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Wednesday 21 Feb 2018 | 08:05 | SYDNEY
Wednesday 21 Feb 2018 | 08:05 | SYDNEY

The demise of 'Factory Asia'?



20 September 2012 14:30

As my colleague Linda Jakobson has written, the recent burst of anti-Japan protests in China tells us some interesting things about sovereign sensitivities, Chinese domestic politics and resource security. I wonder whether they might also have some implications for the dense and complex network of regional supply chains that are sometimes described as 'Factory Asia'?

One of the defining features of our current era of globalisation has been the emergence of global supply chains or global value chains. In a process that economists have variously described as the disintegration or fragmentation of production, the rise of vertical specialisation, or the second great unbundling, production has been 'sliced and diced' into different stages of production distributed across a range of economies.  

Source: Asian Development Bank.

Several factors have driven this trend, including policy-led declines in tariffs and other trade barriers (in part through specific agreements like the ITA and regional arrangements like ASEAN), technological innovations in transport and communications which have reduced coordination costs by increasing the speed and quality of communications, and a combination of strong demand growth in the developed world with a strong supply response from emerging economies.

East Asia in general (and China in particular) has been at the heart of this process, with supply chains in the region more integrated, and national export structures more closely intertwined, than is the case in North America or Europe.

While global supply chains have proven to be a very successful manifestation of globalisation, they are not without their vulnerabilities. A swing to protectionism would be very disruptive, for example, although it's also true that their country-spanning nature may have served as an important barrier to protectionist impulses in recent years. Big increases in transportation costs (due to increases in the oil price, for example) would likewise threaten the current model of globalisation. And natural disasters such as the 2010 volcanic eruption in Iceland and the 2011 earthquake and tsunami in Japan have also demonstrated some of the fragilities of these complex international networks.

Now, however, two additional factors look to be threatening the longer term viability of the Factory Asia model.

First, the aftermath of the global financial crisis has seen a sharp decline in growth across much of the developed world, prompted in large part by a major retrenchment by European and American consumers. If the years of credit-fueled consumer binges that were the counterpoint to East Asia's high investment, high export growth model are to become nothing more than a fading memory, then economic and business models predicated on that version of the world will be at risk.

Second, the expansion of global and regional supply chains took place against a very particular geo-political and geo-economic environment. Specifically, it was a product of the period following the end of the Cold War when cross-border trade and investment were facilitated not only by a more friendly trade policy environment and by technological innovation but by a period of relative geo-political tranquility (at least in East Asia). 

If this week's developments prove to be a sign of things to come, a region which is going to be marked by the kind of nationalistic tensions and business disruptions we have just seen would be a region that looks much less welcoming to the kind of deep economic integration that has hitherto helped power East Asian growth.

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