Risk looms in Southeast Asian economies amid industrial transfer from trade war

Source:Global Times Published: 2019/6/13 21:03:40

Illustration: Luo Xuan/GT

Due to China's dwindling demographic dividend, rising production costs, and environmental protection pressure, many Chinese and foreign-invested companies in recent years have relocated their Chinese factories to Southeast Asia, where labor costs are lower. The intensified US-China trade frictions and deteriorating global trade environment have driven even more companies to move to Southeast Asian countries. However, the business environment in Southeast Asia is not as good as imagined, and industrial transfer doesn't mean that China has lost its competitiveness in the world manufacturing sector.

For instance, media reports indicate that the Cambodian garment manufacturing industry has seen a wave of shutdowns recently, for a number of reasons. First among them is an increase in labor costs. The minimum wage of Cambodian workers has jumped from $40 per month in 1997 to $182 per month this year. If various benefits and subsidies are included, the cost is up to $210 per month. By comparison, Bangladesh, Sri Lanka, India, Myanmar, Pakistan, and Laos all offer even lower labor costs for the garment industry. Another reason is Cambodia's incomplete supply chain. At present, the country's infrastructure and support facilities for industrial manufacturing are relatively weak, leading to relatively high overall costs. A third reason is low efficiency. According to some industry analysts, the productivity of Vietnam and Indonesian factories is about 80 percent of Chinese factories, while the productivity of Cambodian garment factories is only about 60 percent of China's. Additionally, workers' strikes and protests have increased difficulties for business operations, and there is uncertainty as to whether Cambodia's export price advantage will persist in the future. It is possible some garment companies will move out of Cambodia amid concerns over the possible suspension of EU trade preferences for the country.

Compared with Cambodia, countries like Vietnam and Malaysia may benefit more from the US-China trade war due to manufacturing transfer. According to a recent Nomura research report, the import substitution effect has been seen in 52 percent of tariffed goods during the US-China tariff war. Vietnam is regarded as the biggest beneficiary and could see a 7.9 percent increase in its GDP. This has prompted many to start planning investment in Southeast Asia so as to avoid risk from the trade war. Yet, these small Southeast Asian economies, represented by Vietnam, are currently facing both opportunities and challenges, which may lead to greater risks if not handled properly.

Take Vietnam as an example. The country may soon face the risk of rising costs. As an export-oriented economy, mass exports will lower the prices of exported goods, while mass imports will push up the prices of imported goods, thus contributing to the imported inflation. Workers will demand higher wages due to the inflation, and the Vietnam government will probably support the demand for political reasons. Thus, the rapidly rising costs and imported inflation will likely be out of the government's control. And that's an inherent drawback of small economies that cannot be circumvented through one or two policy adjustments. The shallow domestic market "pond" has a relatively small population, thus wages will rise quickly and the costs will soon catch up with China's. At that time, these economies will lose their most important advantage in undertaking China's industrial transfer.

It is also worth noting that the Vietnamese economy has been growing rapidly in recent years. But the rapid growth rate has also seen the country enter rapid urbanization, leading to a shift of wealth created in the manufacturing sector to the real estate sector. Following this trend, Vietnam will soon face a development bottleneck.

All in all, Vietnam and other small Southeast Asian economies may benefit in the short term from the industrial chain restructuring and manufacturing transfer driven by the trade war, but due to their small economic scale, their limited market capacity will soon be overwhelmed by foreign investment in export-oriented processing and urbanization. Then, the rapid increase in costs and asset prices will lead to various problems like rising inflation and soaring housing prices.

In addition, while a large number of companies left China due to costs, it doesn't mean China has completely lost its industrial advantages. China is undergoing economic restructuring, and its comprehensive industrial competitiveness and market space are incomparable to those Southeast Asian countries once it gets through the difficult stage. It should also be pointed out that in a world of excess production, the manufacturing capacity formed as a result of industrial transfer from China to Southeast Asian countries will make global overcapacity even more serious, which may trigger a new global economic crisis. These small economies will be hit harder once such a crisis breaks out.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound. bizopinion@globaltimes.com.cn


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