“It’s globalisation, Jim, but not as we know it.” - by Martin Crawford

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There isn’t a day that goes by where the business media in Hong Kong aren’t reporting on the global tensions with China and how companies and countries are reacting. Supply-chain strategies are in the spotlight as the fear of trade disruption continues to force companies and governments to re-imagine their visions of globalised trade with strategies of ‘near-shoring’ and ‘friend-shoring’. As an investor and corporate leader, I need to understand what impact these policies may have on global trade and the economies where I operate. I also want to understand if these supply-chain moves make any sense.

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The disruptions caused by the US-China trade war, Covid-19, Russia’s invasion of Ukraine and the trade restrictions that followed have all contributed to a drive for a more robust supply-chain. At the same time, government officials are set to mitigate against what they call ‘economic blackmail’ and security threats through ‘friend-shoring’, or as US Treasury Secretary Janet Yellen called it in November, ‘ally-shoring’. Many see this as a thinly veiled de-coupling from China policy, and economic experts are keen to point out that it will not work.

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An Asia Times article this month called ‘friend-shoring’ a politically-motivated pantomime and Singapore’s Premier,?Lee Hsien Loong, claimed it will restrict trade and may give rise to the very conflicts we hope to avoid. In short, a country cannot hope to achieve economic or security objectives through restrictive trade policies. A cursory look at how private Chinese firms are creating subsidiaries in Mexico to supply the USA demonstrates the chaos. Also consider Apple’s China+1 desire to move some of the iPhone production to plants in India and Vietnam (Foxconn) which will take an estimated 8 years to move just 10% of production, and even then many of the components will be sourced from China.

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While ‘friend-shoring’ may be a political game, businesses are keen to explore ‘near-shoring’ in their supply-chains with some very good rationale. The Trade in Transition 2023 report, produced by the Economist and commissioned by DP World, provides a clear picture of corporate rethinking in supply. Expansion of operations in existing/new markets is a key driver in growth strategy. Cost reduction, possibly through government incentive schemes, is the key driver in corporate supply-chain reconfiguration. However, 96% of respondents in the Economist survey also cited geopolitical concerns as influencing supply-chain strategies.

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Acclime, a professional and corporate services firm of which I am CEO/Founder, specialises in advising and servicing clients across Asia-Pacific. We are seeing our clients express an increasing interest in mitigating supply risk from distant suppliers and in taking advantage of incentive packages to keep sourcing within the region. This is reinforced by HSBC’s recent The?Global Supply Chains – Networks of Tomorrow?report, which polled the senior management of 450 corporates from nine APAC markets – Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, Singapore and South Korea.

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The initial impetus to shake up supply may have been the disruptive events of recent years, but a major driver now is the China-led Regional Comprehensive Economic Partnership (RCEP) – a free trade agreement (FTA) between the ten member states of the ASEAN and its five FTA partners (Australia, China, Japan, New Zealand and Republic of Korea). The HSBC report indicates that APAC companies will have 53% of their supply network within Asia in the next two years, up 6% from 2020, with suppliers in North America and Europe mainly losing out.

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What does this mean for globalisation? The World Trade Organization estimates that a disintegration of the global economy into separate blocs could reduce global gross domestic product by about 5% over the long term with trade back at levels before China joined the WTO in 2001. This remains to be seen, but in the short term Asia’s attractiveness as a market and for supply looks set to increase.

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And as for us? We are agnostic about where clients will establish factories, source supplies or set up Asian HQ operations. Whichever direction they take, we want to be by their side helping them to navigate these new markets and supporting them as they grow their presence in the most vibrant region in the world.

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Thanks for reading. Leave a comment with your thoughts on the subject, happy to hear your opinion and continue the conversation.

And if you think Acclime can offer any value or support to your business in Asia, reach out to me or leave a message to my team, we’ll get back to you promptly:?[email protected].