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Global value chains: risk mitigation to reduce dependence on China

Risk mitigation will lead to reduced dependence on China in global value chains, and diversification will benefit ASEAN, but localisation of production will have negative effects for ASEAN producers

Boris Sullivan

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Moody’s Investors Service says in a new report that shifting supply chains as countries reconfigure trade relationships following the coronavirus crisis will have mixed credit implications for the Association of Southeast Asian Nations (ASEAN).

  • Risk mitigation will lead to reduced dependence on China in global value chains
  • Diversification will benefit ASEAN, but localisation of production will have negative effects for ASEAN producers

Specifically, trade diversification is likely to favour ASEAN economies over time, while the reshoring of supply chains closer to consumer markets – especially in sectors with heightened security requirements such as pharmaceuticals – could move productive capacity away.

“We expect many governments and companies will reduce their dependence on China in global value chains moving forward, driven by the coronavirus outbreak, the China-US trade conflict, and heightened national concerns over economic security,”

Deborah Tan, a Moody’s Assistant Vice President and Analyst

“While the technological capabilities of the ASEAN region still lag those of more advanced Asian economies, particularly in electronics, a general openness to foreign direct investment and lower production costs will offer some advantages,” adds Tan.

Recent events will accelerate the offshoring of activities to ASEAN at the expense of trade with China, although an exodus of foreign companies from the Chinese markets is unlikely even as companies step up efforts to mitigate risks.

While the ASEAN economies stand to benefit from the efforts of producers to diversify their sources of supply, they will be negatively affected if reshoring trends become more pronounced.

Yet, there are three ways in which the ASEAN economies might mitigate the impact of a possible reshoring trend and the associated fragmentation of the global trading system: (1) enhancing free trade agreements with advanced economies, (2) deepening regional trade agreements, and (3) developing ASEAN further as a trading bloc in its own right. However, for the latter, ASEAN will first need to address structural challenges to harness the bloc’s full potential.

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