Manufacturing to ASEAN: What are the challenges and opportunities?
Posted 2022-05-31 17:25 in Beijing
The original article is linked here.
Tang Yao is an Associate Professor in the Department of Applied Economics at the Guanghua School of Management, Peking University, and a Research Fellow at the CITIC Foundation for Reform and Development. He received his PhD in economics from the University of British Columbia, Canada, and taught with tenure at Bowdoin College in the US from 2009 to 2017. His main research interests are in macroeconomics, international economics and Chinese corporate strategy.
Today (May 31), a Weibo hit #canVietnamreplaceChinaastheworld'sfactory sparked widespread discussion, with Weibo data showing that the topic had been read by more than 80 million people by press time.
According to recent media reports, in March this year, Vietnam surpassed Shenzhen in terms of export scale and growth rate. Meanwhile, US President Joe Biden officially announced the launch of the Indo-Pacific Economic Framework (IPEF) in Tokyo, Japan. Analysts believe that the Biden administration is advocating the establishment of a "multilateral partnership adapted to the requirements of the 21st century" through this framework, essentially promoting the "de-Chinaisation" of regional countries in terms of supply chains and infrastructure. As a result, there are concerns that China's manufacturing chain may shift to ASEAN countries in the future.
Tang Yao gave a detailed answer to this question in an interview with the media. According to Tang Yao, it is difficult for Vietnam to replace China as the "factory of the world". The challenge for China is to improve the quality of its manufacturing industry and to bring the per capita output close to that of the first tier countries. China's manufacturing industry is currently moving up the value chain, and China and ASEAN can leverage their respective strengths in this context to unleash the full potential of the RCEP, a regional free trade agreement, and strengthen the manufacturing cluster in East and Southeast Asia.
Q1
How do you see the shift of manufacturing to ASEAN, especially Vietnam?
International industrial shifts have been a constant in economic history since the industrial revolution. While industrial shifts improve economic efficiency and promote global growth through a dynamic restructuring of the division of labour, they also conflict with a country's overall socio-economic goals in a number of ways, such as causing income divergence, employment loss and external dependence. In the process of reform and opening up, China has achieved great success by participating in the international division of labour and nurturing local enterprises through attracting foreign investment and developing export industries, and by embedding itself in global value
and supply chains. Like major economies that have completed industrialisation throughout history, China is currently facing the challenge of industrial out-migration. Respecting the laws of economics, China needs to weigh up the multifaceted objectives of development and security and optimise the process of industrial relocation by proactively adjusting its economic system.
It is clear that China needs to avoid a too rapid and premature relocation of manufacturing industries out of the country. As the current international political and economic environment is complex and volatile and China's development faces more external challenges, stabilising the manufacturing sector has a key role to play in stabilising the overall macro economy. From the perspective of time, the orderly transfer of industries requires that the incremental output value brought about by industrial upgrading should be able to offset the output value transferred out, thus stabilising the overall scale of the manufacturing industry and buying time for the manufacturing industry to develop to a high level. From a spatial perspective, due to the significant difference in development levels between the coastal and central and western regions, the labour force and resources in the central and western regions provide space for the multi-level
development of the domestic manufacturing industry for a considerable period of time.
At the same time, it is important to see that there are many mutually beneficial and win-win opportunities for China and ASEAN in the process of industrial relocation. For China to move into the ranks of high-income countries, it will inevitably need to gradually reduce its reliance on labour-intensive industries and focus on moving up the value chain to increase the value created per unit of labour. In the process of economic growth, China's working-age population has peaked, while the education level of its workforce is increasing, and there are complementarities with ASEAN countries in terms of labour endowments. A rational transfer of industries is conducive to both sides leveraging their respective strengths, unleashing the full potential of RCEP, a regional free trade agreement, and strengthening the group advantages of manufacturing in East and Southeast Asia.
Q2
Can Vietnam replace China as the world's factory?
