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Shifting Supply Chains from China to Southeast Asia
Many multinational companies have been gradually shifting segments of their supply chain out of China due to cost considerations. The US-China trade war accelerated this trend, prompting businesses to explore alternative manufacturing locations.
Geopolitical factors, rather than purely commercial considerations, are now the primary drivers of supply-chain shifts, with government pressure likely to intensify over the decade.
China’s emergence as the global manufacturing hub began with its accession to the World Trade Organization (WTO) in 2001. China then quickly improved its supply chains and productivity to manufacture higher value products at a low production cost.
Key Takeaways
- China’s rising production costs have prompted the shift of supply chains to Southeast Asia, particularly for labor-intensive goods.
- The Sino-US trade war and the COVID-19 pandemic have accelerated the relocation of manufacturing bases from China to countries like Indonesia, Thailand, and Vietnam.
- Southeast Asia’s increasing investment in infrastructure and sustainable energy is making it an attractive destination for manufacturing, with potential to improve the region’s human capital and economic growth.
Prior to this, China had already implemented export-friendly policies, such as VAT exemptions on most exported products and a permissive regulatory environment. Combined with a large pool of low-cost labor and rapid infrastructure development, China solidified its position as a manufacturing powerhouse. Additionally, the deliberate devaluation of its currency in 1994 by the Chinese government further enhanced its competitive advantage.
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