Strengthening Links in ASEAN’s Global Value Chains Post-Pandemic

The Covid-19 pandemic, growing trade disputes amid U.S.-China geopolitical tensions and the Russia-Ukraine war have intensified the risk of global value chains (GVC) disruptions. In response, multinational corporations (MNCs) have been forced to strengthen resilience in their supply chains and operations. They have responded to the pandemic and geopolitical tensions by diversifying suppliers, establishing new production sites, and shifting production closer to consumers. ASEAN countries – geographically located near China, one of the top three global production hubs – are becoming increasingly attractive destinations for foreign investors, especially those from the U.S. and China. This presents both opportunities and risks for ASEAN’s GVCs.

On the positive side, the relocation of production sites from China to ASEAN countries could further enhance their participation in GVCs, which should boost economic growth and generate more jobs in the region. Our analysis of ADB’s value-added trade data reveals that ASEAN countries are increasingly participating in GVCs and gaining domestic value-added, although four ASEAN countries – Brunei, Cambodia, Laos, and the Philippines – are starting from a very low base. The share of global value-added trade captured by ASEAN economies grew from about 7.2 per cent in 2000 to 7.4 per cent in 2020. About half of global value-added trade is still concentrated in 10 countries, namely China, the U.S., Germany, Japan, France, the United Kingdom, the Netherlands, South Korea, Italy, and India. As global trade grows, developed economies increasingly rely on imported content for their exports, allowing ASEAN countries to add disproportionately to their domestic value-added in exports.

Reaping the benefits of GVCs amid global economic and political uncertainties requires ASEAN as a group to strengthen its resilience in value chains. The presence of high-risk sectors in ASEAN means that some industries have already reached a degree of concentration in the supplier or buyer markets, or both.

Moreover, our review of media reports between 2018 and 2022 shows that ASEAN countries, especially Vietnam, Thailand, and Indonesia are increasingly favoured destinations for the relocation of production plants from China. Due to tariffs arising from U.S.-China trade tensions, about 25 per cent of foreign manufacturers for Adidas in China were shut down, and started searching for low labour cost locations in Vietnam, Thailand, and Indonesia. Nike has reduced its dependence on Chinese suppliers and relocated production to Vietnam in 2021. The U.S.’ Google and Japan’s Sharp have decided to move Pixel smartphone production and computer manufacturing respectively to Vietnam to avoid U.S. tariffs. The pandemic has reinforced this trend. According to the European Union Chamber of Commerce in China, nearly one in four European companies in China will move their production plants out of the country due to the Covid-19 outbreaks and lockdowns. About 16 per cent of them may move to Southeast Asia. 

On the flip side, however, MNCs could increase the concentration of supplier and buyer markets, which makes ASEAN countries more vulnerable to external shocks. ADB’s value-added trade data reveals that Brunei, Cambodia, Indonesia, Laos, the Philippines, and Thailand face significant risks of both supplier and buyer market concentrations. These countries use a high share of imported intermediate inputs in producing goods for exports. These imported intermediate inputs are sourced from a limited number of countries, resulting in supplier market concentration. Meanwhile, they sell a high share of domestically produced goods to a limited number of foreign buyers, leading to buyer market concentration. The remaining ASEAN countries, namely Malaysia, Singapore, and Vietnam, face the risk of either supplier market concentration or buyer market concentration. The high-risk sectors are particularly in sectors as such as agriculture, mining, textiles, food, wood products, chemical products, basic metals, electrical and optical equipment, wholesale and retail trade, transport, and financial intermediation. 

In addition, our risk assessment of ASEAN’s GVCs across key trading partners reveals that any restrictions on the use of intermediate inputs from the U.S. or China to manufacture goods in ASEAN can cause substantial disruptions to GVCs in the region. The upstream and downstream GVCs in ASEAN countries are dominated by the U.S., China, and Japan. These trading partners account for 67 per cent of 332 key sectors in the upstream GVCs, and 64 per cent of 328 key sectors in the downstream GVCs. 

Reaping the benefits of GVCs amid global economic and political uncertainties requires ASEAN as a group to strengthen its resilience in value chains. The presence of high-risk sectors in ASEAN means that some industries have already reached a degree of concentration in the supplier or buyer markets, or both. This has raised concerns over the healthy operation of these sectors in GVCs. 

These risks can be mitigated by implementing three sets of trade policy measures. First, the efficiency of releasing perishable and intermediate goods at border checkpoints should be improved by implementing ASEAN’s authorised economic operators and expediting trade in perishable goods. Second, the full-fledged ASEAN Single Window for cross-border paperless trade should be accelerated by improving laws and regulations for cross-border electronic transactions. This would involve exploring possibilities for improving the efficiency of cross-border electronic exchange of certificates of origin, sanitary and phytosanitary certificates, and customs declaration documents. Finally, promoting the digitalization of GVCs requires ASEAN as a group to create a greater coherent regulatory framework on cross-border data flows to enhance digital connectivity both within and outside the region. 

Such trade policy measures should enable ASEAN countries quickly respond to potential trade disruptions caused by the pandemic or geopolitical shocks. Seamless trade flows should increase investors’ confidence and boost inflows of foreign direction investment, which should enhance ASEAN’s participation in GVCs and support regional efforts to transform the grouping into a regional production base.

2022/08