China Plus One: an opportunity or a curse for Southeast Asia?

Just recently, China shut down the US consulate in Chengdu in retaliation for the US closing the Chinese consulate in Houston. While it may seem sudden, to many of us who have been observing relations between the two powers, this was a conceivable, if not predictable, outcome. In fact, it is just the tip of the iceberg in a string of worsening US-China relations, especially for those of us who have watched China and the US duke it out over the South China Sea for the past few years. This has been a feature of Southeast Asian geopolitics long before Trump stirred tensions in the South China Sea.

With the COVID-19 pandemic and seemingly no end in sight for the US-China feud, the boardroom discussions have increasingly turned towards the old adage of diversification. Geopolitical risk is not something that should be taken lightly. Industries that over-leveraged their supply chains on China are still reeling from the economic impacts Computer imports to the US are down at least US$5.72 billion and cell phone imports are down at least US$13.25 billion. All in all, US exports and imports from China are down at least US$84 billion, and if recent events are any indication, the prospect of a phase two trade deal to end the suffering is dead in the water. To many, the answer is the “China Plus One” strategy, and with good reason.

The “China Plus One” strategy advocates diversifying supply chains outside of China given the increasing cost of doing business there, especially for manufacturers. This does not mean that MNCs are looking to move out of China, but rather reduce their reliance on it; complementing rather than substituting their China-based supply chains. While word about “China Plus One” has been circulating for years, it is now that this trend is finally gaining traction.

What does this mean for the ASEAN?

The Association of Southeast Asian Nations, or ASEAN, is an organisation of 10 nations in the Indo-Pacific region which has a twofold focus: promoting cooperation between governments and the more ambitious goal of regional integration. As a group, they make up nearly 9% of the world’s population, and is one of the world’s largest and fastest growing economies.

While the US and her allies play the blame game, ASEAN stands to benefit. Geographical proximity, low labour costs, and rapidly developing infrastructure (ironically, what made China attractive to manufacturers in the first place) make ASEAN countries ideal choices for those looking to diversify. For instance, many ASEAN countries have minimum wages that are on-par or even below that of China.

Indeed, many ASEAN nations have already caught wind of this. Vietnam is already being hailed as the model for taking advantage of the fallout. From 19% of trade as a percentage of GDP in 1988, Vietnam has crossed the 200% mark in 2020. Vietnam’s track record can be accredited to the fact that labour costs are half that of China, even lower than Mexico, its next-best rival. Companies like Nike and Adidas have moved more than 40% of their production towards Vietnam in recent years, looking to fully take advantage of these benefits. Accompanied by the strong governance exhibited by the government during the COVID-19 pandemic, it is no wonder why Vietnam has become a prime destination for outsourced manufacturing over recent years.

That being said, a cruise to victory is not guaranteed. A diversion of trade towards the ASEAN region could potentially act as a destabilising force. While Vietnam and Singapore clearly have the manufacturing capabilities and good governance that makes them attractive FDI destinations, others are not so lucky. Countries like Indonesia and the Philippines have failed to catch the outflow from China due to complicated labour regulations and political instability, posing risks to companies looking to relocate their business. This would only worsen inequality between ASEAN members, hindering regional integration and ultimately threatening the integrity of the ASEAN organisation.

Furthermore, an over-reliance on global supply chains is not necessarily something to be desired – this would mean that a large percentage of the national economy would be reliant on factors outside local government control. As a prime example, in its bid to move up the global value chain, Vietnam has leveraged an increasing reliance on non-ASEAN intermediate goods for manufacturing inputs, putting them at the mercy of international developments.

Look both inwards and outwards

This all paints an uncertain, if not gloomy, picture for the region, but countries can do certain things to ensure that they take full advantage of “China Plus One”. First and foremost, they must keep one eye on domestic affairs and another on international issues. It is tempting for countries to look inwards during this time and cower in fear of globalisation. Indeed, Indonesia is already putting attracting foreign investors on the backburner in favour of prioritising their homegrown industries.

Yet, coming out of the crisis, this would put countries like Indonesia on the backfoot. This calls for a mindset shift from ASEAN governments. Like any good investor, ASEAN governments must carefully tailor their exposure to different markets around the world. They should not be like Vietnam, who relies too much on the US and EU export markets, or like Indonesia, who sees their salvation in their local companies. Rather, they should attempt to achieve a balance to ensure that they trade in good proportions with all major markets.

External considerations must also include China, the eternal elephant in the room. The South China Sea and the Belt-and-Road Initiative will always remain sticking points with ASEAN states, but it need not be a zero-sum game. Seeing as most companies still involve China in their supply chain networks, ASEAN states can benefit from Chinese investment and trade. At the end of the day, China needs these ties to enhance its political-economic ambitions as much as the other way around, so there is nothing gained by holding them hostage. A good step towards this is the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement between ASEAN nations and China, Japan, Korea, Australia and New Zealand. What ASEAN needs to do now is perform a balancing act. They must resist China’s creeping influence while curbing US aggression towards China. While this is certainly easier said than done, the best way to do this is by simultaneously enhancing ties with both nations through means like the RCEP.

The key that ties all of this together is regionalism. Southeast Asian states have already taken greater steps towards ASEAN centrality, but now it is more pertinent than ever. Only by strengthening solidarity with fellow ASEAN states can its members hope to avoid choosing sides. Ultimately, a fractured ASEAN will only serve to kill the investor enthusiasm for the region as they will only see it as another battleground for the US-China feud. Similarly, ASEAN can serve as a platform for regional dialogue and international cooperation such that states do not fall into false beliefs about autarky. It has already done this by working with its extra-regional partners like Japan, South Korea, China, Australia and New Zealand, but it must project a more international presence, especially with other blocs like the EU and its Pacific neighbours in South America. In doing so, ASEAN states will have more access to international trade routes and connections, making ASEAN a more viable FDI destination while diversifying their exposure to the outside world.

While the journey towards future prosperity is not exactly smooth sailing, ASEAN’s prospects are promising. ASEAN states must band together with the common goal of collective growth and recovery, and the COVID-19 pandemic has provided them with the unfortunate impetus for doing so. As long as ASEAN can do this, the region can improve regional economic equality and climb up the ranks in terms of GDP growth globally, equalising itself both internally and externally.

By Matthew Seet - BSc Philosophy, Politics and Economics Student at the University of Warwick

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