Asean can be key player as companies flee China, say economists

Economists say recent trade spats and punitive tariffs in China have made investing in Asean more attractive to multinational corporations. (Bernama pic)

PETALING JAYA: Economists from around Southeast Asia believe that Asean can be an important strategic player as companies look at moving their manufacturing activities away from China.

They said if they decided to come to the region, it would help speed up its economic recovery.

The “China Plus One” strategy, which involves diversifying a company’s manufacturing activities to avoid relying totally on China, has long existed, but recent trade spats and punitive tariffs there have made investing in Asean more attractive to multinational corporations (MNCs).

In a paper by the Institute for Democracy and Economic Affairs (IDEAS), they said Asean’s comparatively low wages, geographic proximity and strong trade ties with China could attract MNCs to move part or all of their manufacturing activities to Asean as they seek an alternative hub.

This would allow them to avoid paying tariff costs and give them an insurance policy against further issues in China, should production there become difficult.

Jayant Menon, a visiting senior fellow at Singapore’s ISEAS-Yusof Ishak Institute, said because tariffs had become so damaging in recent months, calculations showed that it might be cheaper to relocate operations to Asean than continue sole production in China.

“The tariff rate is misleading as it underestimates the true impact on relocation,” he said.

“A small tariff can have a big impact on relocating activities out of China.

“If you look at a tariff of 25%, then as long as the costs of moving the (manufacturing) activities out of China to, say Malaysia, don’t rise 81%, then it makes sense to move those activities to Malaysia.”

Jayant said Asean members should “come together to set a common set of standards” to avoid a “race to the bottom” as countries competed for MNC investment by undercutting each other and loosening regulations.

Upalat Korwatanasakul, assistant professor at Waseda University’s School of Social Sciences, agreed that standardisation was important as cooperation among Asean members would lead to regional gains.

“Even though these gains will not be distributed equally, the relocation will benefit Asean as a whole,” he said.

He predicted a spillover effect that would benefit economies of countries that might not attract as much overseas investment, such as higher employment rates and improved wages for lower skilled workers.

Upalat said even with foreign investment, Asean countries needed to continue innovating to maximise the gains brought on by the relocation.

“These opportunities do not guarantee upgrading,” he said, adding that government policy, local investment and the skill level of employees must work in tandem with foreign investments.