Key Takeaways
- Geopolitical friction, trade barriers, and industrial policy are challenging Asia's dominant supply chains. However, our analysis of the data shows the supposed shake-up is far less than headlines would suggest.
- China's share in global exports has held up even though it has declined in the U.S. Other Asian emerging markets and Mexico have made modest gains at the expense of Asia's developed economies. Meanwhile, as foreign direct investment (FDI) into China seems to have plunged, Asian EMs and Mexico have generally not seen significant increases.
- Global supply chains will continue to evolve. But we think China's role in global exports won't diminish drastically and most other Asian EMs won't be major net winners of relocation from China.
The headlines would suggest a production exodus from China as global supply chains shift. Yet China's share of global imports is higher than it was six years ago. Our analysis of exports and inward foreign direct investment patterns shows that this will be a slow-motion shakeup.
This is not to say that relocation isn't happening. In recent years, unfavorable experiences during the pandemic, rising geopolitical tensions, and new trade barriers and industrial policies have motivated many firms to reassess their global supply chains. In particular, their China operations.
Even before these recent developments, firms in sectors such as textile and sneakers moved production out of China as wages and other costs rose rapidly. Such relocation has intensified and broadened out to other sectors, especially electronics including semiconductors and smartphones.
In addition to moving out of China, multinationals are now more likely to install new capacity elsewhere. Moreover, current plans and discussions in many countries on restricting trade and investment ties with China suggest that more supply-chain adjustment is on its way.
However, trends in exports and inward foreign direct investment (FDI) show that, overall, the role of Asian economies--including China--in global supply chains is changing only modestly.
China's Role In The Global Economy Is Evolving
While changes have taken place, the global market share of China's exports has held up. The country's share of U.S. goods imports has shrunk since the Trump administration increased tariffs on most type of imports from China by 25 percentage points in 2018 (see chart 1), with other Asian EMs and Mexico filling most of the gap. And China's share of Japan's goods imports has also declined. On the other hand, its share of the European Union's imports still exceeds its 2018 level. In all, China's share of developed markets' imports fell in the six years to early 2024 (see chart 2).
Chart 1
Chart 2
Meanwhile, the country's exporters have expanded their share of the imports of emerging markets. This matters, as emerging market (EM) imports make up a large and rising proportion of the global total (see chart 3). In all, China's overall global market share in the 12 months to April 2024 was slightly higher than six years earlier.
Why is China's global market share holding up despite significant supply-chain adjustment by multinational companies? One key reason is the rising role of "normal" exports from supply chains run by increasingly competitive domestic Chinese firms that rely more on domestic suppliers.
Exports of Chinese-brand capital goods, electric vehicles, smartphones and home appliances have expanded rapidly in recent years. Since around 2010, normal exports have vastly outpaced "processing exports" based largely on imported components assembled in China for re-export to third countries (see chart 4).
China's role in global supply chains also benefits from its vast industrial sector. The landscape includes competitive firms and specialized suppliers, as well as good infrastructure and facilitating local governments. Relocation to economies with smaller, less-developed industrial sectors has sometimes led to difficulties and cost increases.
Chart 3
Chart 4
Other Asian EMs And Mexico Have Gained Somewhat At The Expense Of Developed Economies
Our exploration of how the exports of key "competitor" economies have fared amid the recent supply chain adjustment shows that, as China's share actually rose, other Asian EMs and Mexico have made modest gains at the expense of Asia's developed economies.
Tracking The Flows: Our Metric
To explore international supply-chain shifts more generally, we track the share of the exports of different Asian economies and Mexico in the total exports of this group:
Exports of individual country / (exports of Asia + Mexico).
Monitoring the market shares relative to this sub-total has two advantages over looking at global market shares: The data is more timely; and the trends are less distorted by the volatile price swings of energy and commodities, which don't feature much in Asian exports. Mexico is included because of its role as a gateway into the U.S. (we exclude Mexican oil exports).
Our method to assess changes in countries' role in international supply chains should capture shifts correctly. If, for instance, Chinese exports to the U.S. are replaced by Mexican exports that rely on imported components from China, our metric would show a rise in Mexico's market share. It would show a decline in China's share as long as the value of the additional Mexican exports to the U.S. exceeds the value of Mexico's imports from China which is very likely.
