The shift of the global supply chain has undoubtedly driven industrial growth in Asia. Following the development of regional division of labour, co-operation between local and foreign-invested enterprises in Asia (including suppliers and manufacturers in China and ASEAN countries) is growing stronger. As a result, different industries within the region have gradually established close ties between their upstream and downstream operations. The transportation of a wide variety of raw materials and industrial materials to and from the production bases in different regions in support of each other’s production activities has stimulated the rapid expansion of intra-Asia trade.

Among the Asian economies, developed countries like Japan and Korea mainly focus on high-tech R&D, product design, and high-end production, while relocating a large part of their lower value-added production activities offshore. Meanwhile, China, the world’s largest manufacturing powerhouse, has developed a mature supply chain as well as highly efficient logistics and supporting services, and is moving gradually from labour-intensive processing activities to high value-added industries. At the same time, other low-cost regions in Asia are also quickening their pace of liberalisation in an effort to attract more foreign investment and industrial relocation with the aim of establishing a modern industrial system to drive economic growth.

However, hit by the slackening global market in recent years, enterprises in Asia are facing intensified competition. Enterprises in China, plagued by labour shortages and rising production costs, have been prompted by this development to proactively enhance their competitiveness, expanding their international business to broaden their market, while setting their sights on Asia and other regions. By adjusting their regional business strategies, including relocating part of their production and sourcing activities, they hope to forge closer links with Asia’s supply chain and take advantage of their resources in the mainland and overseas to pursue transformation and upgrading, in order to meet the changing demands of the international market.

Currently Guangdong enterprises, which are mainly engaged in exports, and Hong Kong manufacturers, which invest heavily in the Pearl River Delta (PRD) region, are devoting great efforts to developing high-tech and high value-added business as well as making use of automation to enhance production techniques. Some of them opt to focus on building brands in the hope of raising the value-added of their business. When considering relocating part of their production to lower-cost regions in the mainland and overseas, some industry players not only make direct investment in setting up factories but also plan to reach sourcing arrangements with local production enterprises to purchase different kinds of low-cost competitive parts and components to support their higher-end production in the PRD. At the same time, they also export industrial materials from the PRD to support the local and foreign-invested enterprises partnering with them in other regions, as well as their own production activities relocated there from the PRD. In this way, they seek to connect the upstream and downstream manufacturers in different regions with the PRD supply chain. The business development strategies formulated by these enterprises are not based on a single factor alone but take into account the overall cost benefits.

In response to this, Guangdong and Hong Kong should strengthen co-operation in the areas outlined below. This would encourage enterprises in both places to use their internal resources more effectively, as well as those of their business partners, to raise competitiveness. This would help meet the challenges brought about by the changing external investment environment. At the same time, steps should be taken to capitalise on opportunities arising from the Belt and Road Initiative to advance sustainable industrial development in both places.

• Enhancing Automation for Industrial Upgrading

Guangdong and Hong Kong enterprises are currently increasing their investment in automated production, with some of them making use of robotic equipment to carry out high precision manufacturing and to raise production efficiency. This is designed to develop higher value-added production activities. Many suppliers providing robotic technology solutions have already established a foothold in the PRD, offering services in cities like Shenzhen and Dongguan. In Hong Kong, a number of industry players, including the Hong Kong Science and Technology Parks Corporation, are also concentrating on developing such technological applications as robotic end-of-arm tooling[1]. All these help to raise the level of automation of enterprises in Guangdong and Hong Kong.

As well as installing automated equipment, industry players also take into account the whole production system, optimising production processes while mapping out their production plans in accordance with external resources. This includes collaborating with upstream and downstream partners at home and abroad to enhance overall production and operation efficiency. However, standard solutions, especially technical standards for developing smart production systems, are not available in the mainland, and this has somewhat constrained the development of automation and robotic production equipment. This will in turn deter enterprises from moving towards higher-end industries in the long run. This is in contrast to the fact that enhancing industrial efficiency is one of the major objectives of the Made in China 2025 initiative which advocates proactive development of smart manufacturing.

To this end, Guangdong and Hong Kong can join hands to help enterprises reach out to the international arena and bring in technical standards and solutions developed by advanced countries in Europe and North America. For instance, Germany’s Industrie 4.0 strategy[2] aims to develop smart manufacturing technologies with a view to creating smart factories by using Internet of Things and Internet of Services applications to improve industrial production processes in manufacturing, engineering, materials utilisation and the supply chain. The objective of this is to achieve further industrial upgrading.

