20 December 2021, NIICE Commentary 7563
Aakriti Verma & Shriya Giriraj

The year 2019 was one of the disastrous years for the entire world. The widespread of covid19 all across the globe led to a total shutdown around the globe. One aspect that was affected badly was the supply chain sector, a crucial part of the international market. Considering the scenario of the Asia-Pacific region, the Chinese market has to play an important role, as it is regarded as a global market. However, the pandemic has acted as a warning alarm for the other Asian Pacific countries against the dependency upon a single country. Therefore, despite forming agreements between the different regions of the area to boost the economy, in 2021, under the concept of Supply Chain Resilience, China Plus one strategy was adopted by India-Japan-Australia. This initiative aims to reduce the dependency on one single source/market and diversify the business into different nations.

Evolution in Asia-Pacific

During the pandemic, the supply chain concept has again gained importance in the Asia-Pacific region. Furthermore, the China-Japan clash over Senkakus made the Japanese realize China’s dominant position and the possibilities only growing soon. Seeing this dominant position as a threat, the Japanese introduced an initiative that could then diversify the opportunities to limit China’s dependency. Asia-Pacific is a vast and diversified region. It is the home for two global markets, China and India, and emerging markets such as Taiwan, Singapore, and Indonesia. The different markets in this area act as an important factor for the growth of the international market.

As of the mid of November,2020, China, along with other Asia Pacific countries such as Japan, South Korea, and Australia, entered into an agreement known as the Regional Comprehensive economic partnership, which is said to be the world’s most significant trade agreement in terms of population and GDP wise. It aims to connect approximately 30 percent of the world’s production and raw materials; through this partnership, the nations expect to strengthen their relations and economically achieve tariff-free access to the markets and the raw materials. This clearly indicates that despite some demands holding a dominant position, the situation has changed, and every nation is dependable upon each other somehow.

Dependencies

Known as the factory of the world, China is highly dominant in various sectors of process, technology, and resources. Since the nation’s products are everywhere globally, China dominates almost every sector as a power hub. From pharmaceuticals to automobiles, every sector is heavily dependent on the country; exports far outweigh the imports. In the year 2018, Oxford Economic, the British think tank, said that China will be a prime destination for the Asian Pacific nations exports for several years. According to the researchers, the geographical location of China is accessible for most Asia Pacific Nations. The communist nation is also the most significant import source for most Asian Pacific countries, which are some key factors that make it a desirable destination. Even during the pandemic, where the world was suffering from its first wave, China had already experienced it and was recovering slowly. This was an advantage for the Chinese economy, giving it an upper hand not only in the Asian-Pacific region but also in the international market.

Possibly Attractive Prospects

In addition to China’s growing influence over the world economy, diversification has become imperative. The aim is to create an alternative destination to reduce the dependency and diversify the markets. India, Vietnam, Thailand, Singapore, Bangladesh, Indonesia, and Malaysia are seen as the potential regions that could benefit from the China Plus One Strategy as these regions provide promising markets. Alongside being a primary beneficiary of the China Plus One Initiative, Taiwan is an eminent producer for manufacturing electronics and semiconductors. Moreover, the country offers a competitive business environment and high governance standards, making it stand out as a flourishing base. Furthermore, the AA Fitch ratings make the country a stable option for investing in.

Vietnam has also put forward policies to overseas firms for investment in the country. As a result, it has gained more importance as a beneficial sourcing destination. In addition, it provides Young and skilled laborers, Free and Resilient Trade Agreements, and the country is an essential player in ASEAN. The EU-Vietnam trade agreement also gives the country an elevated position. Thailand has simplified the ease of doing business from improvising the protection for minor investors to optimizing the construction permit process. As a result, in the First Quarter of 2021, the FDI investments rose to 80 percent. Significant investments are done in the medical sector; along with that, manufacturing industries have also been attracting foreign direct investments.

Another Southeast Asian Nation that has been gaining the attention of investors in Malaysia. The country has a well-settled and structured legal system. Moreover, the internet capabilities and high telecommunications have attracted substantial foreign direct investments. Ranging from Manufacturing to primary sectors, the flow of FDI grew by 383.4 percent year-on-year. The majority of the investment has gone to Penang, which provides high-tech manufacturing. As Malaysia’s Digital Blueprint Program moves forward, it is expected to continue attracting foreign direct investment into the development of digital infrastructure.

Standing as a competitive and robust substitution to the Chinese market, India acts as a one-stop destination for many reasons such as low labor cost, having a large promising market, and providing export opportunities, creating global opportunities. However, to establish itself as a manufacturing hub, the focus needs to be shifted to train the workforce and make them sustainable and reliable. Where Digitalisation, Diversification, and Collaboration will boost the region, while, Infrastructure development and cost reductions will amplify economic growth and prosperity over the long run.

Way Ahead

Global Supply Chains could bring the evolution and heaps of opportunities and benefit them widely. Having high competition and a long-term project, decoupling may take up to 10 years to settle down and implement the whole procedure in these regions. However, the regions could develop themselves in required aspects so that firms could easily approach these regions. Along with the opportunities, there also lie several challenges in the streamline. It is not possible to ultimately relocate from China as the sectors and the firms are heavily dependent. The Belt and Road Initiative could also be seen as a challenge in this separation as BRI’s primary objective is to improve regional integration and stimulate economic growth.

Aakriti Verma is pursuing Masters in International Relations from Amity University, India and Shriya Giriraj is  pursuing Law from University of Petroleum and Energy Studies, India.