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Thread: The big tilt away from China

  1. #1
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    Default The big tilt away from China

    The big tilt away from China

    Wed, Apr 29, 2020

    RIZAL RAMLI


    THERE is a plethora of theories on how the Covid-19 outbreak could end up changing the geopolitical landscape - everything from great power relations, food security, and the economic balance of power are just a few examples of what some of the world's best minds are forecasting for when the outbreak is finally contained and the dust is settled.

    Armchair speculation about possible change makes for good intellectual entertainment, but much like the coronavirus itself, there are too many unknowns to be certain about what the world will actually look like in the future. Many pundits are predicting the world will never be the same, but for those who think the pandemic will lead to tectonic shifts, one need only be reminded that the 1918 Spanish flu pandemic, which claimed over 50 million lives, had little discernable impact on global politics.

    There are, however, some things we can be sure about, which has less to do with radical change but more with how the pandemic's effects will accelerate certain trends. One of the more important will be an intense decoupling of the world's economies with China. Starting a decade ago, there were already the beginnings of a tilt away from China. As China progressively became richer after opening up its economy in the late 1970s under the leadership of Deng Xiaoping, its labour costs steadily rose, going from an average yearly wage of US$150 in 1990 to US$8,900 in 2015 and most recently US$13,500. In contrast to the 1990s, where China emerged to become the factory of the world and eventually accounted for one-third of the world's manufactured goods, in past years there has been a steady exodus of labour-intensive manufacturing out of China into lower-wage economies such as Sri Lanka, Bengladesh and Vietnam.

    Then there is the Trump administration's trade war with China - after having been slapped with prohibitively high import duties on Chinese imports, multinational corporations were compelled to think even more seriously about hedging their China country risk.

    Countries that benefitted from the trade war to fill the gap created by decreasing trade between the US and China include Chile, Argentina, Malaysia and Vietnam, with the latter being the biggest beneficiary due to technology companies such as South Korea's Samsung moving their manufacturing there.

    In spite of the end of what was once known as Cheap China and the effects coming off the US-China trade war, for the time being China still accounts for a substantial portion of world trade. It remains by far the world's largest exporter, with its exports valued at nearly US$2.5 trillion in 2019, and, for many economies in the world, their leading export and import trading partner in terms of value is China.

    DANGEROUSLY VULNERABLE

    The coronavirus pandemic, arguably one of the more disruptive events in modern history, has exposed the degree to which we rely upon China, in our supplies of computers, microchips, automotive components, medical equipment, and much more. Now, in the midst of major supply chain disruptions, boardrooms and political leaders have quickly come to realise how dangerously vulnerable they are and the need to rely less on China.

    What will this tilt away from China look like? It certainly won't happen overnight, for it takes more time and it is a more complex exercise to move production for higher-value added goods such as medical equipment than for labour-intensive products like garments. But invariably it will happen.

    Not only the the West, but the entire Indo-Pacific must think about and act upon how they can become less dependent upon China and hence become less vulnerable to future shocks. Given the size of the Chinese economy, having most of our proverbial eggs in the Chinese basket may have made for good business in normal times, but it makes for bad public policy in the long run.

    The most interesting question for now is, given that a tilt is inevitable, which countries will emerge as the beneficiaries, and who stand to become the new economic powers?

    If we look at the current roster of strong emerging economies, then certainly Vietnam, India and Mexico have great potential to become powerful economies. Given their size, plenty of human resources and cost of labour, they stand to become preferred destinations for foreign direct investment in a post-pandemic world.

    One potential winner, but one over which hangs a question mark, is Indonesia. It has the potential - driven by a very large, relatively young and cheap labour pool along with an abundance of natural resources - to become the darling of manufacturing and agribusiness firms. With a workforce of 130 million people, it could easily compete with Vietnam, which has a workforce of only 57 million people. Indonesia also ranks eighth in the world in terms of its total agricultural land of 570,000 square kilometers, giving it the potential to become a major regional agribusiness player.

    Yet, Indonesia's potential, at least so far, remains just unrealised potential. Unlike Vietnam, its manufacturing sector failed to attract new investments in the wake of the US-China trade war. Its agricultural sector continues to be dominated by smallholders with insufficient access to technical assistance and credit schemes, paling in comparison to other agro-players in the region such as Thailand and the Philippines.

    It was once said that bad times make for good policy. This was certainly true for Indonesia during the Asian financial crisis. The current crisis, both in terms of its scale and magnitude, could prove even more devastating. What Indonesia needs now is to think about how this crisis, as terrible as it is, will eventually open up opportunities. But to take advantage of those opportunities, it must first adapt the winning policies of others.

    The writer was Indonesia's Coordinating Minister for the Economy and Minister of Finance, 2000-2001. He was also Coordinating Minister for Maritime Affairs, 2015-2016.

  2. #2
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    Default Re: The big tilt away from China

    After many years later, Dollar and Sense will bring them back to China again.
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