Trade diversification away from China may favour ASEAN: Moody’s Investors Service

Global credit ratings firm Moody's Investors Service on Tuesday said many governments and companies will reduce their dependence on China in global value chains due to the coronavirus crisis and that would have mixed credit implications for the Association of Southeast Asian Nations (ASEAN).

“Specifically, trade diversification is likely to favour ASEAN economies over time, while the reshoring of supply chains closer to consumer markets – especially in sectors with heightened security requirements such as pharmaceuticals – could move productive capacity away,” it said in a report.

Although an exodus of foreign companies from the Chinese markets is unlikely even as companies step up efforts to mitigate risks, recent events will accelerate the offshoring of activities to ASEAN at the expense of trade with China.


“We expect many governments and companies will reduce their dependence on China in global value chains moving forward, driven by the coronavirus outbreak, the China-US trade conflict, and heightened national concerns over economic security,” says Deborah Tan, assistant vice president and analyst, Moody’s.

As per the report, while the technological capabilities of the ASEAN still lag those of more advanced Asian economies, particularly in electronics, a general openness to foreign direct investment (FDI) and lower production costs will offer some advantages. The 10-member ASEAN is now the sixth-largest globally, and the bloc has the third-largest labor force in the world behind China and India, at 350 million people. The region also has a history of being open to FDI inflows and has well-established regional production networks.

“While the ASEAN economies stand to benefit from the efforts of producers to diversify their sources of supply, they will be negatively affected if reshoring trends become more pronounced,” the agency said, and suggested three ways to mitigate such an impact- by enhancing free trade agreements with advanced economies, deepening regional trade agreements, and developing ASEAN further as a trading bloc in its own right.