Does Southeast Asia have to choose between the security supplied by the US and trade with China? DBS Bank’s chief economist Taimur Baig shrugs off this zero-sum assumption.
“It’s great that the rest of the world is interested in Southeast Asia’s supply chain, and they all want to come and do business, but the region is not beholden to the rest of the world,” says Baig near the end of a rapid-fire, half-hour panel on Nov 17.
The region is “capital-rich” and “more insulated” today than it was in the 1990s, Baig adds at French sovereign wealth fund Bpifrance’s inaugural Asia forum. “You cannot think of Southeast Asia, in any stretch of imagination, as detached from China. But at the same time, you don’t have to worry about Southeast Asia being beholden to massive cycles of geopolitics and global macroeconomics.”
Was Baig puffing his chest next to fellow panellists Wang Dan — China director for New York-headquartered political risk consultancy Eurasia Group — and Cédomir Nestorovic — a professor at ESSEC Business school?
Perhaps. Nestorovic had proposed the dichotomy at the start of the panel, even offering ties with Europe as “an opportunity for Asean countries to foster this ‘non-choice’”. “The US and China are not the only countries in the world… Where is Europe in all that? I think there will be some room in order to manoeuvre.”
Asean certainly cannot stay neutral, says Wang, who left her Shanghai role as chief economist at Hang Seng Bank China at the start of the year.
She points to the US’s “declining” investment into “almost every Asean country”. At the same time, China is “improving its investment [and] trade with every single country.”
Wang says US-China competition is unlikely to stop “anytime soon” and “no one can de-risk from [t]his powerful neighbour”.
“That means Asean, Northeast Asia [and] Southeast Asia, their economies and investment are still highly dependent on China. Despite all those pressures from the US, the regional integration in Asia can only deepen over time.”
China’s ‘tech ascendancy’
While Baig acknowledges that China is attracting “a lot of willing partners”, he attributes this to the country’s genuine innovation and tech advancement, and not “coercive diplomacy”.
“The dialogue in the last 20 to 30 years was that China steals intellectual property, China copies Western designs, they deploy big scale to drive down costs, and that really hurts jobs and prosperity elsewhere in the world,” says Baig. “To me, that’s yesterday’s story. Tomorrow’s story is: If consequential technologies are coming from China that I want to consume, how much do I want to pay for licensing that? Or do I want to ignore that and try to make my own tech?”
China’s “tech ascendancy” is a “major force [that] would have taken place independent of the geopolitical situation”, he adds.
Putting on his economist hat, however, Baig says China’s rise means it cannot be everything to everyone any longer. “Would it now command the entire spectrum of the supply chain — low end and top end — and enjoy absolute advantage in everything? I think it defies the laws of economic gravity.”
This means another “China shock” is unlikely, according to Baig — as China moves up the value chain, it will “cede space” for low-income economies. “I think once your per capita income exceeds US$15,000 [around $19,000] and beyond, nobody wants to work in a garment factory. Even the return on capital from garments is very unattractive compared to other areas.”
Baig urges a more rational impression of China’s standing. “We seem to be so impressed with China. We think that: ‘Oh, they will just rule the world and take over every single supply chain.’ That’s just not the way economics works.”
Risk assessment
Chinese companies and foreign firms with operations in China are “speeding up” their industrial allocation to other regions as part of their “China-plus-n” strategy, says Wang.
Their choice of secondary site, however, is “all over the place”, spanning Latin America to the Middle East, she adds. “It’s really this new model that we haven’t seen before. When we talked about industrialisation before, it was driven by cost. Now, it’s driven by some sort of risk assessment.”
Wang says the world still “consistently underestimates” the strength of China’s supply chain. “China’s manufacturing value-add to the world is about one-third, but if we think about the operations owned by Chinese globally, it is more than half. Even if you’re not using things produced within the boundary of China, you’re using things produced outside of China owned by Chinese or supported by Chinese capital.”
Baig admits “this idea of decoupling, or putting the Chinese in a corner, is sort of futile”. “We can have all sorts of ways of trying to pin the Chinese down [with] export controls or trans-shipment tariffs — it is futile. There are Singaporean citizens who were born in China, educated in China, made their millions or billions in China, but they now are Singaporean citizens, and they have companies, deposits and know-how in Singapore — is that a Chinese business or a Singaporean business?”
He adds: “If a Chinese person has become a citizen of the United States, does that person become American or Chinese? It’s 1.4 billion people. They are important, consequential [and] the heart of the global fabric.”
