ASEAN production network

KPAT

I Made Krisna Gupta

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Today

  • A reminder on the Global Value Chain.

  • Production network pattern in ASEAN.

  • Increasing importance of China in the region.

Some stats

  • East Asian non-oil exports recorded 3-fold increase between 69/70 - 90/07: from 11% of global non-oil exports to 33%.

  • Japan dominated the 60s and 70s (60% of total east asian exports). This figure drops significantly to 20% in the late 00s.

  • China has been the main story, but also other regions.

  • Asian exports are 92% manufacturing goods.

Some stats

Source: Athukorala 2011

Some stats

Source: Athukorala 2011

Some stats

Source: Athukorala 2011

The flying geese

  • Flying geese model coined by Akamatsu (1961, maybe earlier): Production moves from the lead to rearguard countries, starting with labor-intensive industries.

  • The Lead geese is Japan

  • Second tier are South Korea, Singapore, Tainwan and Hong Kong.

  • Third tier is Thailand, Malaysia, Indonesia

  • Rearguard: China, Vietnam, etc.

The flying geese

  • At the beginning, Japan grew faster in Asia (somewhere in the early 1900s to the 1960s)

  • At some point, Japan wage level became too expensive, and it sources labor-intensive industries to the second tier of the flock.

  • The second tier grew, then outsource its labor-intensive to the third tier. The second tier then develop its own innovation as well.

  • At it keeps on happening untul the rearguard.

  • GVC changed this model slightly in the 80s

Framework

  • In East Asia, the second unbundling concept has been central to their development strategy.

  • Kimura (2017) identifies 4 concepts:

    • Fragmentation theory (aka. the global value chain)

    • Two-dimensional fragmentation

    • New economic geography

    • Trade in value added (TiVA)

Global Value Chain

Typical Global Value Chain (GVC) of an airplane industry

GVC

  • large reduction of trade cost mean firms can engage in trades in intermediate inputs.

  • Activities of a production process can be separated and move into countries with comparative advantage in those sectors.

  • This changes the calculation of industrial policy: free flow of goods is actually important for firms to marginally exploit its advantage

  • Labor-abundant countries like Vietnam can participate in the value chain of high-tech products by doing the assembly while import tech-heavy components from abroad.

  • Backward participation like this is crucial for an industry to learn and upgrade.

GVC

Illustration of a high-tech country’s participation in the GVC

GVC

Source: Kimura 2021

GVC

  • The prototype of such model in ASEAN was the Penang export processing zone (EPZ) in the 70s to early 80s.

  • The EPZ manufactured semiconductors with 100% imported components for 100% foreign market (i.e., 100% import and 100% export)

  • Hong Kong and China relationship on garment and light industries, where HK firms operates in China, utilizing the rules of origins and wage difference.

  • The important piece (tech owner) is still the head of the geese.

2D Fragmentation

  • in the firm’s perspective, there are 2 important considerations:

    • Geograpihcal distance: the farther, the costlier fragmentation becomes.

    • Control: how much tasks actually gets outsourced

  • Longer-distance transaction tends to be intra-firm, while closer tasks are usually outsourced.

  • The close-distance transactions is the backbone of agglomeration in developing countries.

2D Fragmentation

Source: Kimura 2021

Agglomeration

  • If developing countries want to move up the value-chain, local firms must be able to participate in the value chain.

  • It often comes through supplying lead firms (typically MNC FDI).

  • The lead firm often provides schematics and know-how for the SMEs. Out of numbers of them, some may learn and upgrade.

  • China largely succeed in utilizing this strategy (Chor, Manova, Yu 2021)

Core-periphery

  • external economies of scale suggests that concentrating a large industry in one place benefit the world by reducing the cost for all.

    • This is called concentration forces e.g., scale, matching, market access.

  • However, comparative advantage of certain tasks create an incentives to move some tasks to a periphery economy

    • Dispersion forces e.g., less congestion, low trade cost, wage differences.

  • nickel is a great example for this model.

