By Narupat Rattanakit
The global supply chain has never been more salient since the global pandemic of COVID-19. The ongoing war in Ukraine and the tense relationship between the United States and China has given Southeast Asia more global attention. Signs of economic diversification in Southeast Asia have brought opportunities for better economic engagement with the region. Since the announcement of the Indo-Pacific Economic Framework for Prosperity (IPEF) headed by the United States, support for a resilient economy in the region has become a priority of vital importance. But why is Southeast Asia a critical supply chain hub and what proposals can the US implement to improve supply chain resilience amidst the continuous challenges and disruptions the world is currently facing? To answer the first question, Southeast Asia is a key manufacturing center for electronics and labor-intensive goods. This is due to the region's growing economy, investment attraction, and geoeconomic vantage point. Hit hard by the COVID-19 Delta variant which has affected the tourism sector, which accounts for a large share of the region's GDP, the pandemic has also caused supply shortages due to shipping delays and backlogs. The disruption has resulted in an increase in inflation and has been most acute in the United States. Given Southeast Asia’s crucial role in the global supply chain, the United States must ensure the same level of messaging to all key stakeholders in the region regarding supply chain resiliency. With a population representing 8.58% of the world, and a rapidly growing economy, according to the World Economic Forum, ASEAN will overtake China as the world's fourth-largest economy within the next decade. In addition, the Asian Development Bank predicts that by 2030, 70% of ASEAN's population will be middle-class, resulting in massive business opportunities and a $4 trillion consumer market in the coming decade. This is largely due to the digital economy and the semiconductor industry which are expected to be the economic driving forces in the region where the region is on the road towards a $1 trillion gross merchandise value economy by 2030 according to a joint report published by Bain & Co. Aside from the region being a vital role in the global chipmaking industry, accounting for nearly 30% of semiconductor testing and packaging, many countries in Southeast Asia realized the importance of the digital economy where they have already begun adapting under the ASEAN Digital Integration Framework (DIF) in 2018. Moreover, the adoption of the ASEAN Smart Cities Network (ASCN) presents opportunities for investments across multiple sectors. Consequently, Southeast Asia’s proximity to China has given the region an advantage to diversify its supply chains and take advantage of low-cost labor, a convenient factor for companies looking to expand their Asia-Pacific operations. Member states of ASEAN have worked to reduce trade barriers within the region where this year Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam have joined the Regional Comprehensive Economic Partnership (RCEP), creating the world’s largest free-trade area covering 30% of the world’s population. This has given Singapore an edge over Hong Kong as a gateway to mainland China. In Southeast Asia, globally competitive clusters of activity have emerged across the region, becoming springboards for innovation that are creating opportunities for businesses to diversify investment. Many of these benefited from government support in the form of industrial master plans and incentives to develop industrial estates also known as Special Economic Zones (SEZs) and attract foreign investors. A good example is the eastern seaboard of Thailand, which has become a major manufacturing hub for petrochemicals and automobiles. The Thai government is now seeking to transform this region into an expanded Eastern Economic Corridor (EEC). Another example is the Penang-Kulim corridor and the southern region of Iskandar in Malaysia which aims to be a globally competitive manufacturing and logistics cluster. During the ministerial meeting in Los Angeles in September, “supply chain issues garnered the most enthusiasm.” Since economic security is one of the fundamental principles that has driven ASEAN’s regional cooperation, the intent for Southeast Asia is to recover economically and remain regionally prosperous by focusing on six key areas: establishing critical sector and goods criteria, increasing resiliency and investment in critical sectors and goods, creating an information-sharing and crisis response mechanism, strengthening supply chain logistics, enhancing worker role, and improving supply chain transparency. Aside from the US, Japan will also play a critical juncture in supporting and strengthening supply chain resiliency according to a joint statement announced last May as Japan continues to rank first in both trust and accumulated investment in the region. By highlighting the importance of Southeast Asia as a critical supply chain hub, the US can help support supply chain resilience through trust which is essential for the smooth functioning of supply chains throughout the region. Moreover, greater trust between businesses and suppliers will provide high-quality goods and services while also ensuring investors that their businesses will manage their supply chains responsibly.
In conclusion, as the Department of Commerce is leading supply chain resilience topics, the distribution of public goods such as infrastructure, education and skill training, research and development, and social safety nets are critical to improving policy-driven adjustments. The US continues to rank the highest in FDI in the region, therefore, reshuffling the supply chain and diversifying risks will mitigate risk for US businesses. An example of this is that Intel has announced that it will invest in a $7 billion semiconductor packaging facility in Malaysia. Additionally, Apple has started discussing shifting its production of Macbooks and Apple Watch to Vietnam. Moreover, for the US to increase its investment in improving and supporting supply chain resiliency, it is also crucial to enforce the same level of transparency in the region between the government and private sectors. To further mitigate global supply chain risk, especially in Southeast Asia, a proposal for the US is to create early warning systems, particularly supply chain intelligence network through the use of blockchain technology to achieve efficiency which increases supply chain capabilities that are critical to achieving resiliency against sudden or unexpected disruptions. It is, therefore, the United States' role to synchronize trust between the public and private sectors in Southeast Asia to take advantage of the geoeconomic features that the region is known for.
Comments