This article was first published as an op-ed in Nikkei Asia on October 5, 2023.


Region’s economies should seek alignment with emerging Chinese sectors

In the wake of the U.S.-China trade conflict and the COVID-19 pandemic, there has been a notable shift in rhetoric toward supply chain independence and security.

The strong push to “home shore” offshore manufacturing from China back to domestic locations, or to move it to nearby politically aligned nations as “friend-shoring” has challenged China’s position as the leading global exporter.

China’s ascendance in world trade began slowing after 2015, with its share of global exports moderating over the following three years amid a general trade slowdown. But China’s export share surged dramatically in 2020 when its resilient supply chains held up better during the COVID-19 pandemic than those of other nations.

China’s downward trend resumed last year. But the loss of global market share has been primarily focused on labor-intensive sectors that account for around 26% of the country’s total exports.

Leading the way downward, China’s textile and footwear sectors have seen their global market share fall to 29% as of 2022, down from 39.3% in 2015. EU nations, and to a lesser extent, those of ASEAN, have taken market share from China in these sectors.

At the country level, Vietnam appears to have benefited the most in absolute terms from the rearrangement of global export markets, especially in relation to its comparatively small export scale and economic size.

Unlike textiles and footwear, most Chinese industries are still progressively gaining global market share, particularly in high-skill, technology-intensive sectors. In these ascendant sectors, which include machinery and electrical products, China’s share had risen to 28.5% as of last year, from 17.9% in 2015.

Correspondingly, in these sectors, many EU and ASEAN countries are losing market share. Vietnam, though, stands as a notable exception, experiencing modest gains in tandem with China. And despite their loss of market share, EU and ASEAN exports in these areas have continued to grow substantially, thanks to the overall expansion of the world market for such goods.

China’s loss of global market share in labor-intensive sectors reflects natural economic evolution. The shift to higher value-added and technology-intensive sectors is in line with the country’s economic development strategy and policy direction, as seen in policies fostering industrial upgrades and transfers.

China has thus amassed capital, skilled labor and technology to enable its transition into advanced industries. This transformation is not just having a positive impact on the country’s domestic economic growth, but also having spillover effects for other regional states.

Among ASEAN members, Vietnam has so far been the primary beneficiary. In addition to capturing a significant portion of the market share shed by China’s declining export sectors, Vietnam has also aligned itself well with China’s emerging sectors.

Revealed comparative advantage analysis by the ASEAN+3 Macroeconomic Research Office shows that the economies of Vietnam and China have similarities in terms of manufacturing structure. Consequently, Vietnam has potential to continue to step in to replace Chinese exports on the decline due to rising tariffs and other trade barriers.

Vietnam, though, is still in the early stages of accumulating the necessary capacity and resources to support and complement China’s advances in innovative high-tech sectors. Encouragingly, Chinese investments in Vietnam are on the rise and shifting toward advanced sectors such as electronics, semiconductors and storage batteries.

However, as Vietnam continues to integrate its production with China’s, its growing export sector will make it more susceptible to external shocks. Hanoi must therefore strengthen the resilience of its supply chains to safeguard against potential disruptions.

Aside from Vietnam, other ASEAN economies have captured smaller market-share gains in China’s declining sectors than EU economies, despite apparently well-matched comparative advantages. This outcome confounds expectations that ASEAN would benefit substantially from China’s export losses from geopolitical tensions and supply chain reconfiguration.

ASEAN exports are rising in China’s expanding sectors, but market share gains have been limited. Considering the region’s deep economic ties with China, ASEAN should have ample potential to benefit from such shifts in the global trade landscape.

To better realize the region’s potential, ASEAN governments should consider implementing supportive policies to nurture new industries to drive future export growth and train workers in skills that will complement China’s industrial evolution. At the same time, diversifying export markets would offer increased resilience.

Policies such as promoting research and development, supporting startups in high-technology industries and providing vocational training would be conducive to the emergence and growth of new industries in ASEAN economies. This, in turn, would facilitate integration into evolving supply chains, particularly as China undergoes its industrial upgrade.

Ultimately, ASEAN economies will need to strike a balance between reliance on China-centered trade and expanding their networks of trading partners. By diversifying their export markets and import sources, they can also enhance the resilience of their supply chains.