- 4 months ago
How is the “China Plus One” strategy reshaping global supply chains and is Southeast Asia ready for the shift? We speak to Prof Volker Perthes, Senior Distinguished Fellow at the German Institute for International and Security Affairs, and Assoc Prof Simon Tay, Chairman of the Singapore Institute of International Affairs, on how major-power rivalry, regional readiness, and global economic shifts are transforming the trade landscape.
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00:00Hello and welcome to Awani Global, I'm your host Fahna Sheh.
00:11Now we are at the sideline of the 38th Asia Pacific Roundtable here at Hilton Kuala Lumpur.
00:17Now in recent years, we've seen a growing shift as governments and companies rethink their dependence on China
00:22for manufacturing and critical components.
00:25But is this shift purely about the US-China rivalry or is it something deeper that is happening?
00:31How are these trends playing out in Southeast Asia and what does it all mean for the future of globalization?
00:38Right, joining us are two esteemed guests who were in the panel on China Plus One Strategy.
00:44Professor Volker Pertes, Senior Distinguished Fellow at the German Institute for International and Security Affairs,
00:49as well as Associate Professor Simon Tay, Chairman of the Singapore Institute of International Affairs.
00:54Thank you so much for joining me, gentlemen.
00:57Right, let's set the scene first to get the audience rolling on this topic.
01:01When we talk about China Plus One, what does this shift tell us about the state of the global supply chain today,
01:08especially with what is happening right now with increased trade tensions, geopolitical shifts?
01:15Anyone can take this first.
01:18Sure.
01:18All right, okay, sure.
01:19I think we're not speaking so much about China Plus One right now.
01:22It's a concept from the early 2000s, which was initially a business strategy,
01:28rising labor costs in China at that point.
01:30So companies did get some of their business out into lower paying countries
01:38with the consent of the Chinese, of the U.S., of everybody else,
01:42and of course countries like Vietnam, like Malaysia were benefiting from it.
01:46And then it was geopoliticized from 2017 onwards, the first Trump administration,
01:52and the U.S. went for or indicated it would go for decoupling from China.
02:00So there was an additional reason for U.S. companies, for example, to move out of China,
02:05or at least move out part of the business of China and set up shopping,
02:10mainly in Asian countries, but also in Mexico, for example.
02:14And so there was a geopolitical move on the part of the U.S. administration.
02:19For the Europeans, it was a bit different.
02:21Most of our production in China is for the Chinese market, actually.
02:30And only sort of from, well, let's say 2020,
02:34when we felt that Chinese policies become more unfriendly,
02:39wolf diplomacy and withholding rare earths from some customers,
02:45plus a pandemic with international tensions,
02:48then the Europeans became concerned about supply chains.
02:52And they wanted a diversification of supply chains
02:56in order to have resilient supply chains.
02:58So we have a geopolitical reasoning on the U.S. part,
03:01a diversification reasoning on the European part.
03:05And now I think we are in the most recent or last phase
03:09where we have the Trump tariff offensive, or whatever we call it,
03:12which is not about China plus one.
03:15It is about curbing trade with China or between China and Asian countries.
03:22So it is rather Asia minus China, which the Trump administration wants to enforce.
03:29I think Volcker is right.
03:32There is a longer story, but the key punctuation point,
03:37the headlines today is those Liberation Day tariffs
03:40and the subsequent back and forth and negotiations in Geneva and then London.
03:47So I think that we are not really at the end of the story
03:49because there are many factors that are working at play.
03:52One is the side American rivalry, not just in tariffs and trade generally,
03:57but specific technologies, strategic composition.
04:01And then there is the domestic issue of what is Mr. Trump trying to do with America?
04:07Does he really believe America with a large, high fence with the whole world
04:13would be better off?
04:15And I think that then we have to flip it around
04:17and see what it looks like from China's angle.
04:21China has talked about dual circulation.
04:24It has gone out into the world with the BRI.
04:26If you look at trade numbers between China and Latin America,
04:31with Europe, with Africa, they are pretty big everywhere.
04:35So China is kind of worried not only about America,
04:38because it is an American market,
04:39but what does it mean for everybody else in China?
04:42And of course, we are in ASEAN.
04:44We are in Malaysia.
04:46We have to really think through the norm of trade and supply chains
04:50and economic engagement we have with America on one side,
04:54with China on the side.
04:55But more than that, globally.
04:58I mean, Malaysia is actually a very open economy.
05:00My country, Singapore, even more so.
