MNI EXCLUSIVE: China Offshores In Asia As US Ties Fray

Worsening Sino-U.S. relations and an emerging trend for shorter global supply chains are prompting calls by Beijing policy advisors for closer industrial ties with the country's neighbours, placing plans for an Asia-Pacific free trade bloc firmly at the centre of China's longer-term economic strategies despite diplomatic tensions which could delay a deal, advisors told MNI.

Chinese companies are already trans-shipping products such as silicon chips and circuit boards via countries including Vietnam, Cambodia, and the Philippines, as an alternative route into an increasingly unwelcoming U.S. Such trends will only intensify as Beijing and Washington decouple, said Wang Peng, a researcher with the Chongyang Institute of Financial Studies with Renmin University. Offshoring industry was inevitable anyway given the drive by China to shift its local manufacturing capacity into more sophisticated brackets, he added.

"Factories have to move out of China to other countries as a result of the industrial upgrade, so why should not China use tools such as tax breaks to encourage moves to neighbouring countries which have better relations with China?" said Wang, pointing to Chinese industrial parks built in countries such as Malaysia under the Belt and Road Initiative. Another researcher, Lu Wei from the Academy of Macroeconomic Research, also called in a recent article for China to set up more industrial parks in southeast Asia, particularly in areas such as textiles.

ASIAN MARKETS

Southeast Asia offers not only a potential productive location for Chinese business, but also an important market at a time when western demand has been sapped by the economic impact of the pandemic, particularly for products such as home appliances, Wang said.

With policymakers in Beijing now seeing decoupling from the U.S. as inevitable whoever wins November's election, talks to finalise what will become the world's biggest free trade area have assumed increasing importance. The Regional Cooperative Economic Partnership, now in the final stages of negotiation, would group ten ASEAN countries, together with China, South Korea, Japan, Australia and New Zealand, accounting for a third of global GDP and with a population of 2 billion people.

The new bloc, aiming at zero tariffs within 10 years, would offer more regionally-focussed alternatives to China's current globe-spanning economic network, which dominates many global supply chains, but is now under pressure from a U.S. backlash, as well as from concerns throughout the West over both technological and health security.

"In the previous phase of globalisation, which was led by multinational corporates, efficiency dominated everything. But now, especially after the pandemic, they have to think about the resilience of manufacturing chains," said a former senior official in Beijing, adding that Chinese manufacturers see the logic in intensifying their regional presence. "Companies would voluntarily do this even if they weren't pushed to do so by the government."

ASEAN

RCEP would build on China's existing bilateral free trade deals with ASEAN, Australia, and South Korea, and allow semi-manufactured products to flow more easily within a huge region, according to Tu Xinquan, dean of the China Institute for WTO Studies, University of International Business and Economics.

ASEAN became China's biggest trading partner this year, with bilateral trade increasing by 5.6% year-on-year to CNY2.09 trillion in the first half, accounting for 14.7% of China's foreign trade.

RCEP could be signed this year, according to Tu, and to Huo Jianguo, vice chairman of the China Society for World Trade Organization Studies in Beijing, and a former president of the Ministry of Commerce research institute.

But others pointed to potential stumbling blocks.

Vietnam, Malaysia and the Philippines, which have territorial disputes with China in the South China Sea, may find encouragement in the recent move by the U.S. to reject China's claims on resources in the region, noted Shi Yinhong, a U.S.-China relationship expert at Renmin University and an advisor to the State Council. This could dim the prospect for a swift conclusion of RCEP talks, he said.

Relations between China and Australia may also constitute a problem, according to a former Ministry of Commerce official, who pointed to Canberra's ban on Huawei's participation in 5G network construction and its criticism of the sweeping national security law in Hong Kong.

Another issue to overcome is the lack of bilateral deals between China and Japan and between Japan and South Korea, but work on these should accelerate, according to Tu. ASEAN already has trade deals with all the other five countries.