Based on our metric, China's export market share rose to 39.8% in the year to mid-2024, from 36% six years earlier.
Among developed economies, Japan and South Korea have seen their share of total Asian exports continue to decline since mid-2018 (see chart 5). Some of that trend is driven by Japanese and South Korean manufacturing firms expanding production in other, lower wage, economies such as in Southeast Asia. Another reason is that China's rapidly rising normal exports rely less on components from Japan, South Korea and Taiwan than the country's flatlining processing exports.
Hong Kong's share has fallen substantially since mid-2022. Taiwan is the only developed economy that has seen its share rise somewhat in the last six. This is in part because some of its companies have moved production from mainland China to their home territory amid the geopolitical turmoil.
Asia EMs' export share is only rising modestly
A lot of attention has been paid to the shift of production from China to other Asian EMs and Mexico. Relative to the discussions and anticipation, the rise in EMs' export share in the last six years has been surprisingly modest (see chart 6; notice the difference in scale between charts 5 and 6). This is true even if in some countries the shift has been more significant relative to the size of the domestic economy.
Chart 5
Chart 6
- Vietnam's share of total Asian + Mexico exports expanded impressively in the 15 years through early 2020. Its rise was subsequently disrupted for several years. While recent trends suggest it may have resumed, Vietnam doesn't seem to have been as much of a winner in the recent global supply-chain shifts as is sometimes assumed.
- Indonesia's share has risen in recent years as it has expanded its role in the mining and processing of metals and minerals for the green transition such as nickel. Indonesia has not yet materially raised its share of core manufacturing exports.
- Malaysia's share in the year to June 2024 was the same as six years earlier. Thailand's share declined in that period, while the Philippines' share remained broadly unchanged.
- India's share of Asia + Mexico exports rose to 5.2% in the 12 months through June 2024 from 4.8% in the year through mid-2018. While that implies progress, this gain is around one-tenth of China's in that period. Nonetheless, India has been very successful in expanding its services exports.
- Mexico's proximity and easy access to the large U.S. market makes it a useful gateway into its northern neighbor as firms are revisiting global supply chains. Mexico's non-oil share was 0.5 percentage point higher in the year to June 2024 than six years ago.
FDI Data Also Suggests Limited Gains For Other Emerging Markets
A related economy-wide metric that we follow is the share of different economies in total FDI into Asia plus Mexico. The plunge in China's share of total inward FDI since 2022 (see chart 7) suggests that more change will come. We would expect to see FDI rise in EMs that are attracting new manufacturing activity. However, the data tells a story of limited gains.
The jumps for Hong Kong and Singapore likely stem in no small part from financial flows due to relatively high (U.S.-linked) interest rates. We expect some of these flows to be temporary. While some may flow to non-China Asian EMs, some may flow back to China as investment plans firm up or interest rates come down.
Among EMs, while there have been ups and downs, mostly due to the pandemic, Vietnam is the only "manufacturing" economy that has a significantly (1.7 percentage point) higher share of the Asian + Mexico total than six years ago (see chart 8). Indonesia's FDI has risen because of its green transition boom. India's share has declined. Mexico's share was broadly equal in the year to March as six years ago.
Chart 7
Chart 8
On an absolute level, FDI into Asian EMs excluding China was US$24 billion lower in the year to March 2024 than six years earlier. The total for Asia-Pacific excluding China rose. But that was more than fully driven by Australia, Hong Kong, and Singapore.
This data underscores an important, sobering point about the impact that deglobalization and decoupling could increasingly have on Asia. The common assumption is that Asian EMs will reap manufacturing benefits as trade and investment links between the West and China decline.
However, such relocations away from China will hurt the country's economy, in turn dragging on its demand for goods and services from the region. Moreover, the uncertainty created by the proliferation of trade and investment restrictions will weigh on confidence and investment in the region. In our view, this means there are fewer winners in Asia from the decoupling away from China than is often assumed.
Related Research
- Global Tech's Shift From China: The Effects By Firm, May 3, 2023
- Global Tech's Moves From China Will Be Costly…And Unavoidable, April 20, 2023
This report does not constitute a rating action.
| Asia-Pacific Chief Economist: | Louis Kuijs, Hong Kong +852 9319 7500; louis.kuijs@spglobal.com |
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