North Asia is reshuffling supply chain to Southeast Asia in response to China vertical integration of the value chain

• In the first five chapters of this series, we examine several important issues for the global economy and Asia. First, both GVCs and RVCs are declining. The decline in the integration of value chain is worrisome since its expansion has shown to create wealth and jobs across the world. More specifically, the reduction in Asia means that these economies are participating less in either exporting their intermediates used by the rest of the world for exports or by importing less foreign inputs for exports.
• Notably, China value chain integration is not falling nearly as fast as the rest of the world, and more importantly, its evolution is asymmetric as China raises its ability to export intermediates to the region while imports fewer regional inputs for production. This is particularly pertinent for North Asian economies, which have long been important exporters of intermediate goods into China and they are losing that role. This report analyzes the response of North Asian economies, namely Japan, Korea and Taiwan to China’s rise in value-added and asymmetric participation in the global value chain.
• None of these economies, especially Taiwan, are standing idle, as they diversify by deploying capital to Southeast Asia at accelerating rates. In the case of Taiwan, reshoring production home is also becoming part of the solution. The recipients of North Asia outward foreign direct investment (FDI) are in Southeast Asia, especially Vietnam, where trade friendly policy has resulted in the fastest increase in their global market export share, followed by Taiwan.
• The rise in manufacturing FDI and export share have also meant an increase in contribution of the Vietnamese domestic value added of export of intermediates to the rest of the world. This is also the case of Taiwan. Looking ahead, we expect Vietnam to continue to do well, followed by Thailand and Malaysia. But there are clearly opportunities for demographic rich economies like India, Indonesia and the Philippines if the necessary reforms and investment-attraction policies are introduced. China, too, despite becoming more expensive and having higher tariffs, retains its medium-tech competitive edge supported by a massive market.

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