05:02We are small, trading countries.
05:05And if the world system starts to shake
05:06because of all these longer-term and Trump-linked initiatives,
05:11we are going to face a lot of challenges.
05:14I mean, definitely with the Trump second administration,
05:16we've increased trade tensions.
05:18A lot of smaller economies, I feel, have to take a step back
05:21and really reassess what they're doing with their trade relations,
05:25what they're doing on the economic side with foreign trade.
05:28So I completely agree with you.
05:30Right.
05:30So talking about the sort of resurgence or revisiting of this China plus one strategy,
05:36right, do you think now, with current tensions right now,
05:40intensifying US-China rivalry,
05:43are there any other deeper structural factors,
05:46you know, economic, political or even technological,
05:48that are driving the push to diversify away from China?
05:51Look, I think it is, for the countries of this region, for Asia,
05:58it is about finding a market which is more resilient against shocks
06:06like the Liberation Day shock and others.
06:09For us in Europe, on the consumer side,
06:12it is about resilient supply chains
06:15which cannot be dependent on just one big country, right?
06:20So I think we have a common interest
06:22in having more diversified supply chains.
06:26I think for the Asian countries,
06:28the challenge which we see with the tariffs
06:30and which are really hurting some countries bad,
06:34if they are not negotiated away, Vietnam, Malaysia, others,
06:38there is a hard challenge
06:40because they have been such a genuine part of this supply chain
06:45between China, themselves, and then Europe and the US.
06:49So they will have to use it as an opportunity
06:53to integrate more deeply inside ASEAN
06:56in order to find a market here,
06:59to move up the value chain
07:01which will make it easier to deal with Europe, for example,
07:04or with the Gulf countries, or with Latin America,
07:06or with Africa, or with others.
07:09And then the US will still be there as a market
07:14but ASEAN countries wouldn't be solely dependent on one market.
07:19What we heard this morning from the Prime Minister of Malaysia
07:24that, for example, semiconductor production here in Malaysia,
07:28more than 60% of the product goes to the US
07:31and, of course, that creates a dependence
07:32which makes Malaysia vulnerable.
07:34So if you diversify the markets by moving up the value chain,
07:38I think you can use it as an opportunity.
07:41I think the three critical words are diversification.
07:45Of course, it brings resilience.
07:46The second word is rules.
07:48And the third, I think, for ASEAN particularly, is unity.
07:52Diversification.
07:53People are always talking about diversifying the source.
07:56So people thought China plus one is
07:58don't get so many materials from China.
08:00But I think what Volker has said, and I agree,
08:05diversification also of your markets.
08:07I mean, the American market and the Chinese production base,
08:10they've been the easy ones, right?
08:12Everything China makes is good and cheap,
08:15or sometimes not so good, but it's still cheap.
08:17And then market, America buys, buys, and buys.
08:21Nobody has an appetite for goods like Americans.
08:24But I think this is where we got lazy.
08:27The economy of scale of production and market
08:30made it hard for us to say, how about Africa?
08:34How about Middle East, which you just mentioned?
08:36How about our own region?
08:38How do we grow the market here?
08:40How do we go to production base here,
08:42originating the value chain?
08:45And that's where the second part comes in, rules.
08:48Because if you start exploring new markets,
08:50and maybe also they look at Trump and they say,
08:53I want to be mini-Trump.
08:54You know, if I'm a big country, India, Indonesia, Brazil,
08:59I also close my market.
09:01And this is where we have to look for partners,
09:03big or small, that will follow what we think are the established rules of trade.
09:09EU, therefore, they don't consume as much.
09:11Europeans somehow, maybe they're quite satisfied.
09:14They don't have the appetite of America.
09:16Maybe they don't have the big garages,
09:17but they don't buy as much.
09:18But there are rules-based,
09:21and this is something very useful.
09:22Of course, they're making new rules of environment, labour.
09:25But these are still rules,
09:26and we can play on a level playing field with these rules.
09:30And the third for ASEAN is unity.
09:32We've really got to open up our market to each other.
09:35We often talk to outsiders, 660 million.
09:39But do we talk to each other?
09:40Like, we have to make it easier to move goods.
09:43Now, Singapore and Malaysia, we do move goods a lot.
09:45But how many Thai products do you see on Malaysian shelves or Singapore shelves?
09:49Not that easy to find, and reverse way around.
09:51And we've got to overcome this among ourselves.
09:54Right.
09:55I mean, I think it's all about not putting all your eggs in one basket, right?
