Will China’s rivals benefit from the trade war?

 

YOU CAN judge a nation by its plastic bags. Or so you might conclude after a visit to An Phat, a Vietnamese company that is one of South-East Asia’s largest exporters of plastic packaging. Japanese clients insist on the highest-quality bags, composed entirely of new plastic, not recycled materials. Eco-friendly Europeans demand biodegradable bags. Convenience-loving Americans want bag handles that tie easily into knots.

Lately the workers at An Phat have spent more time catering to American tastes. Of the $ 2.5bn-worth of bags that America imports annually, roughly two-fifths come from China. In September these were among the 5,745 Chinese-made products that started facing American tariffs of 10%—high enough to tempt retailers to look for suppliers elsewhere. “America has been a hard market to break into, and we saw we could make a push,” says Nguyen Le Hang, An Phat’s deputy chief executive. Over the past three months its sales to America have more than doubled.

Around the world, companies and countries are vying for business that is seeping away from China because of the trade war. America’s president, Donald Trump, hopes his hardball tactics will bring more factories home, but there is little evidence of that so far. Instead, other countries in Asia are more likely to benefit, because they can more readily step into the voids left by China. Both those further up the value chain than China and those below it spy opportunities.

Wealthier countries are eyeing some of the high-end manufacturing that they lost to China. Taiwan is trying to lure back computer companies, while Malaysia and Thailand want to expand their footholds in electronics. In low-income countries, the focus is on the cheaper sectors that China has long dominated. Vietnam is strong in food processing; Cambodia in footwear; Bangladesh in clothing.

But the trade war cuts both ways. “Factory Asia”—the web of supply chains that is spread across the region, often centred around China—accounts for nearly half of global manufacturing. The more closely countries are integrated with China, the more that they, too, will suffer from America’s tariffs. The question is whether the gains from any business they snap up from China will offset the slowdown in China-centred trade.

The shift in factories away from China in fact predates the trade war. For the better part of a decade, soaring wages have nudged companies, particularly those in labour-intensive industries such as garment-making, towards poorer Asian countries. Those in more sophisticated sectors are also affected: university graduates in China now earn nearly as much as their Taiwanese counterparts. Over the past few years China has also ratcheted up its environmental standards, pressuring factory owners to invest in more modern facilities or shut up shop. It is not just foreign companies that are looking for more hospitable climes. Chinese firms are doing the same: their investment in manufacturing in South-East Asia has been growing by nearly 50% a year. Mr Trump’s tariffs should help accelerate these trends.

Not in the bag

Yet the transition away from China is far from straightforward. It is the world’s biggest exporter for good reasons. The country’s dense clusters of companies offer everything manufacturers need: electronics in the south, automobiles in the east and heavy industry in the north. They are supported by top-notch roads and ports. As wages have risen, companies have poured money into automation. Moreover, China itself is a big market, and manufacturers want to stay close to their customers.

All these advantages make China’s factories productive. Dan Krassenstein, director of Asian operations for Procon Pacific, a manufacturer of heavy-duty bags for transporting fertiliser, sand and the like, says that China still has its attractions. Workers in India earn 75% less than those in China. But because they are also less efficient, Mr Krassenstein estimates that his savings per bag in India are only around 35%. His company is shifting some production to India—but only gradually.

Others can only absorb so much manufacturing from China before their costs spiral. Its workforce is more than double that of all South-East Asian countries combined. Walter Blocker, chief executive of Vietnam Trade Alliance, a group of consumer-product firms, describes the flow of business from China into Vietnam as a deluge. Already, wages are rising quickly, as are land prices in industrial parks.

The upshot is that China cannot easily be replaced. Sudhir Shetty of the World Bank reckons that others in the region thus have more to lose than gain from the trade war. Pain for Chinese exporters will spread to their suppliers, from chipmakers in South Korea to textile-makers in Myanmar. On top of all that, uncertainty about the global trading system could take a toll on investment in Asia. “We are talking about the part of the world that has gained the most from openness,” says Mr Shetty.

There is little precedent to help estimate the impact of trade war. Zhang Zhiwei of Deutsche Bank has used America’s anti-dumping duties on China-made washing machines, imposed in 2017, as a case study. China’s exports of washing machines to America collapsed, but those to other countries stayed strong. Meanwhile South Korean firms shifted production to Vietnam and Thailand, which let them expand their sales in America—a decent outcome for Factory Asia. But then in January 2018 Mr Trump whacked tariffs on all imported washing machines. That finally led Asian makers to open factories in America. Machines there are now 15% more expensive.

Casualties unknown

One thing looks clear from recent data: the region is already being buffeted by trade headwinds. In 2017 exports from both richer countries—Japan, South Korea and Taiwan—and poorer ones, such as the Philippines and Vietnam, rose at double-digit rates. This year the pace has slowed sharply. Strikingly, Chinese exports have fared much better; in September they were 15% higher than a year ago. But that was because companies were shipping as much as they could before tariffs took effect. Disruption is on the horizon.

For some, that prospect is welcome. Already South Korea’s Samsung Electronics produces a third of its global output in Vietnam, and it plans to expand. Japanese investment in Vietnam is booming. At An Phat, there is almost giddy excitement about its chances of acquiring big new customers, and not just for plastic bags. The company is refashioning itself as a maker of complex parts for washing machines, mobile phones and more. It has brought in state-of-the-art robots and plans to double its workforce next year. The trade war, it hopes, will be a bags-to-riches tale.

This article appeared in the Finance and economics section of the print edition under the headline “War profiteering”