ASEAN factories seen to gain from US-China friction

MANILA, Philippines — Southeast Asian countries are seen to benefit in terms of manufacturing investments amid the ongoing friction between China and the US, according to think tank Oxford Economics.

In its research briefing titled Shifting Asian supply chains amid ongoing US-China friction, Oxford Economics said it expects Southeast Asian countries to be a key beneficiary as firms adjust and diversify some production away from China.

“The region is already well established in global and regional supply chains. And it looks set to remain an attractive destination for export-orientated FDI (foreign direct investment), given its labor dynamics, improving quality of infrastructure, and openness to trade,” Oxford Economics said.

It said some firms are already responding to the rising labor costs in China and that environmental pressures are increasing.

In particular, Oxford Economics said the share of Southeast Asian economies such as the Philippines, Indonesia, Malaysia, Thailand, Singapore and Vietnam or the Association of Southeast Asian Nations (ASEAN)-6 in global inward FDI averaged around 11 percent over the past five years, up from six percent for the period of 2012 to 2017.

Oxford Economics said ASEAN has benefited from trade decoupling between the US and China which started after the US raised tariffs on Chinese imports in 2018.

While China remains the US’ biggest supplier of imported goods, its share has dropped to 17 percent in the first half of the year from about 21 percent.

China’s share of US’ electronics imports are also down by 5.5 percentage points, with the imposition of other protection measures on electronics and computing products.

“The biggest winners have been ASEAN-6,” Oxford Economics said, noting the region as a whole now accounts for 10 percent of total US imports, up from around seven percent in 2018.

While it expects ASEAN to become an increasing source of global manufacturing and exports, it said breaking the global and regional dependence on China would require a significant drop in the reliance on backward integration with the Chinese industry.

ASEAN serves as a platform for Chinese exports with many goods shipped out of the region containing some inputs from China.

Oxford Economics said reducing dependence on China would be easier for some products such as furniture, clothing, and household goods which are labor-intensive.

It said production of textiles and furniture, as well as the labor-intensive process of electronic products have been shifted away from China to ASEAN economies.

But for other products, China is seen to remain a key manufacturing hub.

“To compete more broadly with China as a production base, ASEAN will need a much larger increase in investment, both FDI and domestic,” Oxford Economics said.

Even with rising labor costs, it said China would still be an attractive destination for FDI given its higher quality of infrastructure and large and skilled labor force.

As such, firms are likely to adopt a China plus one strategy and reduce dependence on China only marginally.

While this strategy could strengthen intra-regional economic links, it said it would bring new risks, particularly if the US implements a broader tariff coverage of Chinese value-added content on third-party exporters and stricter enforcement of anti-circumvention rules to reduce China’s role in supply chains.

Oxford Economics said under a broader tariff coverage, it expects a sharper reorientation of supply chains.

“In the medium term, ASEAN could gain from such reorientation. But this would also depend on whether China responded to the dismantling of these trade links by restricting ASEAN’s access to China’s domestic market,” it said.