Recently, there has been widespread concern in the community that Vietnam's exports are showing high growth and that they could replace
China's manufacturing sector in the world. However, as a country's exports often include intermediate goods and services from other countries, one of the best indicators of a country's hard manufacturing power is the value added created by manufacturing. In this indicator, there is currently a big gap between Vietnam and China in terms of manufacturing volume, with China accounting for 28.55% of the world's value added created by manufacturing in 2020, while Vietnam accounts for 0.34% of the world, equivalent to 1.17% of China, according to data published by the World Bank.
On the other hand, comparing the manufacturing industries of the two countries also needs to take into account the development potential of Vietnam. We can take South Korea, whose manufacturing level is in the first tier, as a reference. South Korea's manufacturing output per capita is about 2.8 times that of China and 17 times that of Vietnam, with a population about half that of Vietnam, and accounts for 3% of the world's manufacturing value added. Assuming that Vietnam's per capita manufacturing output reaches the level of South Korea's, its share of world manufacturing would be around 6%. Calculations based on this extreme assumption suggest that it will be difficult for Vietnam to replace China as the 'factory of the world'. In the long term, there is bound to be a dynamic competition between the ASEAN countries as a whole and China in terms of manufacturing, and the challenge for China now is to improve the quality of manufacturing and to bring per capita output closer to the level of the first tier countries.
Q3
How do the advantages and disadvantages of transferring China's coastal manufacturing industries to ASEAN compare with those to the Midwest?
The transfer of China's coastal industries requires a "two-legged" approach. ASEAN countries have advantages over central and western
China in terms of shipping costs, geographical location, tariff arrangements and local market potential, so there is a strong incentive for some industries to shift production capacity to ASEAN countries, including industries that are sensitive to transport costs and tariffs, "big-in, big-out" industries that import a large number of inputs and export finished products, and industries that value industries that value the consumption potential of the end market. In addition, after years of development, China has emerged some leading companies with global competitiveness in terms of technology and brand names, and these dominant companies can expand the influence of China's manufacturing sector by taking the initiative to increase production capacity in ASEAN in some production segments.
Coastal industries moving to central and western China can rely on China's expanding and speeding up transport infrastructure network to more effectively combine coastal overflow industries with the relatively cheap labour and land factors of central and western China to serve the large Chinese market. Cities in the mid-west with good living conditions can take advantage of their livability to develop R&D, design and other production segments that serve the manufacturing sector and are not sensitive to trade costs. In addition, compared to the location advantage ASEAN has, China's mid-west has a long-established supply advantage in upstream basic industries and renewable energy, which is an important factor in stabilising the manufacturing sector against the backdrop of highly volatile international prices for basic products such as energy and the approaching carbon tariffs.
Q4
What opportunities and challenges will the manufacturing industry in China and ASEAN face in the post-epidemic era?
The regionalisation of value chains and supply chains, the decarbonisation of production, the servicification of the economy and digitalisation are new challenges common to many developing countries' manufacturing industries. Globalisation has stalled or even regressed in recent years, and there has been a trend towards regionalisation of value and supply chains, with China, the USA and Germany being the three main countries at the centre of the world's value chains. As international trade and investment relations have been severely impacted by trade wars, the epidemic and the Russia-Ukraine conflict, major countries are focusing on backing up their supply chains and trying to locate them in friendly countries in the region, while individual countries are deliberately pushing for the "de-Chinaisation" of their supply chains. Against this backdrop, both China and ASEAN countries need to adapt to this new trend in supply chains and build stronger supply chain linkages to stabilise production networks in East and Southeast Asia through cooperation.
