No economy can escape the fallout from the tussle between the U.S. and China over trade, currency management and the role of government in economic growth. But Southeast Asia could ultimately gain more than it loses.
As a growing region of 650 million people with a combined gross domestic product approaching $3 trillion, Southeast Asia has provided the heft for what has come to be viewed as "Factory Asia" -- a network of low-cost production bases that produce parts and components for consumer goods exports.
Recently, however, there has been a rise in investment flows within the region from indigenous companies expanding their activities in neighboring countries, marking an important shift toward what could be called "Market Asia."
This could be a significant development for Southeast Asia -- but only if regional governments act quickly to adapt policies and programs to support the trend.
Since the late 1980s, abundant and cheap labor combined with export-driven, investment-friendly government policies has attracted substantial sums from multinational companies in advanced economies to set up manufacturing and export platforms in the region.
By 2017, the 10-member Association of Southeast Asian Nations ranked as the fourth largest exporting region in the world, accounting for 7% of global exports, ranging from consumer goods such as sports shoes to intermediate products such as hard disk drives and semiconductors.
Leading multinationals like Nike, Adidas, Western Digital and Toshiba list the region among their most important manufacturing hubs.
Naturally, the rise of China has overshadowed Southeast Asia's role. Since 2011, China has been the world's number one manufacturing exporter, edging out the U.S., which had led the field since 1980, according to the Asian Development Bank. No country or region can match that performance easily.
Even so, the U.S.-China trade war, along with China's rising costs and its increasing orientation toward the domestic economy, has turned the spotlight back to Southeast Asia.
The imposition of U.S. tariffs on Chinese-made goods and components forces China-based multinationals and Chinese companies to rethink their supply chain location strategy. Keeping factories open in China remains necessary to serve domestic demand, but supplying U.S.-bound goods from China is becoming costlier.
Southeast Asia is an attractive alternative because of its proximity to China, its relatively reasonable costs and its growing economy.
A 2019 survey of members of the American Chamber of Commerce in China found that approximately 40% had relocated manufacturing facilities outside China or were considering doing so. Among those 40% that were moving or had moved, Southeast Asia came top as the alternative location, with nearly 25% of respondents indicating a preference for the region.
Supply chain relocation aside, rising intraregional investment flows reflect corporate attempts to pursue market opportunities nearer to home. In just two decades following the 1997 Asian financial crisis, intraregional investment grew by 22 times -- from $1.2 billion in 2000 to almost $27 billion in 2017.
In this way it became the most important source of foreign direct investment, accounting for almost 20% of total flows into the region, according to a joint report by the ASEAN Secretariat and the United Nations Conference on Trade and Development. This trend is a compelling testimony to the region's transformation from "Factory Asia" to "Market Asia."
Intraregional investment flows extend beyond traditional manufacturing sectors such as electronics and food and beverages to a wide variety of services, including real estate, finance, wholesale and retail.
Familiar names include large family-owned conglomerates, such as Thailand's Charoen Pokphand Group, Indonesia's Lippo Group and Ayala Group of the Philippines. Among other leading regional multinationals are state-owned or government-linked companies such as PTT in Thailand, Sime Darby in Malaysia and Singtel in Singapore.
The regionalization of trade and investment activities among Southeast Asian companies helps to buffer the strains caused by intensifying rivalries between the economic superpowers.
But positive gains are not automatic. Regional governments need to come up with policies that address and accommodate the opportunities and challenges of this dynamism. A more demanding landscape is emerging in which neighboring countries will be competitors as well as partners.
Understanding where each country stands in the stages of regional value chains would be a good start. For example, basic manufacturing investment has different attractions from those of higher value-added activities, and thus policies need to respond differently.
An emphasis on cost-based advantages such as tax exemptions in special economic zones may be more attractive for those wishing to relocate low-cost manufacturing.
To enable the region to fulfill its potential, Southeast Asian policymakers must look to a future in which innovation, specialized supply chains and strong institutions that protect intellectual property rights and guarantee fair competition become the most important aspects of the national competitiveness agenda.
Pavida Pananond is Associate Professor of International Business at Thammasat Business School, Thammasat University, Bangkok.