Developed Western and East Asian economies are not the only countries dealing with the deleterious second-order consequences from China’s overcapacity affliction. The manufacturing sectors of Association of Southeast Asian Nations (ASEAN) countries are also grappling with intense pressures. This is an especially politically acute problem given that in most ASEAN countries, manufacturing still accounts for more than 20 per cent of GDP.
Although every manufacturing sub-sector has its idiosyncratic factors, there are common underlying structural forces that are impelling China Inc’s export machine. The collapse of China’s property sector has reduced associated demand for goods such as steel. It has also put downwards pressure on already parsimonious household consumption, given property’s relatively outsized role as a reserve of Chinese household wealth.
Beijing’s response has been to prioritise the so-called “real economy” and marshal low-cost capital into the manufacturing sector. Lending to the sector has increased exponentially over the last few years. These low-cost loans have augmented the considerable state-endowed advantages already enjoyed by Chinese manufacturers, who operate in a supply-side nirvana. The Kiel Institute recently found that direct and indirect (e.g., cheap land, credit and power) industrial subsidies in China are up to nine times greater than in the United States relative to overall GDP.
The problem for global manufacturing writ large is that the obverse of these subsidies is weaker Chinese consumption.
The problem for global manufacturing writ large is that the obverse of these subsidies is weaker Chinese consumption. Less government spending on social welfare is one obvious manifestation. The corollary is that China is buying fewer manufactured goods from the rest of the world. With weak demand internally, it is bursting at the seams with oversupply. This is becoming startlingly conspicuous in trade figures. Thailand’s trade deficit with China increased from US$20 billion in 2020 to US$36.6 billion in 2023. Malaysia’s deficit grew from US$3 billion to US$14 billion over the same period. Only Indonesia managed a modest surplus off the back of surging nickel and metals exports.
The gamut of affected sectors is much broader than higher-value-added goods du jour such as electric vehicles (EVs). In 2023, China’s President Xi Jinping made it clear that he wanted a “modern industrial system” to extend to traditional labour-intensive sectors such as apparel, toys and furniture. Instead of migrating offshore to lower-cost destinations, the risk is that these operations will remain in China in an increasingly automated form.
All of this will have potentially severe consequences for ASEAN economies – both for where they are now, and where they would like to go.
Take the example of apparel. This sector employs more than 7.5 million people in Vietnam, Indonesia and Cambodia alone, and is a considerable foreign exchange earner. In Indonesia, cut-throat competition from Chinese exporters forced factories to lay off 49,000 workers in the first half of 2024. Indonesia has spent the last few months in anguished indecision, eyeing tariffs of up to 200 per cent on textiles, in addition to ceramics and cosmetics.
Known as the “Detroit of Southeast Asia”, Thailand has developed an automotive sector that has long made most of its neighbours green with envy. Traditionally dominated by Japanese carmakers manufacturing internal combustion vehicles, Thailand has emerged as an export hub – shipping around 200,000 vehicles each year to Australia alone. The Japanese, as they have tended to do in most markets where they assemble cars, have cultivated extensive locally owned automotive supplier networks.
ASEAN is perhaps uniquely positioned to capitalise on growing Western tariffs on China.
The Thai government has recently decided to court Chinese investment in EVs by making tariff-free imports of Chinese-made vehicles contingent on the development of local factories. This deal was sweetened with consumer subsidies. All well and good. What this deal did not anticipate was the brutal price wars and overcapacity in China’s domestic market, both of which have now spilled over to the Thai market. This is bad news for Thailand’s local automotive supplier networks and legacy Japanese automakers. Both have joined the ranks of the almost 2,000 factories that closed in Thailand last year. Bangkok has asked nicely for Chinese automakers to use more local suppliers, but there is no guarantee they will oblige given the political imperative to preserve Chinese jobs and production.
Steel is another salient case study. The proliferation of tariffs targeting Chinese steel in Western markets has had the unwitting effect of making ASEAN a more attractive export destination. Malaysia, Thailand and Vietnam are among ASEAN countries that have been compelled to also raise tariffs. Like most countries but with some added effect, ASEAN states are having a hard time mounting a coherent response beyond the odd bit of tariff whack-a-mole.
Aside from wanting to avoid poking the dragon, ASEAN’s dilemma is complicated by the fact that Chinese imports often serve as inputs into finished goods bound for Western markets. ASEAN is perhaps uniquely positioned to capitalise on growing Western tariffs on China. Supply chain diversification and potent consumer demand means the United States is now once again ASEAN’s largest export market.
As ever, different constituencies pull policymakers in different directions. The interests of Indonesian nickel smelters, Malaysian palm oil plantations, and Thai farmers are very different from those of Cambodian textile and Vietnamese steel workers. Resolving these tensions will be crucial to the vitality of ASEAN’s manufacturing sector and economic robustness.
