The trade war between US and China is forcing high-tech companies to lower their reliance on China
First, it was the US-China Trade War triggered by President Donald Trump in 2018 by imposing tariffs and other trade barriers on China to force it to change its unfair trade practices and intellectual property thefts. Then came the Covid pandemic that severely disrupted the global supply chain of which China was the most important link, and ever since the Western multinationals which have created huge manufacturing bases in China taking advantage of its infrastructure and cheap labour have been trying to relocate their factories away from China, benefiting other emerging economies of Asia.
China is a global manufacturing hub for multinational companies, especially for consumer electronics. exported electronic goods worth $1trn in 2021, out of a global total of $3.3trn. But foreign companies have now started to look beyond China. The ongoing trade war between US and China is also forcing high-tech companies dependent on the use of semiconductors to rethink their reliance on China. Between 2020 and 2022 the number of Japanese companies operating in China fell from around 13,600 to 12,700. Sony is moving its production of cameras from China to Thailand, Taiwan’s Foxconn, Pegatron and Wistron, which assemble gadgets for Apple, are planning to shift their bases to India; Samsung has already slashed its Chinese workforce by more than two-thirds since a peak in 2013. Dellis is also reported to be planning to stop using Chinese-made chips by 2024. Google is shifting the outsourced production of its newest Pixel smartphones from China to Vietnam. Asian economies stand to benefit hugely from these shifts; for example, the share of iPhones made in India is expected to increase from around 5 per cent in 2021 to almost 25 per cent in 2025.
But despite all these shifts, the Chinese economy remains too strong and too large to be replaced by a single or a couple of Asian economies. That is why The Economist magazine has come up with a term called ALTASIA, a network of 14 economies stretching in a crescent from Hokkaido in northern Japan, through South Korea, Taiwan, Philippines, Indonesia, Singapore, Brunei, Malaysia, Cambodia, Thailand, Laos, Vietnam, and Bangladesh, all the way to Gujarat can together counter and even outmatch China’s economic and manufacturing strengths. Altasian economies have distinct strengths, from Japan’s high skills and deep pockets to India’s low wages and are in a position – if they can work together – to present themselves as a very viable and reliable alternative to China leveraging their comparative advantages, so that some countries can manufacture sophisticated components while others can assemble them into finished gadgets. This has the potential of changing the geopolitical and geoeconomic equations between the existing global order dominated by China and the US. The Chinese mouthpiece Global Times dismisses it as a “far-fetched idea” that makes no economic sense: “any talks about replacing China's manufacturing sector is political rhetoric”, but in so reacting, it also recognises the underlying risk.
The numbers are convincing enough for an alternative Asian supply chain to look viable, as it has got many distinct advantages over China as well. Altasia's Collective labour force of 1.4bn, of which 155m have a college education dwarfs China’s 950m with 145m with a college education. In contrast to a fast-ageing China, the Altasian population is poised to expand yet for quite some time. They also enjoy a wage advantage over China; hourly manufacturing wages in India, Malaysia, the Philippines, Thailand and Vietnam are below $3, compared to China’s $8.31. The region is already an export powerhouse: its members sold $ 634bn worth of merchandise to America in the 12 months till September 2022, as compared to China’s $614bn. A model for the Atlassian economy also already exists - Japanese companies have been engaged in building supply chains in South-East Asia for decades, and even its neighbour, South Korea, has done so. In 2020, South Korean firms’ total direct investments in ASEAN that include Brunei, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, Vietnam and politically unstable Myanmar, as well as in Bangladesh reached $96bn, exceeding its investments in China, unlike a decade ago when their investments in China were nearly twice as large as in Altasia.
Atlassian countries have attained substantial economic integration. India could not join the Regional Comprehensive Economic Partnership (RCEP) due to its limitations, but all other Aaltasian countries save Bangladesh and Taiwan are already members, as is China. RCEP has created a single market in intermediate products, easing regulatory barriers to complexsupply chains that run through several countries. Most Atlassian countries are also members of the Indo-Pacific Economic Framework, an American initiative.
Five of them - Brunei, Japan, Malaysia, Singapore and Vietnam - belong to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is a reincarnation of the earlier Trans-Pacific Partnership (TPP) from which the US under President Trump had pulled out in 2017.ASEAN has a free trade agreement with India (AIFTA), and a Comprehensive Economic Partnership with Japan. Atlassian countries also enjoy formidable trading heft, being the centre of global production of much sought-after, and also geopolitically fraught, semiconductors. Malaysia already exports around 10 per cent of the world’s chips by value, more than the USA. ASEAN countries account for more than a quarter of global exports of integrated circuits, easily surpassing China’s 18 per cent. Qualcomm opened its first research-and-development centre in Vietnam in 2020 and its revenues from Vietnamese chip factories tripled between 2020 and 2022.
But then there are many hurdles too. Not all the Atlassian countries are evenly poised in terms of infrastructure and manufacturing efficiency to replace China overnight. The World Bank’s latest logistics-performance index (2018), which measures countries' efficiency in areas like customs, transport infrastructure and logistics regulation, shows a wide range of variations from 2.58 out of a total of 5 for Bangladesh and Cambodia to 4.03 for Japan and 4 for Singapore (China is ranked 27th with a score of 3.61 and India 44th with a score of 3.18). It will be difficult for such diverse economies to work as a single entity like China. Altasia’s future also hinges on India with its huge market, but India itself has to overcome several formidable roadblocks for better integration. From the Free Trade area to Customs Union to Common Market to the Economic and Monetary Union is a long way. It has taken almost 50 years for Europe since 1950 to forge an Economic and Monetary Union with a single currency. But given the current geopolitical realities and the urgency facing the world, it may not take as much time today if the countries can harness their strengths and overcome their weaknesses displaying purpose, determination and willingness to accommodate the disadvantaged countries.
(The author is a former Director General at the Office of the CAG of India and is currently a professor at the Arun Jaitley National Institute of Financial Management)
