The Deglobalization Myth: Summing up Asia's supply chain changes

Key highlights: 

• Global supply chains have continued to expand between 2018 and 2022, despite talk of deglobalization and near-shoring. We also found some evidence of China’s decoupling – but only with US and Japan. In contrast, China has become more important for international supply chains in major Group of Seven economies.
• Several Asian countries are emerging as "hotspots" of supply-chain trade growth. In particular, Vietnam and Indonesia registered double-digit growth in annual intermediate goods exports during this period.
• Countries don’t have to choose sides in the China-US decoupling. In fact, Vietnam and Taiwan became a lot more important for supply chains of both the US and China during this period.

The recent and multiple disruptions to global supply chains, such as the US-China trade war, Covid-19, and sanctions on Russia have prompted businesses and governments alike to re-evaluate the resilience of their supply chains. These issues are not new. Since the early 2010s, rising labor costs in China have caused many enterprises to explore alternative manufacturing bases and sourcing strategies to maintain their competitiveness.

We find that global supply chains, measured by trade in intermediate goods, have continued to expand, despite talk of deglobalization and near-shoring. Total intermediate goods exports grew by an annualized rate of 6% in 2018-22.

Regional sourcing, measured by the share of IG imports originating from countries within the region, have fallen across most of the world, suggesting that near-shoring may not yet be a prevalent supplier strategy globally. This does not refute isolated incidences of near-shoring. Since November 2022, Mexico has overtaken China as the top provider of international inputs to the US.

On the other hand, we find evidence that decoupling has materialized for China’s trade with the US and Japan – China's share of IG imports into the US fell from 18.5% in 2018 to 14.1% in 2022. This share dropped to 11.4% in the first half of 2023.

A few Asian countries are emerging as "hotspots" of IG trade growth in this volatile and increasingly tense geopolitical global environment. In particular, Vietnam and Indonesia registered double-digit growth in annual IG exports during this period. The growth of IG exports in multiple countries (and China’s own trade data) suggest that the 'China plus one' investment strategy is giving way to a 'China plus two, three, or four' strategy.

High-level comparative analysis of these "hotspot" economies reveals markedly different economic structures and geopolitical orientations. For example, Vietnam has made strides in becoming more important for international sourcing for both the US and China. This reflects not only the need of Western multinationals but also Chinese enterprises looking to expand production bases abroad. Foreign direct investment inflows from China to Vietnam have surged in 2023 and are now the largest of any country to Vietnam. In contrast, India has become more important for US supply chains, but less important for China’s supply chains.

Going forward, we would expect the geography of Asia’s supply chains to continue evolving due to multiple factors. First, heightened US-China tensions including over the Taiwan Strait will continue to put pressure on multinational enterprises to prioritize the resilience of supply chains, spurring the diversification and relocation of supply chains.

Second, the revival of industrial policies among Western governments is creating attractive subsidies for companies to reshore at least parts of their production networks. Environmental policies such as European Union’s Carbon Border Adjustment Mechanism and Deforestation Regulation are also expected to have large impacts on Asia’s production, reshaping the competitiveness landscape. In particular, Asian producers risk getting locked out from certain trading routes due to their weaker ability to comply with new regulations and the region’s energy dependence on fossil fuels.

Third, economics matter, even if most of the discussion around supply chain reconfiguration has focused on geopolitics and public policy. Enterprises benefit from co-locating in areas with a dense industrial network as they can share resources, find better matches in skill sets, suppliers, customers, and benefits from innovation. These external economies of scale will make such places “sticky”, such that economies that manage to gain a critical mass of market share during this reconfiguration of global supply chains will continue to grow long into the future.

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).