What Does The 'ill Wind' Of US-China Trade War Mean For South-East Asia?

When tensions initially escalated, most manufacturers thought the two sides would find common ground and higher tariffs would never be imposed.

Then, as the first 10% actually hit, panic set in and companies scrambled to re-route products, or strike deals with customers and distributors to split the hit between them and leave end-consumers least impacted. Few believed the shift to 25% tariff increases would ever really materialise, but when January came with no resolution, manufacturers based in China began to act.

Trade, tariffs and tax: Is China still a viable investment option?

The trend to relocate from China had already been underway for some time. Beijing's Made in China 2025 policy had been trying to shift the country's manufacturers up the value chain by raising wages and lessening tax breaks for low-end products.

Many companies were also becoming ever more uncomfortable with the degree of surveillance to which they and their staff are now subjected. So, when the need arose to have anything but ‘Made in China' on their labels, companies began to act, increasing their existing overseas capacity - though this may have backfired for some with bases in Mexico - or leaving entirely.

As companies flee China, it is the countries that make up the Association of Southeast Asian Nations (ASEAN) who are proving the largest beneficiaries. Producers of low-end goods are seeking out Vietnam, Myanmar, Indonesia, Laos and Cambodia, whilst those focused on higher-value products are moving to Malaysia and Thailand.

The benefits are not only an avoidance of the negative impacts of US-China trade tensions. By moving into ASEAN, Chinese companies regain the ability to export to countries like Korea and India, which, to avoid dumping, restrict the inflow of Chinese goods.

Indonesia and Vietnam

In Indonesia, industrial estate management company Puradelta Lestari has seen enquiries from Chinese customers rise 150% this year over 2018 numbers. Meanwhile in Vietnam, the number of new foreign direct investment projects reported by the General Statistical Office of Vietnam rose 82% year on year in May 2019, after rises in January, February and March of 147%, 93% and 80% respectively (there is no data for April).

The bigger picture beyond China's slowdown

We have spent a considerable amount of time trying to disentangle this apparent exodus from China from other underlying industry trends, talking to companies not only in the recipient countries, but also other foreign businesses with facilities in China, who are relocating.

We have also looked closely at the data. Despite the surge in foreign investment projects in Vietnam, the data shows Japanese and Korean investment in the country has actually fallen by 27% and 28% respectively year-to-date, year on year, and this is in line with that of other nations. On that basis, we are confident the surge in foreign investment is primarily driven by Chinese relocation.