09:59And it's also about all this unity and diversification and cooperation within ASEAN especially.
10:09That's the ASEAN's ethos, essentially.
10:11And maybe you're right.
10:12That maybe countries or smaller countries have gotten a bit, I wouldn't say,
10:17maybe lazy or maybe have gotten a bit comfortable with the current trade dynamic,
10:22with the current economics setting of, you know, the global landscape.
10:25So, from a global security and political stability standpoint,
10:45how might a fragmented supply chain architecture influence power dynamics,
10:49especially what's happening right now within the US, China, and even the EU, maybe, Prof?
10:56Well, I guess it's a bit of a hand-and-the-egg question,
10:59but I guess it cuts the other way around.
11:01So, we have political tension, geopolitical conflict, great power conflict,
11:06whatever you call it, and that actually fragments the supply line.
11:09So, the economy or the economic relations, globalization, if you so wish,
11:14has become the victim of great power politics.
11:19And I think, and here I can refer to, refer and defer to Simon,
11:25those who stick to rules, and here we're speaking about WTO rules, trade rules,
11:30they need to work together closely to maintain as much as possible
11:35of this rules-based, multilateral trading world.
11:41And, of course, that would then have a positive impact also on other relations beyond trade,
11:48political relations, security relations.
11:50ASEAN is a good example for that inside itself.
11:53The European Union is a good example for that.
11:55Even Latin America, Mercosur, is a good example for that.
11:58And I think we are in a phase where we start to knit together these blocks.
12:04We have an EU-Mercosur free trade agreement now.
12:07We don't have one with ASEAN because probably ASEAN isn't ready for it,
12:11so we're moving ahead pluribilaterally, as we say,
12:15with a free trade agreement with Singapore and Vietnam, which we have,
12:17Malaysia, which is closer to being completed.
12:22But let's see that as stepping stones for a block-to-block free trade agreement.
12:27And then I think we can ward off, not totally, but a little bit,
12:30sort of the impact of the political, of the great power conflicts on trade.
12:35I think I just wanted to add to that that one of the key elements
12:39is to see whether the world can be better with bifurcation or worse.
12:44We have to decide that.
12:45And really, the formula for the last few years has been a lot of innovation comes from the West.
12:50But in terms of the cost, the scale and improvements, China has been the factory.
12:58That's why it is China plus one rather than anybody else plus one.
13:03They have already earned that role.
13:05And now in this time of bifurcation, which Biden started,
13:09one of the starting dimensions is when faced with being pushed out,
13:14Chinese have responded by innovation.
13:17Huawei was cut out.
13:18Huawei comes up with a new phone, a new chip, deep seek.
13:24All this really starts to show that the Chinese aren't going to lie down and play dead.
13:29So that makes us between the US and China very hard to choose.
13:33It's not like the 1990s where America is so far ahead of everybody else.
13:39So my hope is that ASEAN can stick to this neither one nor the other,
13:44play with both, show value to both.
13:47Because even during the Cold War,
13:49there was always a need for some places like Switzerland to be playing on both sides,
13:54some intersections.
13:55Now, if really both sides pull it completely apart, that would be very difficult.
14:00But how do you see smaller countries, say Vietnam, Malaysia, Indonesia,
14:05navigating this delicate balance between benefiting from Western supply chain diversification
14:10as well as maintaining strong ties with China?
14:13Because you're right, it's still China plus one.
14:15And also we're looking at such a fragmented and high-tension trade situation right now.
14:22So how do smaller countries actually do this?
14:26Well, I think first, let's look at what they are doing.
14:29And they are all, many of them are rushing to Washington DC and trying to talk to Trump.
14:33And that feeds Mr. Trump's purpose.
14:36He wants them to come talk to them.
14:37And I think you have to genuflect to America a bit.
14:40You don't want to say boo to America.
14:42But that's not the essential.
14:44The essential is in the end to stop some bad practices.
14:48There are websites you can say, you buy your stuff in China, you bring it to a country XYZ,
14:54they take off all the labels and put the label of the XYZ country on.
14:57That kind of nonsense has really got to stop.
15:00Because today, there's a forensic process of tracking, did you really make this good in this country?
15:07And you'll be having a kind of trust deficit if your country allows this flouting of the rules of a richer,
15:14which exists in FDA.
15:15It's not Mr. Trump invented it.
15:16You're supposed to do this.
15:18So I think stop those kind of bad practices.
15:20Really then reform so that you have the value added, the content in the country.