Against the backdrop of climate change threatening global development, the trend towards lower carbon production is a long-term one. This year, the EU adopted the Carbon Emissions Regulator, which will start collecting information on imported energy-intensive products in 2023 in preparation for the introduction of a carbon tariff in 2026, covering five sectors: steel, aluminium, cement, fertilisers and electricity. The European Parliament's Committee on Environment, Public Health and Food Safety has further proposed additional carbon tariffs on organic chemicals, plastics, hydrogen and ammonia. As these products are important basic industrial products, carbon tariffs would have a profound impact on the manufacturing value chain and supply chain. China has a more than adequate technological reserve and manufacturing capacity in the production and application of renewable energy, and should seize the opportunity of a low-carbon transition to consolidate its position in the global value chain.
In modern global value chains, production service segments such as research and development, design, creativity, and marketing have an increasing impact on the value of the final product in manufacturing, and the increasing digitalisation or digital deliverability of these modern services has given developed countries a continued advantage in these production segments. On the one hand, digital forms of trade are characterised by ease of delivery and their globalisation is more competitive, while on the other hand, digital trade is more vulnerable to trade protection measures. The question of how to foster competitiveness in modern services and how to balance the objectives of developing a digital economy and data security is one that developing countries need to explore urgently.
Q5
In which areas does our manufacturing industry need to make efforts in order to stabilise its total volume and improve its quality?
First, against the backdrop of China's rising labour, land and ecological costs, China needs to systematically reduce manufacturing costs and enhance the incentive to innovate by deepening economic reforms, promoting new infrastructure, including low-carbon transformation, and increasing financial support.
Secondly, we should continue to expand openness and further remove hidden barriers to market access, both for foreign enterprises and for private enterprises. Reducing policy uncertainty, strengthening communication with market players and stabilising the expectations of enterprises will stabilise the broader manufacturing sector.
Third, we should promote the building of a unified domestic market, not only to reduce manufacturing costs through market-based allocation of land, capital, manpower, data and intellectual property elements, but also to play the role of a large consumer market as a "sucker", so that the value chain and supply chain can gather around the large market of China.
Fourth, combine long and short-term policies to mitigate the impact of labour shortages on the manufacturing sector. Promote as soon as possible a systematic combination of rural revitalisation policies and flexible labour policies to guide farmers to flexibly participate in low- and medium-skilled manufacturing industries during agricultural leisure. In the long term, promote digital technologies such as artificial intelligence and the Internet of Things in an orderly
manner to transform traditional manufacturing industries and reduce the sensitivity of manufacturing industries to the wage costs of simple labour.
Fifthly, we should train the "internal strength" of modern service industries such as research and development, information, finance and commerce, which serve the manufacturing industry, and enhance the hard strength of the manufacturing industry by strengthening the soft strength of the service industry. We should avoid opposing the development of the service industry and the manufacturing industry and severing the relationship between the two as complementary.
Sixth, adjust the economic spatial structure of the central and western regions, promote the accelerated concentration of population in the central cities and key towns in the region, and build low and zero carbon industrial parks by taking advantage of the advantages in renewable energy, thereby increasing the attractiveness of the central and western regions in terms of consumer demand and factor supply. Accelerate the development of Southwest China's function as an economic link between developed coastal regions of China and ASEAN through strengthening infrastructure development and guiding the relocation of manufacturing industries to achieve balanced regional development.
Conclusion
Since the 1980s, China and ASEAN countries have generally embarked on the path of developing an externally-oriented economy, focusing on the introduction of foreign investment and increasing exports. In their long-term efforts to integrate into the world economy, both sides have developed a situation of competition and cooperation, facilitating the formation of an efficient transnational production network for manufacturing in East and Southeast Asia. Just as the Asian and global financial crises have historically impacted this region, the many new trends in the post-epidemic era will also trigger profound changes in the international division of production patterns in the region. By systematically reducing comprehensive costs, building a unified large market for supply and demand, integrating the development of manufacturing and service industries, and optimising the spatial layout of manufacturing, China can dynamically balance the competitive
and cooperative relationship with ASEAN in the course of an orderly transfer of industries, and achieve the long-term goal of stabilising the total volume and improving the quality of manufacturing.