multinational corporations decide to move investments elsewhere, momentum would start building especially among its network of suppliers. The resulting reconfigurations would likely result in more balanced supply chains, a potentially healthy alternative to an overdependence on China. The reallocations will entail cost and would require an entire ecosystem to be built, including a talent pool, good infrastructure and regulatory environment, as well as neighbouring upstream and downstream industries. But it is a price that MNEs may be willing to pay to ensure greater stability and robustness of their supply chains. What is unknown, however, is the readiness of alternative host countries to absorb the deluge of relocating investments.
In particular, is ASEAN ready? The region is already a major player with more than 60 per cent of its exports routed through GVCs. Still, there is room for growth. Establishment of more foreign affiliates in the region will increase domestic value added. But ASEAN should build the institutional and business capabilities that attract investors, such as transparent and predictable regulatory environment.
Hence it is important to continue to improve the ease of doing business for both domestic and foreign enterprises. They must improve infrastructure and build productive capacities in domestic firms, especially in meeting international standards. In ASEAN, while trade in goods enjoy near-zero tariff levels, services trade continues to face hindrances to liberalisation. Yet, services are important for manufacturing competitiveness; after all, the value of services bundled into goods exports is substantial. It is important for countries in ASEAN to align policies for trade in goods and services with investment policies. If not, they may lag behind in the race to grab a bigger slice of the GVC pie.
ASEAN should not squander away this once-in-a-lifetime opportunity to acquire a central place in a reconfigured GVC.
Gloria Pasadilla was Associate Fellow at the ASEAN Studies Centre, ISEAS – Yusof Ishak Institute.