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International relations

ASEAN becomes China's top trade partner as supply chain evolves

Beijing turns to neighboring bloc as trade war disrupts access to US market

A port in Shenzhen, China: More Chinese businesses are setting up factories in Southeast Asia.   © Reuters

BEIJING -- Southeast Asia became China's largest trade partner in the January-June half as the trade war with the U.S. forces Beijing to recalibrate its global supply chain.

China's total imports and exports with the 10 member countries of the Association of Southeast Asian Nations increased 2% on the year to $297.8 billion, the country's custom agency said Tuesday. The bloc accounted for 14.7% of China's overall trade for the period, up from 14% in 2019.

The European Union, which was previously China's largest trade partner, saw total trade with China decrease 5% on the year to $284.1 billion, partly due to the U.K.'s exit from the bloc. Third-ranking U.S. suffered a 10% plunge amid deteriorating bilateral ties. The EU and the U.S. accounted for 14% and 11.5% of China's total trade for the first half, respectively.

China is rapidly building a new supply chain in Southeast Asia as the conflict with Washington shuts access to U.S. technology. China-based manufactures are also shifting production to the region to avoid the import tariffs the U.S. imposed on Chinese-produced goods. 

"China maintains close relations countries like Vietnam, Malaysia and Singapore, which are part of the global supply chain for the electronics industry," customs spokesperson Li Kuiwen told reporters Tuesday.

Semiconductors have been a major contributor to their growing trade relationship, with shipments from ASEAN to China increasing 24% and those from China to ASEAN increasing 29% in yuan terms on the year.

Although the U.S. is cracking down on chip deliveries to China, due to deteriorating ties and their growing rivalry in the tech sector, many shipments are still making its way to China through Southeast Asia.

Trade was also buoyed by Chinese companies setting up production hubs in ASEAN countries to circumvent U.S. tariffs on Chinese exports. Many of these plants assemble products using components shipped from China.

Vietnam approved $3 billion of new direct investment from mainland China in 2019, up 75% from the year before, according to Vietnam's Foreign Investment Agency. This made the mainland the third-largest foreign investor in Vietnam.

Chinese investment slowed by 30% on the year in the first half of the year, but is still more than double what Japan invested in Vietnam. China's total trade with Vietnam increased 14% on the year between January and June, the largest increase of any major trade partner.

China and ASEAN enacted an updated free trade agreement in October. The revised deal "lowered the hurdle on rules of origin, currency, services, investments and other fields, doubling down on the advantages of a free trade agreement," Li said.

In an attempt to counter U.S. clout, the Chinese government has promoted trade with ASEAN and other participants in its Belt and Road infrastructure initiative. Belt and Road participants accounted for a larger percentage of China's total trade between January and June.

The U.S. and China signed a phase one trade deal six months ago, which set the goal of increasing U.S. exports to China by $63.9 billion between 2017 and 2020. Under this plan, U.S. exports to China were expected to increase to about $110 billion in the January-June period, but the actual figure was just $56.4 billion. Shipments of soy beans and other agricultural products, which U.S. President Donald Trump considers a priority, have been slow to grow.

In terms of a "phase two" deal, "I don't think about it now," Trump said Friday. There is concern the U.S. could once again harden its attitude on trade with China, through additional tariffs.

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