As China’s cost base has risen and it looks to move up the value chain, an opportunity will arise for some Southeast Asian economies to replace China – a trend accelerated by the trade war and geopolitical tensions. However, breaking the dependency on China will involve a far higher degree of vertical integration and intra-ASEAN connectivity.
There are few parts of the world that have a stronger interest in protecting and deepening the rules-based multilateral trading system than Southeast Asia. Home to more than 600 million people and boasting a combined GDP of US$ 3 trillion – that’s 3.5% of the world economy – ASEAN’s ten member states also have among the world’s highest trade intensity. The average trade to GDP ratio is approximately 90%, compared to a world average of 45%.[i] Consequently, ASEAN member states account for about 7.8% of global trade.
Two explanations account for the trade intensity. Except for Indonesia, each country is of insufficient size to sustain the full range of industries that support a modern economy. For many nations in the region, productivity improvement through specialization is an effective route to economic growth. Therefore, Thailand has developed into an auto manufacturing center. Singapore is the hub for financial services and trans-shipment. The Philippines has fostered a comparative advantage in business process outsourcing. Malaysia has cultivated its semiconductor industry. And Vietnam has created industrial clusters for textile manufacturing and mobile phone production.
Secondly, ASEAN member states, at the forefront of the early wave of globalization, attracted significant amounts of export-orientated foreign direct investment (FDI). According to the United Nations Conference on Trade and Development (UNCTAD), the stock of inbound FDI in the ASEAN countries has reached US$ 2.9 trillion in 2020 – equivalent to 95% of the combined GDP of the ten member states.
Meanwhile, the economic rise of China looms large. China’s rise has impacted the region in two conflicting ways. While China’s growth has been a source of demand for ASEAN products, its dominance in manufacturing has also provided stiff competition, both domestically and in third markets. The second of these factors has been more prominent. On balance, China’s growth may hinder rather than promote Southeast Asia’s economic performance.
Compare, for example, China’s GDP in 1994, then equal to the combined GDP of the ASEAN member states, with the current size of China’s economy, which is five times larger than ASEAN’s. Then compare the growth of manufacturing value-added. China’s global market share has risen from just 6% in 2001 – when it joined the World Trade Organization – to 28% in 2020. In contrast, ASEAN’s share of manufacturing value-added in 2020 is only 4.4%. Twenty years earlier, its share was 2.5%.
China has been extremely successful in attracting export orientated FDI that otherwise Southeast Asia may have received. Several factors may have helped. Infrastructure development in China has been rapid and advanced. Access to the domestic market can be a critical incentive. The industrial workforce is comparatively highly skilled. The undervaluing of the currency was maintained while the country’s industries attained sufficient scale to be competitive. Lastly, government subsidies help create a competitive environment. While ASEAN exports to China have grown, the marginal propensity of China to import from ASEAN remains very low. In 2011, ASEAN members exported US$ 140 billion of goods to China, a number that grew to US$ 218 billion in 2020. That amounts to a US$ 78 billion increase.[iv] Over the same time frame, China’s economy nearly doubled from US$ 7.5 trillion to US$ 14.7 trillion – US$ 7.2 trillion of growth. Hence, every US$ 100 of China’s growth only produced US$ 1 of export growth from Southeast Asia.