Hong Kong is the preferred platform for mainland businesses looking for foreign co-operation partners. The city has a strong technology industry and ideal business environment, including a sound intellectual property protection system. As such, it can assist enterprises in importing advanced smart manufacturing technologies and solutions from abroad. Furthermore, the governments of Hong Kong and Guangdong can help promote technology exchanges between industry players and join together to encourage businesses in both places to pursue transformation and upgrading of production technologies.

• Advancing Technological Co-operation

Guangdong and Hong Kong enterprises are also proactively formulating different business development strategies in order to increase competitiveness. As well as seeking transformation to expand upstream or downstream business and building own brands, many manufacturers hope to strengthen their existing business, expand their ability in technology R&D and innovation, and develop products of higher value-added and higher technology content. By doing so, these manufacturers can not only maintain their existing production operations and ensure sustainable business development, but can also reduce the investment risks brought about by branching out into unfamiliar territory.

Currently, the PRD has a large pool of technical personnel, while Hong Kong is the bridgehead for Guangdong enterprises seeking to develop business around the world and find technological co-operation partners in foreign countries. As such, the two places can forge closer ties, taking advantage of the human resources in Hong Kong and the PRD to advance scientific R&D activities while bringing in more technologies from abroad through Hong Kong to help enterprises upgrade their R&D and product design capability. In certain technological arenas, such as the development of the next-generation internet, the application of smart home technology, and so on, the mainland still lacks general technical specifications and user experience, which in turn constrains the R&D and applications of the relevant technologies. Hong Kong’s technology industry players, well-versed in the development of advanced technologies in foreign countries and experienced in using technologies developed in accordance with international standards/frameworks, can assist Guangdong and Hong Kong enterprises in developing the technologies needed.

In addition to using existing technology exchange platforms, Guangdong and Hong Kong can also take advantage of such platforms as the Hong Kong/Shenzhen Innovation and Technology Park, which is being developed jointly by Hong Kong and Shenzhen in the Lok Ma Chau Loop. This park aims to develop into a key innovation and technology R&D co-operation base for the two cities by attracting the entry of leading enterprises, R&D institutions, colleges and universities from Hong Kong, Shenzhen, other parts of the mainland, and overseas. It could also help Guangdong and Hong Kong enterprises commercialise the scientific and technological achievements of the mainland and foreign countries in a move to capture opportunities in the mainland and international markets.

• Improving Regional Logistics Network

In response to rapid globalisation, enterprises in Guangdong and Hong Kong are also strengthening their efforts to connect with the growing supply chain in Asia to support their higher-end production business in the PRD. This includes relocating part of their production and sourcing activities to lower-cost regions. In doing so, they need highly efficient logistics services to help them transport a wide range of industrial materials between the PRD and other production bases in Asia. As enterprises have to respond quickly to the demand of the international market for highly efficient production and its stringent requirements regarding logistics and delivery, they are in dire need of supply chain management on both the global and regional levels.

In most low-cost regions overseas, not only is the production of key industrial materials, parts and components scarce, but the supply of skilled workers, technical staff and engineers is also insufficient. In light of this, enterprises planning to invest in setting up manufactories or carry out sourcing of various kinds of production materials or manufactures there must take into consideration the availability of local materials and technical support.

Hong Kong, with its extensive logistics and transportation networks worldwide, can effectively link Guangdong, Southeast Asia and other Belt and Road countries with major production bases overseas. This can in turn help enterprises make use of the materials produced in the PRD to support their offshore business. Also, blessed with a large pool of personnel well-versed in technological applications and production technologies, Hong Kong can provide these enterprises with effective technical services in support of their offshore production and sourcing activities. Against this backdrop, if Guangdong and Hong Kong can collaborate in strengthening cargo flows and transport links as well as introduce measures facilitating the customs clearance and commercial inspection of import and export goods, enterprises in the two places can integrate their resources in the PRD and foreign countries to improve their business plan for conducting regional production and sourcing.

