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Southeast Asian countries to win from the trade war in the medium term

Alicia Garcia Herrero
Alicia Garcia Herrero11/1/2019 07:00 AM GMT+08  • 3 min read
Southeast Asian countries to win from the trade war in the medium term
SINGAPORE (Nov 4): Today, one in five manufactured goods globally comes from China — a great leap from its 3% contribution in 1996. The rapid rise of China’s export engine, especially in manufacturing, and its ambition to produce the highly prized “
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SINGAPORE (Nov 4): Today, one in five manufactured goods globally comes from China — a great leap from its 3% contribution in 1996. The rapid rise of China’s export engine, especially in manufacturing, and its ambition to produce the highly prized “high-tech goods” set out in its “China Manufacturing 2025” strategy, appears to be the key motivation behind the US-led trade war against China.

The question today is whether other economies in Asia can really benefit from such a trade war, and the answer very much depends on the time frame analysed.

In the short run, trade-war gains for Southeast Asian economies are not obvious, as China’s manufacturing capacity and global market share of exports is simply too hard to compete with. In a few years, however, the situation could be significantly different, as several Southeast Asian countries are well positioned to profit — though not to the extent of becoming the next China.

More generally, the reshoring towards South Asian economies away from China had started before the trade war began. Today, the room for supply chain cost arbitrage is larger than the goods being substituted in relation to increased tariffs stemming from the ongoing trade war. This trend is bound to continue, as China’s ageing population will only push labour costs higher. In fact, many Asean countries (except Thailand) are in a much better position than China in terms of their growing working populations.

In the same vein, rising costs in China, particularly manufacturing wage costs, are growing much higher than in the rest of Asean, which erodes its labour-intensive manufacturing competitiveness. That being said, the US’ non-existent labour-intensive comparative advantage means that it is not really possible for US companies to relocate labour-intensive manufacturing back to the US, which leaves other geographies as more sensible options for the sourcing of goods. For labour costs, Vietnam, the Philippines, Indonesia and India are cheapest, reflecting their labour advantage. But for inputs such as electricity, Vietnam outperforms in terms of affordability. As such, a labour-intensive firm would be very keen to invest in Vietnam.

In fact, companies are already reacting to Asean’s long-term competitiveness in manufacturing. Asean, as a region, now exceeds China as an attractive investment destination. Manufacturing foreign direct investment into Vietnam, Indonesia and India are already quite large as a share of total FDI received, and larger than for China. All in all, China’s massive stake in global manufacturing makes it very difficult for emerging Asian economies to gain in the short run by exporting goods to the US for the sectors with import tariffs for China. However, things could be very different in next few years.

Given the expected offshoring of manufacturing production away from China, both by MNCs as well as Chinese manufacturers, any country that has the excess labour — at a low-enough wage — and the necessary infrastructure should benefit in the medium run. Vietnam is probably the best placed to take a share of China’s labour-intensive manufacturing, followed by India, while Thailand is best placed to specialise in capital-intensive manufacturing, followed by Malaysia. Still, China’s manufacturing share is so massive that there is room for virtually every Asean country in the massive re-offshoring that is going to take place in the next few years.

Alicia Garcia Herrero is chief economist for Asia-Pacific at Natixis and senior fellow at Bruegel, a Brussels-based think tank

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