Supply chain diversification impact on ASEAN mixed

by Louella Desiderio (The Philippine Star), 26 Aug 2020

MANILA, Philippines — Companies seeking to reduce dependence on China by diversifying supply chains amid the coronavirus disease 2019 (COVID-19) pandemic would have mixed implications on the Association of Southeast Asian Nations (ASEAN) economies, Moody’s Investors Service said.

In a report titled, “Supply chain shifts and reshoring will have mixed impact on ASEAN region,” Moody’s said some Southeast Asian countries stand to gain from the diversification of trade as governments and companies want to lessen the risks of relying on a single manufacturing location such as China.

“We expect many governments and companies will reduce their dependence on China in global value chains moving forward, driven by the coronavirus outbreak, the China-US trade conflict, and heightened national concerns over economic security,” Deborah Tan, assistant vice president and analyst at Moody’s, said.

“While the technological capabilities of the ASEAN region still lag those of more advanced Asian economies, particularly in electronics, a general openness to foreign direct investment and lower production costs will offer some advantages,” she added.

At present, many companies are already adopting a “China+1” strategy by keeping their existing manufacturing operations in China to continue to have access to a large market, and at the same time operating a production facility in another location in Asia.

As this development is taking place, ASEAN is seeing an increase in market share in exports to the US, while China’s market share has been unchanged since 2015.

Last year, ASEAN’s market share rose to 7.5 percent from 6.2 percent in 2018, while China’s share declined to 16.3 percent in the previous year from 18.4 percent in 2018 amid escalating tensions between the US and China.

While the efforts of manufacturers to diversify their supply sources could be beneficial for ASEAN economies, Moody’s said they could also be negatively affected if reshoring becomes more pronounced.

“The likely shifts to global supply chains from moving closer to consumer markets and consolidating activities have the potential to fracture the global economy along regional lines, with competing supply chain blocs centered on China, the US, and Europe,” Moody’s said.

Reshoring is expected in industries with higher security concerns such as pharmaceuticals, medical technology and food.

Moody’s said there are three ways ASEAN economies can mitigate the negative impact of a reshoring trend.

One is by improving free trade agreements (FTAs) with advanced economies by providing additional incentives for multinational corporations to retain some of their productive capacity in the region.

At present, ASEAN has FTAs with major trading partners China, Japan, South Korea, Australia and New Zealand.

While most ASEAN countries do not have bilateral FTAs with the US and European Union except for Singapore and Vietnam which recently entered into an agreement with the EU, many Southeast Asian countries enjoy preferential access for certain goods to the two major markets.

Another way to mitigate the negative impact would be to deepen regional trade agreements through the Regional Comprehensive Economic Partnership (RCEP) or Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).