US Investment in Southeast Asia and Decoupling From China
Published: 18/09/20
The United States must find an alternative to China for its high-tech production supply chains. Concerns about intellectual property (IP) theft by Chinese companies have plagued the U.S. business and policymaking communities for the past decade.
These unfair practices have had significant impact on U.S. advanced technology companies that depend heavily on thousands of Chinese business partners who play a critical role in their global supply chains. Recent bilateral political tensions and trade conflict, and disruptions due to the COVID-19 pandemic, have underscored the dangers of U.S. over-dependence.
However, China’s large pool of skilled labor, huge domestic market, efficient logistical infrastructure and other advantages continue to draw and maintain U.S. investment interest. High-tech supply chains have shifted somewhat in the past decade as Chinese wages have risen and as a consequence of the recent trade conflict, but American companies have yet to relocate existing production bases in significant volume.
The Supply Chain in China, the U.S., and ASEAN
The U.S high-tech sector is a critical element to both economic and military strength and stability. Semiconductors, in particular, are the backbone of the U.S. high-tech industry. Many successful U.S. high-tech companies produce their semiconductors in China, leaving their supply chains vulnerable to IP theft, disruptions caused by a lack of diversification, and overreliance on one country.
Diversification away from extreme reliance on China is an obvious necessity for the United States’ future economic health and hard security, but it will be difficult for other countries to replicate Chinese efficiency and quality without significantly more investment in infrastructure and training. The 10-country Association of Southeast Asian Nations (ASEAN), with a combined population of some 650 million, is collectively the world’s fifth largest economy and is home to a number of potential new supply chain bases.
Vietnam, for example, was the fastest growing ASEAN economy prior to COVID-19. It has low labor costs and has been investing heavily in economic infrastructure such as highways, ports, and electrical supply. Labor in Vietnam costs about half as much as it does in China and is advancing in skill and efficiency. With a growing youth consumer base, Vietnam also offers an eager market for high-tech consumer goods. Plus, Vietnam has emerged in recent years as a quasi-security partner for the United States, making it an attractive trade and investment partner and partial supply chain alternative to China.
Vietnam and other large ASEAN countries including Malaysia, Thailand, Indonesia, and the Philippines, have long received significant U.S. private investment but still lack the capacity to fully accommodate the relocation of U.S. companies long based in China. A complete transition would take decades, and likely never fully occur. But more investment in Southeast Asia could speed up a shift in manufacturing, fabrication, and assembly locations. Foreign investments in education and training would support increased efficiency and worker skills, and negotiations with ASEAN and its member states to decrease political and economic barriers to foreign investment would encourage U.S. businesses to move more supply chain operations into Southeast Asia.
What Should the U.S. Government Do?
No single policy is going to completely eliminate the commercial and security risks inherent in a China-dominated supply chain. However, a full-blown “America First” policy is not viable. Although the idea of returning key industries completely to the United States would be highly welcome, in reality businesses will continue to make decisions based on maximizing profits, efficiency, and serving foreign markets. The U.S. labor market cannot match Chinese prices, and will never be a perfect alternative. Recently some businesses have set up small footprints in the United States in an attempt to appease policymakers, but the past four years have not seen any largescale movements of real production to the U.S.
A “China Plus One” strategy of investing both in China and one or more countries in Southeast Asia is the most practical approach to safeguarding U.S. national interests. Developing Southeast Asian nations’ supply chain capacity would empower U.S. companies to select partners based on needs and abilities without solely relying on China. Providing aid and expertise to Southeast Asian nations and businesses also ensures the United States maintains its soft power, and political relationships with partners there, which can encourage stronger security cooperation as well.
This strategy also takes into account the size and sophistication of the Chinese market. ASEAN is unlikely to be able to replace China completely within the next few decades. However, by establishing a reliable alternative in Southeast Asia, the United States can negotiate with Chinese firms and the government to better protect IP and ensure good business practices. Both options provide the U.S. with the ability to reassert itself against China on both the security and economic fronts.
Source: thediplomat.com
