De-risking – ASEAN as an Option?

De-risking is the new buzzword for reducing dependencies on China. The recipe usually includes re-shoring production, increasing domestic stockpiling (e.g., of critical raw materials), and diversifying supply chains – with ASEAN frequently mentioned as a potential alternative, sometimes with a touch of overexuberance. However, it is important to keep expectations tempered, as ASEAN has some potential in this regard but is certainly not “the next China.”

The search for “the next China” is closely linked to the discussion of de-risking, i.e., reducing critical economic dependencies on a country whose friendliness cannot be relied upon. China is a crucial target of de-risking for good reasons. China’s ultimate political goal is to reshape the existing international order to make it more accommodating to Chinese values and interests and autocratic regimes in general.

One way for them to achieve this is to reduce technological reliance on the West while at the same time increasing the rest of the world’s dependencies on China. These dependencies could then be used to implement these political goals. Key policies include the Belt and Road Initiative and Made in China 2025. Recognizing the threat, The EU declared China a “systemic rival” in 2019, alongside its existing partner and economic competitor role.

During the coronavirus pandemic, China used dependencies on critical medical equipment to steer a positive international narrative of China fighting the pandemic and attempted to divert attention from the virus’s potential origin in China. When Australia requested an investigation of the virus’s origin, China used trade dependencies as punishment by imposing high tariffs on Australian imports and launching an anti-dumping investigation.

It has also reacted aggressively when countries have deepened relations with Taiwan. In the case of Lithuania, China used its trade power to try to coerce the Baltic state to rename its newly established Taiwanese Representative Office. China is also known for exploiting “good and special” relations with individual EU member states, such as Hungary, to pit member states and the EU against each other.

In addition, China’s decision to close ranks with Russia in the war against Ukraine and its moves to heighten tensions in the Taiwan Strait have further increased the urgency of reducing dependencies on China. ASEAN, an economic bloc with 600 billion people, seems to offer vast opportunities as companies try to better integrate geopolitics into their risk management and make their supply chains more resilient.

ASEAN – diverse and fragmented

Encompassing a diverse array of religions, ethnicities, languages, and cultures, the ten ASEAN countries are home to roughly nine percent of the world’s population. This region, of contrasting geographies, spans from landlocked Laos to the island nations of the Philippines – and Indonesia, whose population of around 276 billion dwarfs Brunei’s roughly half a million.

ASEAN accounts for 6 percent of world GDP, with Indonesia contributing 2.5 percentage points and Brunei 0.02 percentage points. Highly developed Singapore’s GDP per capita (purchasing power parity) amounts to roughly 88,000 USD, while Myanmar barely reaches 1,400 USD. ASEAN’s political systems couldn’t be more diverse either: from democracies, such as Indonesia, to Thailand’s monarchy and Vietnam’s one-party state. Therefore, it is not surprising that ASEAN’s Common Market is far less economically integrated than the EU’s. This is even more evident in regard to political and institutional integration, which is loose at best.

If companies think the EU market is fragmented and cumbersome to access, they probably haven’t done business in ASEAN countries yet. China, despite increasing difficulties for foreign investors, might seem easy in comparison.

ASEAN is no next China, …

Even when looking at ASEAN as an integrated market, which it is not (yet), it cannot compare to China in many key indicators. China’s 18-percent share in world GDP towers over ASEAN’s six percent, as is the case for its relative share in population and exports.

The gap decreases a little for share in imports, a bit more for direct investment abroad, and is nearly non-existent for inward foreign direct investment. Here, ASEAN has caught up in recent years, which could be a result of de-risking strategies of international companies already looking for alternatives or complements to China.

It is important to keep in mind, though, that – aside from being the world’s second-largest economy and, until recently, most populous country – China has also undergone a decade-long process of reform and opening-up, with a strong focus on attracting foreign investors.

In recent years, it has also upgraded its position in global value chains and is pushing innovation. China’s expenditures for research and development (R&D) in relation to GDP, for example, stood at 2.4 percent in 2022 and by far dwarfed the ASEAN average at 0.6 percent. Only Singapore, at 2.2 percent, managed to come close.

