From Foreign Policy, July 15:
From Malaysia to Mexico, some countries are gearing up to benefit from economic fragmentation.
A full decoupling of the Chinese and Western economies could be a costly proposition. The International Monetary Fund estimates that it could shave around 7 percent off global GDP in the longer term, a loss equivalent to $7.4 trillion or about the size of the French and German economies combined.
The IMF also predicts that developing economies would be hit hardest if Washington and Beijing were to cut economic ties. But what these aggregate figures miss is that is that some emerging economies will be winners from decoupling—or, as its somewhat milder form is called today, de-risking. In fact, some emerging countries are fast positioning themselves to benefit as China and the West rewire their supply chains—for example, by serving as industrial and trade hubs between both sides or by playing one side against the other for investment support.
Here are five trends that highlight how some countries are gearing up to benefit from U.S.-China tensions and the economic fragmentation they are bringing about.
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1. Countries like Malaysia benefit as new industrial hubs for critical goods. Malaysia’s northern island state of Penang may not often make the headlines, but its 1.7 million inhabitants have lately been witnessing an economic boom. As multinational companies diversify supply chains for the production of critical goods away from China, Penang has positioned itself as a neutral manufacturing hub for legacy semiconductors. While Malaysia has a 50-year history producing microchips, there has been an unprecedented recent rush to set up assembly and testing lines for semiconductors on Penang. The island attracted $13.5 billion in foreign direct investment last year, more than the sum of all such investment from 2013 to 2020.
In turn, the island has become a major supplier of semiconductors, providing 20 percent of U.S. chip imports in 2023. Looking ahead, the island’s edge in microchips looks set to grow further: U.S.-based Intel has just announced a $7 billion plan to expand production on the island. Western firms are not the only ones interested in Penang: xFusion, a former Huawei subsidiary, and Shanghai-based Starfive both plan chip production on the island. Perhaps the interest of Chinese firms for Malaysia should not come as a surprise: Unlike China, Malaysia is not subject to U.S. controls on the export of advanced semiconductor technology or machinery, making Penang an ideal base for Chinese firms looking to skirt these measures.
2. China is redirecting its investments to new emerging markets. Western firms setting up additional production lines outside China have become a familiar example of corporate de-risking, but they are not the only ones diversifying. Chinese firms, too, are shifting or adding production abroad to hedge against Western de-risking plans. This trend explains the huge rise in Chinese foreign direct investment (FDI) in several emerging economies, including Mexico and Hungary.
In early 2024, Mexico became the favorite destination for Chinese greenfield FDI in manufacturing and logistics. This trend looks set to last: Mexican industry bodies reckon that one in five businesses setting up shop in the country’s industrial parks—which are a perfect base to produce goods covered by the U.S.-Mexico-Canada free trade agreement—will be Chinese in the coming two years. Eastern Europe is another beneficiary of China’s diversification strategy. CATL, a Chinese battery giant, is building an $8 billion plant in Hungary, for instance. By cultivating economic ties with a Beijing-friendly European Union member like Hungary, China is playing the long game. If it were to invade Taiwan, Beijing would be quick to point out that the EU has every interest in remaining neutral (read: avoid imposing sanctions on China) if the bloc does not want to jeopardize thousands of jobs on European soil.
3. De-risking is turning some countries into intermediaries. De-risking comes with unexpected side effects: according to the Bank of International Settlements, which has looked at the production lines of thousands of global firms, supply chains are getting longer. At first glance, this seems counterintuitive. If de-risking is pushing Western companies to produce closer to home, surely supply chains should be shortening? BIS data show that this simple reasoning does not hold up to scrutiny. Instead of cutting ties with China, many Western businesses are still buying Chinese-made supplies—but they are now buying them from connector countries that act as a proxy between both sides.
A look at Vietnam’s trade statistics shows how this works in practice. The value of Chinese goods exports to Vietnam has nearly doubled since 2017, to more than $138 billion last year. (China’s overall goods exports only grew by about half over the same period.) It is hard to believe that Vietnam’s consumer market is absorbing such a massive influx of Chinese gadgets. Instead, many of China’s shipments are simply transiting via Vietnam en route to the United States. This trend helps to explain why U.S.-Vietnamese trade is booming. The value of Vietnam’s exports to the U.S. has grown almost three-fold since 2017, with a near-perfect correlation between the growth in Vietnam’s imports from China and that of its exports to the U.S. On paper, this looks like a de-risking win for the U.S., which imports less from China and more from Vietnam. Yet the reality is different: In truth, U.S. reliance on China remains unchanged—while supply chains get even longer....
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Also at Foreign Policy, July 16:China’s Third Plenum, Explained