ASEAN - Beneficiary of trade tensions

Citi analysts believe that ASEAN could be a key beneficiary of trade diversion and supply chain reconfiguration away from China to circumvent rising US tariffs. In particular, Vietnam, Malaysia, Thailand and to a lesser extent Philippines were assessed to benefit most, on the basis of a similarity of their export products vis-à-vis China, and strong production cost competitiveness vis-à-vis China.

The southward migration of regional supply chains from China to ASEAN started 2010-2011 shortly after the Global Financial Crisis (GFC) as Foreign Direct Investment (FDI) into ASEAN began catching up with China, after lagging behind for nearly a decade.

US-China trade tensions may accelerate the trend benefitting ASEAN, in industries likely broadening beyond labour-intensive and heavy industries, to include more automated and tech-intensive sectors which in China, would be impacted by US technology restrictions.

Trade frictions between Japan and US in the 1980s is a good example, as Japanese firms increased direct investment into East Asia to also build “export platforms” for the US market. More recently, US tariffs on China-made solar panels and washing machines prompted a shift in production to Malaysia and Vietnam.

With China’s exports to the US of the affected items three times larger than ASEAN’s, even if a small fraction of China’s exports are diverted, the impact on GDP growth for ASEAN could be meaningful.

For example, Citi’s calculations suggest that if just 10% of China’s affected exports are diverted to production bases in Asia, the boost to GDP growth could be in the order of 0.5-0.6% pts in Vietnam and Philippines, and close to 0.4% pts for Malaysia.