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Southeast Asia economy benefits from China vs. USA trade war

Southeast Asia benefits from trade war between China and USA

Southeast Asia’s economy is emerging as the winner of the trade war between the USA and China. Foreign direct investment (FDI) in the region is on the rise and more and more companies are considering withdrawing their production and supply chains from China.

Since July, US President Donald Trump has imposed fines on annual Chinese imports worth USD 250 billion to force Beijing to change China’s industrial policy. China has reacted with new tariffs on US exports worth USD 60 billion.

The increasing tensions between the two countries are now prompting many companies to relocate their production to other countries. A survey by the American Chamber of Commerce for South China found that 64 percent of companies surveyed are considering relocating their production and 72 percent are considering relocating their supply chains from China. Some companies are already implementing such plans.

Panasonic, for example, is relocating the production of automotive electronics from China to Thailand, Malaysia and Mexico. China’s GoerTek, which manufactures wireless headphones for Apple, has informed suppliers that it intends to relocate part of its production to Vietnam. Chinese polyester producer Zhejiang Hailide New Material is investing $155 million in a factory in Vietnam for US exports.

FDI in Southeast Asia on the rise

This is underpinned by rising FDI in Southeast Asia: compared to last year, FDI has increased by 18 percent to USD 73 billion, according to the recently published report of the United Nations Conference on Trade and Development. The biggest winner is Thailand, followed by the Philippines and Cambodia. Singapore also benefited from new investments and became the digital innovation centre of a number of multinational companies in the first half of the year.

Vietnam has also enjoyed an increase in foreign investment, especially in manufacturing. According to research by Maybank, Malaysia, FDI in manufacturing rose by 18 percent in the first nine months of 2018. This is mainly due to two projects by South Korean companies: Hyosung Corp. is investing USD 1.2 billion in a polypropylene production project and LG Innotek USD 500 million in its production facilities in the northern city of Hai Phong.

Minimum wages conquer Southeast Asia Economy

The main advantages of the Southeast Asian countries include their geographical proximity to important markets such as China and India on the one hand, and relatively low labour costs on the other. This makes them natural homes for foreign manufacturers wanting to relocate to Asia.

However, here, too, minimum wages are on the rise. This trend could slow down foreign investment again. In Cambodia, where the textile industry accounts for 60 percent of exports, the Japanese wig manufacturer Artnature recently sold a factory to a Hong Kong company — only three years after it was founded. Rising wage costs were a factor in the decision.

The Cambodian minimum monthly wage set by the government in 2018 is USD 170, 11.1 percent more than in the previous year and almost three times higher than in 2012. The government aims to raise the minimum wage to USD 250 per month by 2023. This would exceed the current wage floor in Malaysia, one of the most advanced economies in Southeast Asia. The minimum wage there has risen by 33 percent since May to around USD 3 per eight-hour working day.

Higher minimum wages do increase consumers’ purchasing power. Wage increases resulting in above-average economic and price growth can negatively impact the profits of companies operating in these countries and reduce their willingness to invest. In a survey of Japanese companies operating in Asia and Oceania conducted by the Japanese Foreign Trade Organization, 40 percent of respondents expected profits to fall in 2018 as a result of rising labour costs.