Charles Dumas and Rory Green assess the decline in trade volumes. They support a long-running theme, specifically that trade war is shifting supply chains and accelerating the world splitting into trade blocs.
Signs of a structural shift in Chinese trade patterns are increasingly clear. Last year we forecast that tariff pressure would induce market forces to create a new Asian trading bloc with China at its centre. Our thesis was simple the market always finds the cheapest way. It is increasingly evident that the “way” is via ASEAN and in particular Vietnam.
Rerouting is a stop-gap measure, shifting production is a permanent solution for Chinese exporters. Chinese firms are finding ways around tariffs by transferring production abroad, sourcing inputs from China and sending the finished product to the US. It makes the most sense for such production shifts to take place within Asia where new supply chains can be easily created and logistic costs minimised. Our analysis of the Chinese solar industry’s response to US tariffs in 2012 shows how firms evaded US levies by moving manufacturing to Malaysia and other Southeast Asian countries. This is occurring again, with Vietnam a key beneficiary. YTD China FDI to Vietnam is already greater than the whole of 2018, which was in itself a record high.
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