• “Going Out” Jointly to Capture Belt and Road Opportunities

Hong Kong and Guangdong enterprises can also consider “going out” together to capture opportunities in overseas markets, including those along the Belt and Road. Enterprises in south China are eager to take advantage of opportunities arising from the Belt and Road to seek transformation and upgrading. In particular, they wish to expand sales, invest in setting up factories, and carry out sourcing in Southeast Asian countries along the Belt and Road. Hence, enterprises in the two places can work together and capitalise on the synergy effect to jointly capture Belt and Roadopportunities.

The survey findings mentioned in Section 4.4 above also show that among enterprises in south China which would consider grasping Belt and Road opportunities, 55% of them wish to obtain marketing strategy services which can help them develop new business and new markets. 38% said they would like to participate in market promotion activities which can help them connect with foreign markets along the Belt and Road. 32% want to obtain product development and design services, while 28% seek brand design and marketing strategy services.

In order to capture business opportunities, 60% of the enterprises questioned said they would first seek these services in the mainland. Yet quite a number of enterprises pointed out that they would seek various kinds of professional services elsewhere, with Hong Kong being the most popular location. Half of the enterprises interested in capturing Belt and Road opportunities said they would seek such services in Hong Kong. In fact, Hong Kong is the most preferred offshore platform for mainland enterprises (including those in Guangdong province) conducting outbound direct investment and developing the global market. As such, Guangdong and Hong Kong should encourage more enterprises to take advantage of various professional services offered by Hong Kong to integrate their resources in the PRD and overseas, which will help them enhance their competitiveness and grasp business opportunities arising from the Belt andRoad and other offshore markets. (See HKTDC Research report: Chinese Enterprises Capturing Belt and Road Opportunities via Hong Kong: Findings of Surveys in South China)

• Using Professional Services to Manage Risks

When Guangdong and Hong Kong enterprises “go out” to connect with the supply chain in Asia and other Belt and Roadcountries, whether through direct investment in setting up factories in these countries or by shifting sourcing activities to Southeast Asia and other regions, they must first look into the local business environment, stability of the supply chain, transport and logistics conditions, and applicable legal and taxation requirements. They need to carry out a thorough assessment to minimise investment or business risks, in order to ensure their business plan can achieve the desired results.

Enterprises “going out” must also make professional assessments of their business prospects, such as whether their arrangements can secure sustainable development, the impact on their relationships with existing supply chain partners and mainland and overseas clients, as well as whether the advantages available will be offset in the medium term by government policy changes in the end markets. These include trade barriers (e.g. anti-dumping duty) and preferential treatments (e.g. tariff concessions under GSP) introduced by foreign countries.

In Hong Kong, not only is there a free flow of available information, but also a wide range of professional services such as marketing, legal and accounting. The territory has a good understanding of the business environment in the mainland and overseas markets as well as an extensive international network, and is therefore in a good position to offer recommendations for the right development strategies to enterprises. As well as providing more information to enterprises in both places via the internet or other service platforms, Guangdong and Hong Kong could also consider organising more business events aimed at helping industry players understand and use professional services to plan their future business development better and enhance their competitiveness.

For further details, please refer to:

Shift of Global Supply Chain and Guangdong-Hong Kong Industrial Development (Executive Summary)

Changing Global Production Landscape and Asia’s Flourishing Supply Chain

Changes in Asia’s Textiles and Garments Supply Chain

Rapid Development of Asia’s Electronics Supply Chain

Evolving Role of “Made in China”

Guangdong and Hong Kong to Adjust Regional Business Strategies

[1] For details, please see HKTDC Research report: “Going Out” to Capture Belt and Road Opportunities (Expert Opinion 6): Setting a New Stage for the Technology Industry.

[2] For more details on Made in China 2025 and Germany’s Industrie 4.0, please see HKTDC Research report: China’s 13th Five-Year Plan: Made in China 2025 and Industrie 4.0 Cooperative Opportunities.

Content provided by 

By Philippe Le Corre, Visiting Fellow in the Center on the United States and Europe at Brookings

China’s Belt and Road summit is over but the Chinese narrative is only just getting started. In a video released by the state-owned media outlet China Daily, a Western father tells his daughter a BRI bedtime story: 'China’s idea does not only belong to China. It belongs to the world'. Yet the world - and Europe in particular - still has plenty of reservations about the concept.