15:27And really proudly say, yeah, some of this money come from China, but we transformed it.
15:33We made it a Malaysian product, an ASEAN product.
15:36And then, hopefully, for fundamental reasons, you can look at everyone and say,
15:40this is our product.
15:41You want it?
15:42Don't want it.
15:42It's not China plus one.
15:44It's ASEAN by itself.
15:45Now, that's a longer-term goal.
15:48And I think it's something worth shooting for because we don't know what the short-term effects of Mr. Trump are.
15:53In the six months we've had, he's gone from this level of tariffs up, down.
15:58Yes.
15:58You can't do business like this, you know.
16:00You can't plan on this kind of variation.
16:03So we've got to figure out what fundamentally makes sense for ASEAN, for our countries, and do that first.
16:10May I add to that?
16:12Sure.
16:12I think it's very important what Simon said.
16:16If a block like ASEAN, I don't know whether you refer to yourself as a block, but we see it as a block, or we think it should be a block.
16:23If you want to gain more autonomy in this rough new world or rough brave world, I think you cannot do without a moving up the value chain.
16:36I mean, not just having raw materials being processed and refined by China, and then you get semi-finished products,
16:44and you probably work a bit on them and export them to the U.S. or the U.S. or the U.S., but do that in your own region.
16:52And if we look at the region as a whole, I mean, you have it all.
16:55I mean, you have the raw material.
16:56You have the rare earth in Malaysia.
16:59You have the copper and the tin and the cobalt in Indonesia.
17:02You have it all there.
17:02You have the finance.
17:03You have the skilled labor.
17:05So a lot of things can be done inside ASEAN.
17:08So that means moving up the value chain at the same time, integrating more.
17:13And for a big trade bloc like the European Union, it's much easier to deal with ASEAN, the more integrated ASEAN is.
17:22So we, I mean, it's not about sort of divide and rule for the Europeans by having sort of one FTA with each singular country.
17:31If we can have it with the whole bloc, it makes it much easier, much smoother to trade with one another.
17:35I mean, I'm trying, I know I'm representative of ASEAN as well, but if I'm playing devil's advocate here, of course, Southeast Asia has always been seen as the key beneficiary of the China Plus strategy movement.
17:50But do you think, you know, what you have mentioned just now, but do you think the region is truly ready to absorb sort of large scale relocations of production, you know, especially in high tech sectors like semiconductors, for example?
18:02Well, we kind of want it, you know, I mean, everywhere I go in ASEAN, Indonesia, Vietnam, they don't want the kind of just cheap assembly jobs anymore.
18:11I mean, we are producing better talent among the youngsters.
18:15We have large population, some young, not Singapore, but overall ASEAN.
18:19So good paying jobs, people value added, realise that they've got to move up.
18:23What we may lack is a truly industrial policy.
18:28So Vietnam is now trying to say the private sector can be champions.
18:31I think each country will have to start to groom champions and ASEAN-wide, we've got to figure out win-win cooperation.
18:38I mean, sometimes we see each other still too much as rivals rather than our bloc or association.
18:44We are not customs unions, so negotiating tariffs is not possible as a group.
18:51But the wider, deeper issue of what can ASEAN add, we see this now from foreign companies.
18:58Foreign companies come to Singapore and say, well, we like this about Singapore, but you're too expensive and we need somewhere nearby, too small.
19:05We don't have enough people, workers.
19:07How about, is there a way to link to Malaysia?
19:09That's why we've got the Johor, Singapore, and so on.
19:12And if this example works out, if this can be a good test case to show the rest of ASEAN, that will help the rest of ASEAN.
19:21I mean, critics are saying that we don't have enough intra-ASEAN trade.
19:25So this might be the push for it.
19:28You know, with recent tariff war between US, China and also, you know, US and the whole world.
19:35So this might be the push and the reassessment that we need.
19:37If I may, one of the mysteries is that, of course, terrorist levels at ASEAN is almost zero.
19:43But it's the non-tariff measures.
19:45Yes, non-tariff barriers as well.
19:47That's what we've got to get rid of.
19:49So in that sense, this problem that Mr. Trump has created for all of us, this urgency, should draw our attention to what is the necessary, difficult homework we've got to really make ourselves an economic community.
20:00Sorry.
20:01No, I totally agree.
20:03I just wanted to add, and you asked the question, more intra-ASEAN trade will actually make you all less vulnerable.
20:12I mean, see the EU example here.
20:15Of course, these are old and developed economies.
20:19But we're also hit by terrorists from the US if they come.
