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.[ii]
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%.[iii]
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.
Conversely, in 2011 ASEAN members imported US$ 155 billion from China. Over the next ten years, this figure grew to US$ 300 billion – that is a 94% growth worth US$ 145 billion. Over that time, the combined GDP of ASEAN member states rose by US$ 700 billion. Hence, every US$ 100 of ASEAN GDP growth was accompanied by US$ 20 of imports from China. The marginal propensity to import from China is twenty times higher than China’s marginal propensity to import from ASEAN.
The clear consequence of this asymmetry has been the widening of ASEAN’s trade deficit with China, which has grown from US$ 15 billion in 2011 to US$ 82 billion in 2020. Due to the five-fold increase, ASEAN’s bilateral deficit with China amounts to 2.7% of GDP.
How does intra-ASEAN trade compare? In contrast, intra-ASEAN trade has fallen, shrinking from US$ 582 billion in 2011 to US$ 567 billion in 2020 – that is a 3% decline. Relative to overall trade, it shrank from 24% to 21% despite economic diplomacy efforts to encourage inter-connectivity of the region. Thus, intra-ASEAN trade is only marginally larger than trade with China, which accounts for 19.4% of total trade.
Furthermore, exports to the United States doubled between 2011 and 2020, expanding by more than US$ 100 billion. This represented both a greater dollar growth and percentage growth than exports to China.
Four conclusions can be drawn from the above analysis. First, the narrative that a fast-growing Chinese economy is a boon for Southeast Asian growth looks increasingly false. The growth in China’s domestic market has not resulted in a large increase in exports to China because the marginal propensity of China to import from ASEAN is so low.
Second, despite its geographic distance, the United States rivals China as an export market for ASEAN. Between 2011 and 2020, the share of exports going to the US increased from 8.5% to 15%. These figures are at odds with the popular view that the United States’ importance is waning in the region.
Third, China’s economic prowess has impacted trade patterns in ASEAN in terms of import dependency. Between 2011 and 2020, China’s share of ASEAN imports rose from 13% to 23%. This largely represents China’s exports of capital goods and components that go into assembling products for export out of ASEAN.
Lastly, the import dependency is in part a function of ASEAN’s struggles to develop a high level of vertical integration and inter-connectivity within Southeast Asia. China has shed lower value-added industries such as footwear and garment manufacturing to Vietnam, Cambodia, and Myanmar. But there remains a heavy level of import dependency on the inputs and capital goods that are essential to the industries. Combined, ASEAN’s economy is large enough to support globally competitive scale in the petrochemicals and other industries required for the inputs. Individually, however, the economies are not.
All this begs the question, how might the Belt and Road Initiative impact future trade patterns? It is in China’s interests to maintain its industrial centrality in Asia’s manufacturing processes. 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. BRI projects may help at the margin but there is an equally strong underlying current that points to greater Sino centrality stemming from regional infrastructure projects.
Consider, for example, the Myanmar oil and gas pipelines. In 2012, Myanmar did not export any minerals fuels to China. As the pipelines came on stream, China’s share of Myanmar’s mineral fuel exports increased – first to about a quarter and now to about 45%. This trade diversion increases China’s importance to Myanmar’s ability to earn foreign exchange.
It may be too soon to tell much from the newer BRI projects. However, trade flows over the past decades suggest measures to facilitate trade between China and Southeast Asia have an asymmetric impact. The goods tend to flow south, and earnings flow north. Greater intra-ASEAN trade can alter this dynamic.
Stewart Paterson is a Research Fellow at the Hinrich Foundation who spent 25 years in capital markets as an equity researcher, strategist and fund manager, working for Credit Suisse, CLSA and most recently, as a Partner and Portfolio Manager of Tiburon Partners LLP.
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