In China’s mind, most roads – and belts - lead to the 500 million-strong European Union consumer market, the world’s largest and richest (though the impact of Brexit and the departure of the UK's 65 million consumers remains to be seen). During last week's BRI summit, China insisted it wanted to share 'growth, development and connectivity' and 'collaborate more closely on concrete projects' with the EU, but the European Commission’s vice president Jyrki Katainen made some different points. In his speech at Beijing, he said that any scheme connecting Europe and Asia should adhere to a number of principles including market rules and international standards, and should complement existing networks and policies. The EU's reservations about China came to a head last year when EU lawmakers voted against China's application for 'market economy status' under WTO law, which, if granted, would reduce possible penalties in anti-dumping cases. The sore point is steel: China's huge production capacity has flooded world markets and threatened the robust industrial base the European Commission considers essential for jobs, growth and competitiveness.

But while the battle over market economy status continues, China has been steadily increasing its presence in Eastern and Central Europe. In 2012 it created the '16+1' mechanism, a platform where the Chinese prime minister meets – usually once a year- with the leaders of 16 countries including EU members such as Poland, Hungary, Bulgaria, Slovenia and the Baltic states, as well as non-EU members including Serbia, Albania and Montenegro. This framework has become a launch pad for the Belt and Road Initiative (at least half of the countries have signed BRI memorandums of understanding with China since 2015), and has helped China to build (or in some cases rebuild) close relations with Eastern European countries. After some complaints from Brussels, the European Commission was eventually admitted as an observer the 16 + 1 group.

Major BRI infrastructure projects are now starting to take shape in Europe - not without controversy. One of China’s top state-owned enterprises is building a high-speed railway line between Belgrade, the capital of Serbia and Budapest, the capital of Hungary. A member of the EU, Hungary is currently under investigation for possible violations of EU transparency requirements in public tenders in relation to the project.

Athens’s Piraeus Harbour is another major piece of infrastructure that has become representative of China’s offensive in Europe. Since 2016, the Greek harbour has been controlled by China Ocean Shipping Company (Cosco) which acquired 51% of the Port Authority and will be able to acquire a further 16% by 2021, following substantial investments. The idea is quite simple: through the 'Maritime Silk Road' and the extension of the Suez Canal, China will be able to reach the Mediterranean Sea and will use Piraeus as a platform for Chinese companies and goods. Cosco intends to turn Piraeus into one of the largest container transit ports in Europe.

In 2016, Chinese foreign direct investments in the EU reached €35 billion, a 77% increase over the previous year. While some Eastern and Southern European States - non EU members - often have little alternative to Chinese capital, Western Europe has a different, more nuanced perception of China, hence the determination to protect sensitive technologies that could affect Europe’s long-term strategic independence and/or security.

Brussels is also concerned about the issues of reciprocity and access to the Chinese market for European companies. Despite several years of negotiations, there is still no bilateral investment treaty, and European companies have found it increasingly difficult to do business in China. Year after year, the EU Chamber of Commerce in China has expressed its dissatisfaction about the difficulties foreign firms encounter, concerns shared by the American Chamber of Commerce.

Yet there has been no unified EU policy toward BRI. Several EU countries and cities have been particularly receptive to Chinese investors. Others have been more cautious, seeking guarantees from China that it will follow international standards and not pursue exclusively its geostrategic interests. Although the EU was represented by a European Commission VP last week in Beijing, neither the President of the European Council Donald Tusk nor the Commission’s Head Jean-Claude Juncker made the trip. Among member states, the prime ministers of Italy, Spain, Hungary, Greece and the Polish president were in attendance. Other countries – including Germany, the Netherlands and the UK - were represented by their finance or economy minister. France, which has just changed governments after the election of President Emmanuel Macron, sent a former prime minister.

It is fair to say that the BRI represents opportunities for Europe, but it is primarily a Chinese project that will help China to expand its influence in the vast Eurasia region in future decades. It is not clear what level of control China's 'partners' will have. For the past few years, China has demonstrated its ability to divide Europeans by creating new entities such as the 16+1 mechanism, and by encouraging EU members to join the Beijing-run Asian Infrastructure Investment Bank (AIIB). In 2015, the UK broke ranks with other EU members (and the United States) by announcing it was joining the AIIB, forcing others to follow without delay.

Although connectivity is both a Chinese and EU concept, it is easy to understand why certain European leaders are reluctant to give China carte blanche to invest in the continent’s infrastructure. At the end of the day, Europe and China have similar aims: preserving jobs; fuelling economic growth; and maintaining social stability. They may not achieve these goals in the same ways.

