US-China trade war opens door for Asian manufacturing

The US-China trade war, which now includes $360bn-worth of tariffs, could shift export-oriented manufacturing from China to other Asian countries in three key sectors: information and communications technology (ICT), automotives and automotive parts, and apparel and ready-made garments (RMGs), according to a recent report by the Economist Intelligence Unit (EIU).

The attractiveness of many south-east Asian countries to foreign investors has grown in recent years due to several recent positive developments. These include a strong network of free-trade agreements, such as the Association of South-East Asian Nations (Asean) and the recent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), as well as their expanding domestic consumer markets, existing industrial clusters and sound infrastructure.

Vietnam and Malaysia – both part of CPTPP and Asean – are set to benefit most from the US-China trade war, especially in low-end manufacturing of ICT products. Existing operations of major electronic companies in both countries – such as Dell, Sony and Panasonic in Malaysia, and Samsung and Intel in Vietnam – facilitate straightforward redeployment of investment and production.

Between January 2008 and September 2018, ICT and electronics was the leading cluster for greenfield FDI projects undertaken in Malaysia and Vietnam, with 591 total projects, according to fDi Markets.

During 2017, exports of Chinese automotive parts totalled $31bn and made up eight per cent of the global total, according to the EIU. Disrupted access to the US market (the largest destination of these exports by value) provides opportunities for well-established automotive parts manufacturers in both Thailand and Malaysia to win market share from their Chinese competitors.

If US tariffs make apparel products from China more expensive, global clothing brands could shift production to Bangladesh and Vietnam, which are the world’s second and third largest RMG exporters respectively.

Meanwhile, Latin America could benefit from Chinese tariffs on US imports. Following its imposition of a 25% tariff on US imports, China must find an alternative source for its soybeans, which amounted to about 95 million tons in 2017.

Imports from regional trading partners such as India, Laos and South Korea will satisfy some of this demand, but most will come from Brazil and Argentina, which have far greater production capacity.

The EIU report concludes that the shift in export-oriented manufacturing, especially ICT, automotive and RMG sectors, from China to other markets in Asia is likely to have a net positive impact for many countries in at least two to three years. 

However, multinational companies require time to transfer their operations from China to other countries, meaning that negative and disruptive effects are likely in the short term.