ASEAN’s prospects of taking over from China might be overhyped.

Foreign Direct Investment into the ASEAN region may be powering ahead, but that does not mean it will take over from China as the global manufacturing centre.

There’s much said about ASEAN (the 10-member Association of South East Asian Nations) taking over from China as the world’s global manufacturing centre.

It’s understandable why.

First, Foreign direct investment (FDI) into ASEAN from outside of ASEAN has recently eclipsed FDI into China.

Second, China itself has been increasingly investing into ASEAN.

And third, The ASEAN Economic Community (AEC) is scheduled to be unveiled in December of this year. The AEC promises to free up the flow of capital, labour, goods and services between ASEAN member countries, so as to accelerate growth and development within the region.

But ASEAN’s prospects of taking over from China might be overhyped.

First, most FDI into ASEAN goes to Singapore, the wealthiest country in the ASEAN collective; indeed, according to some estimates Singapore enjoys the highest material living standards of all countries situated on the Pacific rim (which includes the USA).  Thus in 2013, 50 per cent of all FDI into ASEAN went to Singapore, a country that accounts for less than 1 per cent of the entire population of ASEAN.

So, why does this matter?

It matters because Singapore does not need FDI in the way that its much poorer ASEAN cousins do. This applies especially to Cambodia, Myanmar, Laos, Vietnam and the Philippines all of which have less than 10 per cent of Singapore’s per capita GDP, and need access to foreign capital and know-how so as to develop infrastructure and commercial competitiveness.

Second, while it’s true FDI into China has been growing, as a proportion of total extra-ASEAN FDI (meaning FDI that comes into ASEAN from non-ASEAN countries), it still only accounted for 8 percent of FDI for the three year period ended 2013. That’s way behind Japan which accounted for around 20 per cent and the European Union (EU) which accounted 27 per cent.

To be sure, there are some major attractants capable of increasing FDI from China into ASEAN. Wages in poorer ASEAN economies are typically lower than in China. For example, factory workers’ wage rates in Yangoon (former capital of Myanmar) are 11 percent of comparable wage rates in Beijing. These low rates are an even stronger attractant to manufacturing businesses with head offices domiciled in high-income economies like Japan, Europe and elsewhere. So it may not be the case that China will replace other high-income economies as a principal source of FDI given the existing balance of incentives.

Ultimately, it depends on a range of factors as to whether businesses find it profitable to set up operations in low-wage countries. Wages are important, but so too are the provision of infrastructure (e.g. reliable power, transport), tax regimes, political stability and so on.

And this leads to a third consideration, the establishment of the Asian Economic Community.

As originally envisioned, the establishment of the AEC was seen as a way of increasing the linkages between the member countries and expanding (thereby) economic opportunities for all members. But the economic performance of ASEAN economies has been notably unimpressive since AEC idea was thrown up as a response to the Asian Financial Crisis of 1997-98. ASEAN economic growth in the new millennium has been less than half that of China.

The AEC is a half-baked idea being implemented by an under-staffed and under-financed Secretariat. It’s unlikely that it will make any significant difference to the vapid path that ASEAN currently travels.     

So it seems unlikely that ASEAN will anytime soon take over from China as the world’s manufacturing hub. The machinations of politics, personalities and policies may of course change in the future. But for the time being, the prognosis is not positive. By Len Perry, 29 June 2015