Over the years, China has accumulated plenty of experience with international investors and management and innovation processes. It is deeply integrated into global production and supply networks. Even though its investment environment has become much more difficult, it is still, to some degree, reasonably accommodating to foreign investors.

ASEAN, in comparison, has only just started catching up – with its member states at very different stages in their development process. Singapore as a developed economy is already the door to Southeast Asia for many international companies, while Vietnam is establishing itself as a hub for low-cost production, which is increasingly being outsourced from China.

Singapore and Vietnam are also the only ASEAN members to have a free trade agreement (FTA) with the EU and, thus, are interesting locations for European companies. Less developed ASEAN countries struggling with acute military, political, and human rights issues, such as Cambodia and Myanmar, in contrast, are less likely to become focal points for international investors.

… but ASEAN shows some promising dynamics

Looking ahead, fortune might be in ASEAN’s overall favor. China’s economy is in serious trouble, which we recently discussed in more detail here: a real estate crisis, youth unemployment, sluggish domestic consumption, deflation, and a population that is aging and shrinking at the same time.

Combined with the re-emergence of the primacy of ideology over the economy, China is, therefore, likely to face declining growth rates and sinking levels of productivity in the years to come. In contrast, most ASEAN members will see substantial economic growth and more favourable demographic dynamics.

Countries like Indonesia or the Philippines still have a small demographic dividend to reap in the years to come. It will yield even more if these countries increase educational efforts and investment, both areas where they have some catching up to do.

Trade projections for ASEAN also show favourable dynamics for the region, highlighting its potential to benefit from future de-risking efforts and play a bigger role in global production and supply networks. Moreover, prospects for the overall region are positive.

In 2022, the Regional Comprehensive Economic Partnership (RCEP) came into force, which brings together the ten ASEAN members plus China, Japan, South Korea, Australia, and New Zealand in one mega-regional trade pact. Even though RCEP, in its current form, is shallow with a focus on tariff reduction, it still offers incentives for deeper regional integration among ASEAN countries themselves.

Trading with and producing in ASEAN ≠ De-risking from China

While ASEAN may offer a range of opportunities for companies that seek to diversify their supply chains, it does not offer China-free supply chains (which for many products probably do not even exist at this point).

ASEAN and China are closely integrated via regional production and trade links: While ASEAN accounts for about five percent of extra-EU trade, its share in China’s overall trade amounts to nearly 15 percent. While the EU has FTAs only with Singapore and Vietnam, China has a regional FTA with ASEAN, is a member of the RCEP, and has established some bilateral FTAs with individual member states, too.

As geopolitical tensions are rising, especially with the United States, Chinese companies themselves are trying to de-risk their international business by shifting production to ASEAN countries to export products “made in Vietnam” rather than “made in China.”

This may increase imports of intermediates from China to these countries and exports from there to Western countries. This tendency is already showing in recent data on trade developments in the region: While Chinese imports to ASEAN have increased in recent years, so have ASEAN exports to the US and EU.

However, it is safe to assume that ASEAN-focused supply chains have “China inside” in terms of intermediaries and raw materials. So, they will be as affected in the case of conflict, e.g., in the Taiwan Strait, as China-centred ones.

It absolutely makes sense for companies to make supply chains more resilient by reducing existing monopolies and cluster risks, and ASEAN can play an important role. It should be clear, though, that turning to ASEAN does not equal de-risking from China but rather serves as a way to diversify (“China+1”) and access the markets of some of the region’s most dynamic economies.

About the author

Cora Jungbluth is a senior expert in the Europe’s Future Program at the Bertelsmann Stiftung. Her research focus is on China, foreign direct investment and international trade (especially the role of emerging economies).

Read More on China and EU Trade

European Economic Security Strategy: New Ideas and Next Steps

EU-China relations: De-risking is Key, but so is Actively Managed Cooperation

Determined to Deter? The EU’s new Anti-Coercion Instrument

Explore our infographic on Asia-Pacific Trade