ASEAN Supply Chain Links to China and the Dangers of Decoupling – Analysis – Eurasia Review


By Ken Heydon *

China’s global value chain (GVC) links with ASEAN are both less dominant and more beneficial than they appear at first glance. But there are major challenges for ASEAN. ASEAN public opinion seeking to align more with the United States and less with China, The dependence of ASEAN GVCs on China could be seen as a cause for concern.

Over the past three decades, ASEAN’s trade ties with the United States, the European Union, and Japan have weakened compared to those with China. In addition, dependence on China has been linked more to backward linkages (where China’s share of foreign value-added exports incorporated in ASEAN exports increased from 5 to 17 percent. ) than in forward linkages (where China’s share of ASEAN’s value-added exports incorporated in other countries’ exports fell from 4 percent to just 12 percent).

But this account must be qualified. ASEAN’s ties with the United States, the European Union and Japan are not as weak as they appear. And the ties with China are very beneficial for ASEAN.

The relatively weaker trade ties between ASEAN and the United States, the European Union and Japan have been largely offset by increased investment and production in search of markets and efficiency, within the ‘ASEAN, subsidiaries in these countries. ASEAN’s GVC ties beyond China have been transformed rather than weakened. It is precisely the presence of these transnational affiliates with a global vocation that helps to explain the strong and otherwise surprising links of ASEAN with, in particular, the European Union.

When intra-EU trade – Europe’s regional value chain – is taken into account, the European Union accounts for a larger (albeit declining) share of ASEAN exports incorporated into the exports of other countries (28%) than China (12%). ASEAN, through its downstream links, is more integrated with EU GVCs than with China, especially in technologically advanced sectors like electronics.

But the most important fix to alarmist rhetoric about ASEAN’s GVC obligations with China is that backward ties with China promote development within ASEAN. It is therefore the scarcity of these backward links and, consequently, the limited access to foreign value added for ASEAN small and medium enterprises (SMEs) that explains why SMEs play a disproportionate role in exports. from ASEAN. ASEAN SMEs have been less exposed to “learning by importing”.

But the backward links are not shared equally across ASEAN. Malaysia, Singapore, Thailand and Vietnam are developing a manufacturing base with strong backward links (foreign value added accounts for 60 percent of ASEAN vehicle exports). Brunei, Indonesia, Laos and Myanmar remain dependent on natural resource activities with weak backward linkages (foreign value added accounts for only 5 percent of Indonesian agri-food exports).

This means that the policy settings will have to differ by country. Nonetheless, all ASEAN states will face three challenges common to GVCs: an increase in the importance of foreign investment relative to trade, a greater focus on domestic demand in dynamic partner economies, and the persistence of demand. vulnerability of GVCs to disturbances. China will be at the center of all these challenges.

As China strives to counter its aging population and rising domestic costs, it can be expected that it will increasingly follow the path already taken by the United States, the European Union and the United States. Japan by promoting investment rather than trade in its GVC links with ASEAN. China’s FDI in Southeast Asia quadrupled between 2010 and 2018. Given the sovereignty issues associated with inward FDI, this shift will need to involve a shift in “China’s tendency to downplay the importance of the autonomous agency ”of developing neighbors.

ASEAN’s own policy parameters will be equally essential to maximize the gains from investment flows, including through stronger environmental safeguards, technological modernization and greater domestic regulatory consistency.

The second challenge for ASEAN GVCs will be a shift in the relative importance of final consumption (rather than subsequent exports) within partner economies with expanding domestic markets. This will again require adaptability within ASEAN, as it directs product design to, in particular, Chinese domestic consumers as opposed to overseas Chinese customers, in accordance with the dual circulation strategy oriented to the country.

The third GVC challenge facing ASEAN is persistent vulnerability to disruption. This will require flexibility and resilience, whether removing hand-picked fibers from the textile supply chain to address Uyghur workforce issues or strengthening digital supply networks, by encouraging traditional manufacturing automation (Industry 4.0) and supporting international efforts to promote a liberal and ‘techno-globalist’ vision of the open Internet – in line with Australia’s 2017 strategy for cyber engagement – which seeks to involve Beijing and not to isolate.

Despite these formidable challenges – and AUKUS ‘heightened ambivalence regarding ties with China – ASEAN should not seek to disassociate itself from the supply chain. OECD modeling suggests that ASEAN decoupling, by reducing exposure to upstream supply shocks, would slightly improve ASEAN’s economic stability (by 0.02% of GDP) but massively reduce growth (over 10% of GDP). The loss of growth occurs precisely because of the reduction in backward links – the same backward links that also help explain why only Asian countries have caught up with the rich world.

* About the author: Ken Heydon is a visiting scholar at the London School of Economics. He is a former Australian civil servant and senior member of the OECD secretariat. He is the author of The Political Economy of International Trade: Putting Commerce in Context (Polity, 2019).

Source: This article was published by East Asia Forum

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