Catalog

The challenge of the PRC for industrialization in Southeast Asia

It is sometimes argued that industrial development in the PRC is different from previous industrializations in East and Southeast Asia. The former pattern of industrial development-the "flying geese" pattern where Japan was in the lead and after beginning with development of manufacturing of processed products and labor-intensive goods such as textiles, clothing, and footwear, subsequently moved into more capital-intensive and sophisticated industries allowing first the NIEs and then the ASEAN-5 to follow suit-in this view is no longer valid. The shriller members of this chorus (NCTO 2004), for example fear that the PRC will completely dominate world production and trade in labor-intensive manufactures (textiles, apparel, footwear, travel goods) and will deprive smaller developing countries the option of moving into manufacturing as a result. Others fear that the PRC will simultaneously dominate all types of manufacturing, including those at mid- and high-levels of technology. De-industrialization of Southeast Asian nations resulting from the PRC's entry into WTO (in late 2001) and improving access to capital inflows and markets abroad are particular concerns (McKibbin and Woo 2003).

The more optimistic about the emergence of the PRC make almost equally fallacious arguments-to the extent of claiming that Asia can soon jettison its reliance on US consumer spending (and to a lesser extent, spending by Western European and Japanese consumers) because of the phenomenal growth in the PRC. Uncoupling of Asia from the US and EU in this view will be occurring rapidly as Asia shifts its focus in favor of fast-growing insatiable demand in the 1.3 billion strong PRC consumer market.

A careful analysis based upon the data paints a much more nuanced view of the role that the PRC is likely to take (assuming it avoids the disastrous collapse predicted for it by pundits such as Gordon Chang). The data presented in this section tend to support this more nuanced view-the PRC may take some of the lunch from Southeast Asia this afternoon but is likely to need to invite the same countries to dine with it in the evening. That is, the PRC prowess in labor-intensive manufacturing may lead it to gain market share in trade and FDI at the expense of countries such as Thailand, Indonesia, Viet Nam, and the Philippines. However, rapid growth in the PRC economy will also depend on increased imports of raw materials and intermediate inputs from Southeast Asia as well as capital equipment and technology from the NIEs. Eichengreen and Tong (2005) argue that the trade and FDI impact of the PRC's emergence will be negative for producers in low-income countries in Southeast Asia that specialize in labor-intensive manufactures and other consumer goods but positive for high-income countries in East Asia that export high-technology components and capital goods.

McKibbin and Woo (2003) estimate that if the PRC's membership in WTO increases its attractiveness as a destination for FDI, this is likely to come at the expense of Southeast Asia and result in losses in GDP of significant amounts for Thailand, Malaysia, Philippines, and Indonesia-unless these countries can rapidly upgrade their human resources in order to move more rapidly into sophisticated manufacturing where productivity growth is likely. Srinivasan (2006) makes the argument that competition for resources between the PRC and India will provide a large dividend for exporters in some of the poorer countries and regions of the world and that any negative effects (such as congestion in demand for shipping) will be short term.

The real danger is that the PRC's success (followed by emergence of India in complementary activities) might set off a protectionist backlash that will have negative global repercussions. Srinivasan (2006) cites the "blatantly protectionist response" of the EU and US to competition from the PRC in their textile and clothing industries as well as threats by US politicians to impose an across the board discriminatory tariff against products from the PRC unless the authorities there revalue the yuan. In addition, threats of increased use of antidumping measures appear to be legitimate as the EU has moved to impose antidumping duties on footwear from the PRC and the US on staple fiber exports from the PRC. Overall, the PRC's impact on the region and the world economy is positive and this is likely to continue, provided the PRC can constantly implement economic and political reforms necessary to sustain growth. A successful revival and conclusion to the Doha Round negotiations in WTO would go a long way toward reducing protectionist threats to sustained growth in the region.

Does the rapid rise of manufacturing in the PRC led by booming exports of assembled machinery products and labor-intensive consumer goods imply that the rest of East and Southeast Asia will be displaced as manufacturing centers and as hosts for FDI? Data on global production shares show that the PRC doubled its share from 3.5% in 1994 to 7.0% in 2003, yet the NIEs and ASEAN-5 also increased their share in world production from 7.0% to 9.0% over the same decade (The Economist 2007). And as has been documented above, ASEAN-5 was able to lift its export share in world markets over roughly the same period, hardly lending support to the argument that the PRC poses a threat. In fact, The Economist argues that the PRC is losing favor relative to Southeast Asia as a manufacturing location and FDI host, as multinationals are adopting a "PRC plus one" strategy in which they invest in the PRC and in at least one ASEAN country simultaneously.

A recently released study for the World Bank (Winters and Yusuf 2007) also provides support for the nuanced view of assorted complementary and competitive impacts of the PRC on the exports and manufacturing competitiveness of ASEAN countries. Empirical data also tend to support the view of a complementary role for the PRC vis-à-vis ASEAN trade and manufacturing. For example, recent data show that ASEAN increased its market share in the US apparel market, in 2006 from 2005, to 19.3% from 17.3% in value and to 18.9% from 16.7% in volume.⁶ In particular, low-income ASEAN members, such as Cambodia, Indonesia, and Lao People's Democratic Republic, have done well in expanding their market shares in the US clothing market.

This indicates that the PRC is not closing off opportunities for low-income countries to enter the manufacturing process along the lines of the traditional "flying geese" pattern. Critical to this process is openness to trade and FDI, market-friendly policies, and institutional reforms at customs and tax departments (and elsewhere) so that export-oriented growth may take root and then bloom.