Please click to read the full report.

Agreements reached on investment in Sulawesi tourism facilities, while talks continue on support for Likupang SEZ.

On course for investment: Sulawesi heads for a massive mainland cash injection in its tourism sector.

Last month, the Indonesian government announced that negotiations were under way to secure substantial Chinese investment in the Likupang Special Economic Zone, a major development project in the country's North Sulawesi province. The news follows a sustained charm offensive by Indonesia as it looked to woo mainland Chinese backing for its major infrastructure redevelopment programme, one seen as having a significant crossover with the aims of China's own Belt and Road Initiative (BRI).

While some progress has clearly been made on securing backing for the Likupang Special Economic Zone, other Indonesian infrastructure projects have fared less well. According to the North Sulawesi Provincial Government, five other initiatives are still struggling to find the required funding.

These projects are believed to include the Manado-Bitung Rail Link, which will run alongside a locally financed toll road that is already under construction. In addition, there is the 28 km-long access channel required to connect the toll expressway to the national road network, a tramline linking Wori and Tateli, the Sawangan Dam, and a new waste-disposal facility.

In all of the above instances, attracting BRI money has proven to be not quite so straightforward. Highlighting the reasons many mainland businesses are reluctant to commit to Indonesia-based projects, Zhao Baige, Vice-chair of China's Foreign Affairs Committee, said: "Jakarta really needs to give Chinese companies more support, especially with regard to tax incentives, enhanced clarity in terms of policy and regulations and better communication with local communities.

"Above all, there needs be greater transparency surrounding the policies and legal issues relating to labour, taxation and land usage. Chinese companies need detailed information and, if there's no land allocated to a project, they consider there is no business to be done."

One area where there has been substantially more progress with regard to Sino-Indonesian collaboration is the tourism sector. In May this year, an International Conference on Tourism was held in Manado, the regional capital of North Sulawesi. Staged partly as a shop window for Chinese investors, the event showcased a series of proposed tourism infrastructure developments designed to woo mainland tourists.

As part of the conference, Indonesia's Investment Coordinating Board led a session dedicated to China's growing engagement with the region. In particular, it focused on the contribution that Sulawesi could make to the wider objectives of the BRI.

By the end of the event, agreement had been made on several collaborative ventures designed to boost the local tourism sector. Among the most high profile of these was a US$200 million commitment from China's Anhui Conch Investment Company to develop a 30-storey hotel and a range of tourist facilities in Manado.

As part of the deal, Anhui – the mainland's largest cement manufacturer – will also invest $600 million in establishing a production facility in the region. Once completed, the plant is expected to have an annual output capacity of some 4.4 million tons.

For both parties, greater collaboration on the tourism front was seen as making a great deal of sense. Indeed, Manado has already proved something of a draw for mainland visitors, with 4,000 said to be arriving in the resort every month. At present, Chinese tourists account for 80% of the island province's total number of overseas visitors, a 230% year-on-year increase and a figure that is expected to continue to rise.

At least part of the region's success is down to its geographical advantages. Set within three to five hours flight time of the majority of substantial East Asian residential areas, the city is also the closest tropical Indonesian destination to China. Its tourism numbers got a further boost last year when the Indonesian government gave the go-ahead for direct charter flights between Sulawesi and six mainland cities – Chengdu, Chongqing, Guangzhou, Wuhan, Nanchang and Changsha – as well as Hong Kong and Macau.

Marilyn Balcita, Special Correspondent, Manado

Content provided by 

Shift of Global Supply Chain and Guangdong-Hong Kong Industrial Development (6)

Amid the shift of global supply chain, Guangdong and Hong Kong enterprises resort to transformation and upgrading to increase their competitiveness while formulating new business strategies for production and sourcing in a bid to keep abreast of supply chain development on the Chinese mainland and around the globe. In order to gain a better understanding of the situation, HKTDC Research and the Department of Commerce of Guangdong Province jointly conducted in-depth interviews on selected manufacturing and trading enterprises in Guangdong in the second quarter of 2017. Separately, HKTDC Research also conducted similar interviews on selected enterprises in Hong Kong.

Guangdong and Hong Kong enterprises are keen to upgrade themselves (1).

Guangdong and Hong Kong enterprises are keen to upgrade themselves (2).

