SEA’s expanding role in global supply chains

The imposition of trade tariffs by the US on Chinese products by the Trump administration in 2018 has resulted in trade recalibration. The latest World Bank data shows that global trade, as a percentage of GDP, has been largely declining since 2012. This is inevitable due to four factors:

1. Global tariffs had reached a historical low in mid-2010.
   
2. Aside from India, the world also lacks a successor country to China, whose entry to the WTO in 2001 helped lift global trade.
   
3. Macroprudential policies adopted by many central banks after the Global Financial Crisis in 2010 have also unpicked the seam of the global financial quilt.
   
4. The awakening of the US to differences with China, which led to the start of the trade war in 2018, is a factor which has accelerated change.

The ideological differences between the two economic giants have always existed. On the one side, we have the general market-oriented policies favoured by Western economies such as the US. On the other, we have China's preference for a statist approach to governance. Or simply, free market capitalism versus a centrally planned economy.

The resulting trade decoupling, which focuses on sensitive sectors such as Information and Communication Technology (ICT), is likely to continue. US FDI into China in 2020 has already halved from its peak in 2008.

As we head into the second half of 2024, US elections notwithstanding, global trade activity is likely to remain soft. With politicised economic policies, there is the risk of further trade fragmentation, driving regionalism as some industries reduce their over-reliance on China as a production base. Many relocating industries have ended up in Southeast Asia (SEA). We have seen the economic growth rate for SEA rising at an average compounded annual growth of 6.6% between 2020 and 2023, almost double the 10-year average of 3.9%. 

That said, "de-risking" by reducing exposure to China will be a lengthy and difficult process, as the country is an integral part of the global supply chain. Recently, Taiwanese manufacturer Foxconn, the world’s largest assembler of Apple’s products, reported that it would be hiring more workers in its factory in China, after expanding production in India, Mexico, and Vietnam.

SEA markets are well poised to benefit from this redistribution of trade activities. Past infrastructural investments have given SEA markets an edge. Apart from Singapore, Malaysia and Vietnam have ranked fifth and eighth out of 179, respectively, on the UNCTAD Liner Shipping Connectivity Index.

Additionally, SEA's potential economic and domestic consumption growth is attractive, given its significantly large population base of over 600 million people. According to estimates by World Data Lab, Asia is also expected to have about 90 million middle-income earners in 2024. Aside from China and India, Indonesia, Vietnam, the Philippines, and Thailand are expected to contribute some 12 million. This should underscore the buying power to drive further demand for real estate.