Core-periphery

Source: Kimura 2021

TiVA

  • Using international input–output tables, allows us to measure the domestic/foreign value-added ratios embodied in each country’s production and exports.

  • This allows us to calculate the upstream–downstream position of each country’s industries.

  • Although the input–output analysis itself is an old quantitative technique, the TiVA framework enables us to visualise the overall picture of GVCs.

Some stats

Source: Kimura 2017

East Asia network

  • East Asia’s production network relies mostly on electrical machinery, particularly semi-conductor devices.

  • This is true for both components and final products.

  • Automotive is quite the opposite: only 4.7% in East Asia but around 33% in the Americas.

  • 2 posible reasons: protectionism and low value-to-weight ratio.

Chinese role

According to the ASEAN Statistical yearbook 2021, China in 2020:

  • Largest source of import (23.5% of total ASEAN imports)

  • Second largest destination of exports (15.7% of total ASEAN exports)

  • 5% of total FDI in the region

  • More than 22% of total visitors in 2019, the largest.

Chinese role

  • Trade with China is massive

  • China-East Asia trade flow accounts for nearly 90% of exports and imports in total manufacturing.

  • Increased imports of components from East Asia from 18% to 44% of total component imports from 94/95 to 06/07.

  • Chinese exports to East Asia drop from 55.8% to 33.7%.

  • “component bias”: China’s component import is increasing, while exporting final goods more to the world.

Chinese diplomacy

  • Success in economic reform & fast growth in the 1990s instils confidence in the Chinese government in its external relations.

  • “China’s foreign policy is transforming from inward-looking, mainly concerned about its own development, to outwardlooking, concerned both about its own development and the development of the world.” (Wang Yizhou in 2004).

  • Zhu Rongji proposed CAFTA (China-ASEAN Free Trade Agreement) in 2001, which was enforced in 2010.

Against the US

  • Decoupling thesis: after the Asian Financial Crisis in 97/98, Asia will decouple with the west.

  • IMF and western conditional debt irks many political figures in East Asia.

  • This “Chinese appeal” was deemed crucial for China to propose the CAFTA.

Conclusion

  • Manufacturing in ASEAN is closely related to the giants in the region.

  • GVC and core-periphery models create a unique network where big firms in the region leads.

  • ASEAN was supposed to be the next-layer Geese, but China increasingly become important as a production base for the lead to supply the world.

  • Innovative Local firms are important, which ASEAN lack.

  • Remains to be seen how US-China would affect.

Further study

  • Earlier studies were focusing on machinery, automotive and electronics.

    • Green goods and services are increasingly important.

  • IO table has been improved and certainly can be useful for your thesis.

  • You can certainly update figures in this lecture, especially amid various global challenges.

References

  • Athukorala, P. (2011). Production Networks and Trade Patterns in East Asia: Regionalization or Globalization? Asian Economic Papers, 10(1).

  • Chor, D., Manova, K., & Yu, Z. (2021). Growing like China: Firm performance and global production line position. Journal of International Economics, 130, 103445. https://doi.org/https://doi.org/10.1016/j.jinteco.2021.103445

  • George, A., Li, C., Lim, J. Z., & Xie, T. (2021). From SARS to COVID-19: The evolving role of China-ASEAN production network. Economic Modelling, 101, 105510. https://doi.org/https://doi.org/10.1016/j.econmod.2021.105510

  • Kimura, F., & Narjoko, D. (2021). Reorganisation of production. In F. Kimura, S. Thangavelu, C. Findlay, & M. Pangestu (Eds.), Global Value Chain, Cities, and Urban Amenities: Implications for Trade and Investment Liberalization in East Asia and ASEAN (pp. 366-389). Edward Elgar.

  • Men, J. (2007). The Construction of the China–ASEAN Free Trade Area: A Study of China’s Active Involvement. Global Society, 21(2), 249-268. https://doi.org/10.1080/13600820701201954

  • Obashi, A., & Kimura, F. (2017). Deepening and Widening of Production Networks in ASEAN. Asian Economic Papers, 16(1).