Such interviews aimed to identify the factors considered by these industry players when mapping out their business strategies. Given below is a summary of those factors:

• Moving Towards Automation

China has a well-developed supply chain system and highly efficient logistics services. In the face of challenges like rising wages and costs, upgrading factories and introducing automated production equipment can help alleviate some of the problems. This is particularly the case with technology-intensive manufacturing, where the wage of non-technical workforce accounts for only a fraction of costs while the support of experienced technical staff is a must. Industry players relocating production to lower-cost regions in Asia have to deal with the problem of shortages in technical staff.

• Corporate Positioning the Priority

In planning future business, precise market positioning and a sustainable business model are prime factors for consideration. For high-tech or high-end consumer products to compete in the market, low pricing is not the way to win the market. The business development strategies of the interviewed companies mainly focus on building brands, enhancing product quality and technology content, and raising product value in order to achieve transformation and upgrading.

• Using Southeast Asia to Support High-end Production in the Mainland

Relocating part of the low value-added production activities offshore is one of the options in countering rising costs. As well as relocating the production of simple light industrial products, some enterprises also consider shifting the production of certain parts and components or industrial materials overseas. These industrial materials are then transported back to the mainland to support higher-tech production activities there. In view of the fact that the production environment of some Asian countries, such as the Philippines and Cambodia, is relatively backward, industrial relocation mainly involves light industrial products and parts and components which are labour-intensive, can stand longer delivery period and have a longer life cycle.

• Overall Cost Benefit

When making outbound direct investment, consideration also has to be given to the costs involved in transportation, logistics, materials supply and management. The overall market benefit, and not only part of the direct production cost, also has to be taken into account. Since the supply chain in most low-cost regions is typically not well-developed, the majority of raw materials required to support local production have to be imported. This not only increases transportation and logistics costs, but the longer production cycle also makes it more difficult for investors to capture opportunities arising from the changing international market.

• Market Demand Draws Direct Investment

In planning regional production, the demand of the end market must be taken into account before strategic production services can be provided to clients. For example, products produced in factories set up in certain countries in Asia and along the Belt and Road are free from import tariffs when sold locally. Even though such an arrangement may not be the lowest cost, it offers the strategic advantage of expanding the local or neighbouring markets. Some enterprises even opt to establish assembly lines in developed countries, and by doing so, they can not only achieve savings in import tariffs, but can also provide better sales and after-sales services to the local market. This in turn helps to enhance their brand image and business value.

• Foreign Trade Measures Impact Production Plans

Conducting production offshore can avoid certain trade barriers, such as anti-dumping measures against certain Chinese mainland products. Moreover, the trade and tariff concessions granted by some foreign countries to developing countries can also serve as incentives attracting investment in production or sourcing in these countries. However, it should be noted that the selected location for production must have in place a fairly developed supply chain or a relatively convenient transportation network to facilitate the delivery of key parts and components from the Chinese mainland or other places in support of the production activities carried out locally.

For example, currently the US grants preferential import treatment[1] under its Generalised System of Preferences (GSP) to about 5,000 types of products (including travel goods since July 2016) originating from Cambodia, Myanmar and other least developed beneficiary developing countries (LDBDCs). And under the EU’s new GSP (effective on 1 January 2014), about 66% of the goods subject to EU’s tariff nomenclature originating from certain Asian countries such as Indonesia and Vietnam are entitled to tariff reduction or exemption, while Cambodia, Myanmar and Laos are classified as Everything But Arms beneficiary countries, i.e. all products except arms originating from these countries are exempted from import tariffs.

Below are some success stories from the surveyed companies.

Precision Production Planning Based on Regional Supply Chain: Artesyn Technologies Asia-Pacific Limited

Synergy Effect of Regional Production: Luen Thai Holdings Limited

Industrial Upgrading and Cost Consideration: PEAK Corporation of Foshan City

Market Benefit-Led Investment Strategy: Keda Clean Energy Co Ltd

Enhancing Product Value: Modern Precision Dental Instruments Co Ltd

Global Production Strategy: Midea Group

For further details, please refer to:

Shift of Global Supply Chain and Guangdong-Hong Kong Industrial Development (Executive Summary)

Changing Global Production Landscape and Asia’s Flourishing Supply Chain

Changes in Asia’s Textiles and Garments Supply Chain

Rapid Development of Asia’s Electronics Supply Chain

Evolving Role of “Made in China”

