As Asia Goes to Heck, Remember Factory Asia

♠ Posted by Emmanuel in ,,,,, at 5/28/2014 02:00:00 AM
The system of production spread throughout East/Southeast Asia has been dubbed "Factory Asia" as we make goods for the rest of the world. In doing so, we (or is it MNCs more accurately speaking?) take advantage of our comparative advantages in splitting production activities country by country. At its apex is Japan which makes leading-edge componentry, closely followed by manufacturing-oriented Asian tigers Singapore, South Korea and Taiwan that are very nearly at the cutting edge technology-wise. Next up are China, Malaysia and Thailand--sites that combine technical expertise with lower labor costs, followed by locations whose attractions are mainly lower costs of production--Indonesia, the Philippines and Vietnam. 

As with all good things however, I think "Factory Asia" as we know it is coming to an end as territorial disputes mean that politics disrupt economics. Witness Vietnamese rioters killing Chinese workers after the PRC's excursions in the Paracels. With Chinese roughhousing now blamed for the sinking of a Vietnamese fishing boat--it's amazing how Chinese "fishing boats" are used as paramilitary forces--I fear things will only get worse. The Philippines' case against Chinese territorial overreach further agitates the increasingly belligerent PRC. Meanwhile, other Southeast Asian nations with territorial disputes with China--namely, a majority of them--are becoming wary of PRC strong-arm tactics. On top of everything, Japan and China are locked into yet another territorial dispute over another set of rocks in the East China Sea. Being the two regional bigwigs, that one probably matters the most. In total, we may have reached the point of no return.

Anyway, I recently found a 2013 publication from the WTO commissioned in conjunction with the Temasek Foundation (funded by Singaporean sovereign wealth fund Temasek) and the Fung Global Institute that provides a lot of information on the operations of "Factory Asia" entitled Global Value Chains in a Changing World. It discusses how these chains no longer flow in one direction but are bidirectional between different countries in the Asian example.

To understand the difference between Asian and, say, North American production networks, consider this example taken from Funukari Kimura's contribution (chapter 15), "How Have Production Networks Changed Development Strategies in East Asia?" Having contributed a lot to the supply chain literature, Kimura adds more insights here into how these networks contrast with the maquiladoras of North America:
Some East Asian developing countries have been successful in starting up industrialization by fully utilizing the mechanics of production networks and they have now attained middle-income levels. Today, the issue has become how to make the transition from a middle-income to a fully developed economy. If we simply extrapolate GDP per capita, a number of East Asian developing countries including Malaysia, Thailand, China, Indonesia and the Philippines may reach US$ 10,000 or higher within 10 to 15 years. Such simplistic macroeconomic growth cannot be automatic. Indeed, it will certainly require substantial economic transformation.

The strength of East Asia lies in the formation of its industrial agglomerations. Production networks in the region have reached a new stage of development (Figure 15.5). Fragmentation of production between the United States and Mexico, on the other hand, mostly consists of “cross-border production sharing” in which transactions can be characterized mainly as simple “go and come back” ones, and these transactions remain typically intra-firm ones. Fragmentation between Western and  Eastern  Europe  has  so  far  remained  at  a  similar  stage  of  development.  Yet,in the case of East Asia, many countries and regions are involved, interlinked by a sophisticated combination of both intra-firm and arm’s length (inter-firm) transactions, and it has truly become a “network.” There is a tendency for intra-firm transactions to be long-distance ones while arm’s length transactions are limited to shorter distances due to high transaction costs (Kimura and Ando, 2005). This generates one of the major forces forming industrial agglomerations in East Asia.
Using conventional trade figures, admittedly a compromised source of data, how can we measure the emergence of this "Factory Asia"? See chapter one of Richard Baldwin who coined the term "second unbundling" to differentiate production stages being dispersed internationally from the "first unbundling" of production from the Global North to the Global South that was still accompanied by clustering effects of factories near each other in, say, the same urban areas of a particular nation. Quoth Baldwin:
One measure of supply chain internationalization focuses on products where nations are exporting and importing an extraordinary amount. This makes little sense from a first unbundling perspective; nations seem to have both a comparative advantage (extraordinarily large exports relative to other nations) and a comparative disadvantage (extraordinarily large imports relative to other nations). From a second unbundling perspective, the extent of such overlapping comparative advantage and disadvantage provides a proxy for global supply chains.

Thus the sum of such overlapping trade as a fraction of world manufacturing trade provides a conservative measure of supply chain trade. The evolution of this measure by shown in Figure 1.3:
Going by Baldwin's figures, us Asians are (were?) far more integrated in a "second unbundling" sense that I despair is now under attack from jingoism and other idiocies. Ah, how the politics always intrudes on the economics, but I guess that's why we need an IPE Zone. I just hope "Factory Asia" won't fall apart as quickly as it rose because of these inane regional tussles. As always, my priority is development for all.