How do ASEAN countries benefit from the trade war?

BY WANG XIAOZHU

 

The trade war between Beijing and Washington is pushing more firms, most of which manufacturers, move to the ASEAN countries to avoid additional tariffs charged by the US.

These include not just Chinese firms, but also international companies that seek to move their plants from China to southeast Asia.

Analysts say the trend is set to impact on China’s export in the short run, but will accelerate the transfer of China’s industrial capacity to the much needed ASEAN countries, which will be a good thing in the long run.

They also point out the ASEAN has the potential to be China’s most important partner in the future.

Zhao Minqian, Senior Sales, Marketing and Customer Service Manager with Cambodia’s Phnom Penh Special Econonic Zone, said the PPSEZ has seen surging numbers of business visitors from China, including mostly labour-intensive manufactors from the Chinese mainland, Hong Kong and Taiwan, as well as those Japanese companies which had China as their long time production base.

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“The trade war is an important occassion for firms to consider the move to the ASEAN,” Zhao said, adding firms could avoid additional tarriff if their products turned from “made in China” to “made in Cambodia”.

Goods made in Cambodia may even enjoy duty-free entry to the US markets.

The restoration of US’s Generalized System of Preferences programme became effective in this April, renewing access to duty-free privileges for Cambodian exporters.

Cambodia is one of 120 nations included in the US’s GSP programme, which was established in 1974 with the aim of promoting economic growth in the developing world.

Chinese firms now account for 22 percent of the PPSEZ’s total 90 corporate inhabitants from all over the world, said Zhao, who also confirmed the zone’s intention to attract more investment from China in the future.

China is now the biggest foreign investor in Cambodia. Last year, it pumped in $1.644 billion officially, according to Nikkei Asian Review.

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China estimates the total construction contracts signed by the end of 2017 were worth $17.54 billion in a country where nominal GDP is just over $20 billion.

The ASEAN region, which comprises of ten countries, has received 56 percent of China’s total investment in the Belt and Road region, according to the Chinese Ministry of Commerce.

China’s investment in the B&R region grew by 8.9 percent in 2017, though the country’s total outbound investment registered a “major drop”.

China’s investment in the ASEAN totalled $81.86 billion as of the end of 2017.

 

‘Cannot sleep at night’

A growing number of small Chinese firms are in the process of deciding whether to close up shop or move to another country with lower costs that is not part of the trade war, as the South China Morning Post reported recently.

Small businesses in Guangdong are already seeing a sharp drop in orders, even as costs are rising to unbearable levels.

James Zhang, 45, runs a company making and selling electrical cables to domestic and foreign clients in the southeast coastal economic hub of Shenzhen. He said orders had declined sharply since the trade war started in July and he expected a further 30 per cent decline next year.

“Clients are dumping me. Some of them demanded that I absorb part of the additional cost of the tariff imposed by the US government, which I cannot afford. Some have already shifted their procurement to competitors based in Vietnam or India,” he said last week at his factory.

Manufacturing Of ZTE Corp. Products And Views Inside The Company's Headquarters
An employee monitors machinery used to adhere components to smartphone circuit boards in a manufacturing facility at ZTE Corp.’s headquarters in Shenzhen. Photographer: Brent Lewin/Bloomberg via Getty Images

Last year, his company earned a net profit of around 10 million yuan (US$1.5 million) based on 220 million yuan in revenue. But Zhang said it would be difficult for him to break even this year.

The products made by Zhang’s company are on the list of $16 billion of Chinese imports on which US President Donald Trump’s administration imposed a 25 per cent tariff from August 23.

So for a USB cable made by the firm that sells for around 0.8 yuan, a 25 per cent tariff would add 0.2 yuan to the cost – and a US importer would have to make up the extra if Zhang wants to keep his price steady. Zhang’s clients have urged him to cover 40 percent of the additional cost, or around 0.08 yuan per cable.

But Zhang says he only makes a 5 percent profit, or about 0.04 yuan per cable. If he were to absorb 40 percent of the tariff cost, he would take a loss on every cable he sold.

“I cannot sleep at night. There seems no way that I’ll be able to make it this time. The only option for now is to give up everything here and start again with a new factory in Vietnam – some friends and clients have already moved there in the last few years,” he said.

Some of Zhang’s clients have already moved their operations outside China to lower their costs.

South Korea’s Samsung Electronics, for instance, is cutting its smartphone production in China, while at the same time strengthening its production lines in Vietnam and India, targeting rising demand in these fast-growing markets as well as making them production bases for exports to the global market, Nikkei Asian Review reported early last month.

 

The writer is a foreign affairs analyst

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2 thoughts on “How do ASEAN countries benefit from the trade war?

  1. China’s belt and Road initiative is exactly the plan that can help in shifting industries. Sad that many get hurt. The US citizens and the US government will be hurt more in the long run. Meanwhile China’s plan is opening new markets for moving industries.

    Liked by 1 person

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