Shift of Global Supply Chain and Guangdong-Hong Kong Industrial Development (Conclusions and Recommendations)

[1] These measures do not cover products such as textiles, garments, footwear and watches

Content provided by 

By Douglas Paal, Vice President, Carnegie Endowment for Int'l Peace; and
Matt Ferchen, Resident Scholar, Carnegie-Tsinghua Center for Global Policy

China's place in a changing global order has never been of greater interest, or a source of greater controversy, than it is today. The rhetoric and policies of the Trump administration, alternately threatening to upend, or redouble support for, American trade and alliance commitments in East Asia and elsewhere, have only served to highlight China's status on the world stage at a time of heightened uncertainty in the international order. For his part, Chinese president Xi Jinping has been only too happy to declare that China is ready to step into the void of American leadership as a champion of globalization and economic development. These contrasts and controversies have again been on full display as China has played host to an international summit to publicize the merits of its Eurasian Belt and Road Initiative (BRI).

Yet behind all the hype surrounding China's changing global role in general, and the BRI in particular, lie important and unanswered questions about America's longer-term strategy for reshaping its relations with China and Asia more broadly. Especially given that China's foreign policy comfort zone increasingly seems tied to the promotion of economic “developmentalist” institutions and initiatives, including the BRI, the United States must develop a post-Trans Pacific Partnership (TPP) strategy for shaping trade, investment and multilateral economic governance in East Asia.

To address these important issues, we recently set out to better understand whether China was best understood as a rule-maker or a rule-taker across a range of issue areas and regions. The results largely confirmed that on many important aspects of the existing international order that China is, in fact, more of a rule-taker than a rule-maker. Yet at the same time, it is very clear that while China largely does not aim to directly and fundamentally overturn the existing international rules governing trade and relations among sovereign states, it has nevertheless entered a new period in its foreign policy where it seeks to actively shape its economic and security environment in a way that aligns with its new status and what it sees as a changing international power structure. Especially in its own neighborhood, including Southeast and Central Asia, China is actively seeking ways, including through initiatives like the BRI, to influence patterns of commerce and geopolitics in a way that aligns with its perceived interests.

Against this backdrop, America's retreat from East Asian trade initiatives like TPP and its questioning of regional alliance commitments contrasts sharply with China's more activist, many would say assertive, regional economic and security policies. Yet if China is not more generally seeking, or able, to supplant the United States as leader of a post-World War II liberal international order, a crucial issue for U.S. foreign policy is how to reshape its relations not only with China but with East Asia more generally in a way that accommodates China's new status and foreign policy activism but that also directly sets out a strategy for America's role in a heterogeneous and dynamic region that is paying keen attention to the maneuverings of both the United States and China.

One starting point is to think anew about America's engagement with China as well as both developed and developing countries in Asia on important topics such as economic opportunity and public goods such as economic development and economic governance in the region. Especially with its withdrawal from TPP, the United States cannot afford to be seen as ambivalent about the region's many economic challenges, and opportunities, especially at a time when China is promoting high-profile institutions such as the Asian Infrastructure Investment Bank (AIIB) and regional trade and development initiatives like the BRI. The Obama administration's misguided hostility toward the AIIB can and should be corrected with a willingness to take a role in that organization. At the same time, while China has declared that the BRI will be China's most important contribution to date toward the provision of regional public goods, it has also gone out of its way to declare that the initiative is not a Chinese Marshall Plan.

One venue where the U.S. and China should seek to address these issues, and the potential for misunderstanding, is in the newly restructured Comprehensive Dialogue that replaces the increasingly bloated and inefficient Strategic and Economic Dialogue. To make headway in reducing rising strategic rivalries, leaders on both sides will have to make a conscientious effort to discuss the possible, and real, overlap between economic, geopolitical and security issues surrounding Chinese-led development institutions and initiatives.

Yet the United States should not cede the important ground of economic development, including transportation and energy infrastructure, and more broadly of regional economic governance, to China's initiatives alone. Instead it must seek ways to actively engage China in multilateral institutions like the AIIB as well as on open-ended initiatives like the BRI. But more broadly it should seek to take a leadership role in helping to provide an updated Bretton Woods structure for East Asia that establishes cooperative and transparent structures that offer opportunities for countries big and small.

Please click to read the full report.