20:22But the portion of our trade with the US is so much smaller, right?
20:29Take a country like Germany or France or Italy.
20:32Sixty percent of our foreign trade is with other EU countries.
20:35So there are no tariffs on that.
20:37That means even if the Trump tariffs hit hard, it only hits a relatively small portion of our economy.
20:44Whereas here, it could hit you or Vietnam or Thailand very, very hard.
20:50If you have more intra-regional trade, it will also shield you against the effects of arbitrary decisions, whether they are in China or in the US or anywhere else.
21:01Right.
21:01Right.
21:02So I have two more questions to sort of wrap up this discussion on where are we moving forward with regards to China plus one.
21:09So this is probably looking a bit more forward than where we are right now.
21:15But is there any risk that the China plus one strategy could further fuel regional tensions, say by, like you mentioned just now, intensifying competitions between Southeast Asia countries?
21:25You are saying just now that we are already looking at each other as rivals or maybe creating new economic dependencies because there is that possibility.
21:33We have depended on US.
21:34We have depended on China.
21:35So maybe, you know, this foreseeable future, you know, this could happen again.
21:40What are your thoughts on this, Professor Wolk?
21:42Well, look, I think there is a risk for these tensions through competition.
21:49Everybody feeling squeezed and then going individually to the Chinese or to the Russians or even to the Americans, sorry, or even to the Europeans and trying to have an individual trade deal or tariff deal.
21:58But that is not necessarily related to China plus one strategy, right?
22:04It would happen once a big bully starts to hit everybody else or trying to hit everybody else.
22:13So the natural reaction is often not to join together and deal with a bully together, but everybody tries to cut losses and go there individually.
22:28And as Simon said, President Trump likes it very much.
22:32I mean, having every country coming as a single country and say, could you please have some exceptions for us and not treat us too badly?
22:39And therefore, I would say he dislikes the European Union so much because there is only one negotiator coming and saying, look, I'm speaking for the biggest domestic market in the world.
22:49And OK, we also have measures.
22:51Yeah, I mean, he's saying that U.S. will probably be the last bloc that he has to deal with in terms of, you know, getting a tariff deal.
22:57So there's that.
22:58What about you, Simon?
22:59What are your thoughts on this?
23:00Well, I think first, we have to understand that the U.S.-China equation is not easy to escape at all because it's really the pattern for the last two plus decades.
23:10And they are dependent on each other as well.
23:12So really, we are kind of a game that's been developed over time for a very economically rational basis.
23:19So what we're trying to do is shift the basis because some people are acting irrationally, not just America.
23:26China also has been quite sharp, elbowed at times about different trade, rare earth.
23:32If they don't like you, you don't get tourists, you don't sell your goods to China.
23:36So we've really got to stand up for rules and amongst ourselves, use the rules to integrate deeper.
23:43And with those rules, understand that it's not just a question of, do I like America or China?
23:48Like the rules.
23:49Figure out how to work with partners who offer the rules.
23:52And if that takes us to the EU, and the EU is a tough negotiator, I can tell you.
23:57But that's the game to play rather than try to just curry favor with one side or the other.
24:03I'm a bit worried in that sense that in this storm created by Mr. Trump, China or people was pushed towards China.
24:11I don't dislike China, but I'm saying a rule-less China is almost as bad as a rule-less America.
24:19So really, we've got to find this balance, this reach, and structure it.
24:24Now, the last appeal, I think, is that it goes back to the ambitions of our companies, not just the governments and countries, but the companies.
24:34Do they see themselves simply as, well, again, all of America, I do this.
24:38America, China, I do this.
24:41Or are they really starting to innovate, create, become their own starter of a supply chain?
24:48And that's the critical mental change, plus the win-win rather than the outright rivalry among asset countries.
24:55There will be some rivalry, of course.
24:56But if we can innovate and we can become more win-win, we will be heading in the right direction.
25:02Right.
25:03I think that pretty much wraps up on what we have to do and how we have to respond.
25:08Whether or not we will be doing that or we will be responding, as what you have said, is another discussion.
25:13But let's see this as an opportunity to reform, as an opportunity to improve, and an opportunity to diversify and ensure that, you know, our global supply chain can be more than what it is right now.
25:28Right.
25:28Thank you so much to the both of you.
25:30That wraps up our conversation on China Plus One and its impact on the global supply chain.
25:35Thank you so much, Professor Volker and Professor Simon for sharing your insights.
25:38I'm Fah Anashe.
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