Liu Hongzhong

Since the 1970s， East Asian countries have registered rapid economic growth and created the Asian Miracle thanks to an increasing division of labor and expansion of regional supply chains in the age of economic globalization. However， the 2008 global financial crisis marked a turning point in the history of human development. In addition， “Black swans” and “gray rhinos” such as the COVID-19 pandemic， the Ukraine crisis， and especially the trade war initiated by the Trump administration have brought new changes to the international environment and led the world economy into a long period of major transition. These developments pose serious challenges to East Asian economies. Against such a backdrop， East Asian countries should work together to promote regional cooperation and regional supply chains through different measures， so as to realize inclusive and coordinated regional growth through orderly adjustment and restructuring in accordance with the principles of market competition and comparative advantage.

Trends in Global Supply Chains amidst Anti-globalization Headwinds

Since the 2008 global financial crisis， greater imbalance in two aspects has brought headwinds against super-globalization which gathered pace after the Cold War. The world economy and politics have thus slid into a so-called de-globalization period. One of the two imbalances is at the international level arising from the unbalanced development between developed countries and emerging markets， and the other is at the domestic level within developed countries resulting from a wider income gap between the rich （capital） and the poor （labor）. Many studies have shown that the concurrences of the two imbalances can send shockwaves to globalization and the international order， manifested in rising trade protectionism， unilateralism and populism. Textbook examples include Donald Trumps rise to power and Brexit.

The COVID-19 pandemic， the Ukraine crisis and the United States ?containment strategy against China have accelerated the retreat of globalization and led the international order into a period of turbulence and change. German scholar Heinrich Geiselberger used the Great Regression caused by the concurrence of the crisis of globalization and neo-liberalism to describe the current global political economy， believing that there are striking similarities between the current situation and the “Great Transformation” that eventually led to World War I in the early 20th century.

With the retreat of globalization and a changing international order， global supply chains， a signature of the post-Cold War super-globalization， also face grave challenges. Dai Tinglong， a professor at the Hopkins Carey Business School， even compared the outbreak of the Ukraine crisis to the “iron curtain” that puts an end to the 30-year expansion of global supply chains. Facing a host of uncertainties， multinational corporations start to pay greater attention to the security， resilience and sustainability of global supply chains， looking to re-shoring and near-shore outsourcing as alternatives for their global industrial layout and investment. According to a survey by the European Union Chamber of Commerce in China in June 2022， 23% of the Western companies say they are considering relocating their operations out of China.

These changes drive the trend of supply chain regionalization. The Asian Development Bank Annual Report 2022 finds that global supply chains have been shrinking in recent years， with the global value chain participation rate dropping from 72.9% in 2018 to 70.7% in 2020. Similarly， Asias participation rate in complex value chains fell from 44.3% to 38.7%. In contrast， regional supply chains in Asia told a different story. Participation rate in complex value chains within the region increased from 23.4% to 26.0%. According to a UNESCO study， the share of suppliers to the Forbes Global 2000 in China from outside the Asia-Pacific region has plummeted from 47% in 2014 to 20% in 2020.

The second trend is supply chain sovereignty， as the Western countries overstretch the concept of national security and， through a host of measures， impose restrictions on foreign direct investment and foreign trade concerning the so-called key industries. A case in point is that the US and other Western countries have strengthened review of foreign investment and import and export of key products by changing their trade and investment administration framework. With the introduction of the Foreign Investment Risk Review Modernization Act of 2018 （FIRRMA） by Donald Trump and the Executive Order on Ensuring Robust Consideration of Evolving National Security Risks by the Committee on Foreign Investment in the United States （CFIUS EO） by the Biden Administration in 2022， CFIUS has expanded and strengthened review， targeting primarily Chinese companies. According to its annual report， Chinas scrutiny index stood at 77.4 in 2021， far exceeding that of the others. In sharp contrast， that of US allies such as the United Kingdom， Germany， Canada， Australia， and Japan was less than 1.0 on average.

East Asian Supply Chains at Crossroads

All these changes and their impacts have brought East Asian supply chains to a “crossroads”. For the past half a century or so， East Asian supply chains have been moving forward in accordance with market principles. The regions model of division of labor can be traced back to late 1960s when Japan joined the ranks of developed nations. Since then， through outward direct investment， export of intermediate goods and official development assistance， Japans development model of imitation， learning， production and export was spread to other countries in East Asia， giving rise to a regional hierarchy of international division of labor and development. This model， which has created an economic miracle in the region， is referred to as the Flying Geese Paradigm.

China was a latecomer in the evolution of East Asian supply chains. Nevertheless， it has gradually gained weight since the dawn of the 21st century， and even overtook Japan as the hub of East Asian supply chains as its integration into the world economy deepens. In this process， the traditional Flying Geese Paradigm gradually gave way to a more sophisticated production network. Though evolving from the Flying Geese Paradigm， the new model has moved away from inter-industry division of labor to intra-industry or even intra-product division of labor. Under this model， decentralized （transnational） production develops in sync with economic integration. A defining feature is the back-and-forth flow of intermediate products such as parts and components to allow for deeper processing at all stages.

On the whole， the East Asian production network takes on three main features. The first is the rapid expansion of intra-industry trade. The share of inter-industry trade in East Asia declined from 45% in 1990 to 22% in 2004， while that of intra-industry trade climbed up from 55% to 78%. Mechanical products such as office and communication equipment and electronic equipment account for more than 50% of East Asias export and 42% of its import， becoming the principal product driving division of labor and making the export structure of East Asian nations increasingly similar. The second is that intra-regional trade grows faster than extra-regional trade. From 1986 to 2007， the proportion of intra-regional export and import rose from 29.3% and 41.5% to 44.5% and 62.7% respectively. The share of intra-regional trade in East Asia stood at 56% in 2004， lower than the EUs 67% but higher than the 52% of the NAFTA region. The third is Chinas replacement of Japan as the center of the regional production network. According to the current regional division of labor in the supply chain， China still undertakes industrial transfers， but has largely transformed from playing a supporting role to becoming a leading player. With growing economic weight， China has overtook Japan and the US to become the largest trading partner of East Asian countries. From 1992 to 2018， the share of export of Japan， South Korea and ASEAN to China increased from 4.0%， 3.9% and 2.4% to 21.2%， 33.3% and 16.3%.

It is fair to say that East Asian supply chains have been evolving following the natural law of economics， namely pursuit of efficiency. As China climbs up global industrial chains with higher cost of labor， recent years have seen the relocation of some labor-intensive industries from China to Southeast Asian countries such as Vietnam and Laos. This is actually a reflection of the Flying Geese Paradigm that advances inclusive regional development and win-win outcomes.

That being said， the natural course of market adjustment has been undermined and disrupted by backlash against globalization and in particular the US attempt to decouple from China. Guided by populist ideas such as America First， Donald Trump unilaterally launched a trade war， tech war and market war against China. In the field of high-tech industries， US was trying to contain Chinas development by means of trade restrictions， corporate sanctions and long-arm jurisdiction. The Biden administration has largely maintained its predecessors strategy of decoupling. Unlike Trumps claim of comprehensive economic decoupling， the Biden administration seeks targeted decoupling from China in the high-tech sector by building small yards and erecting high walls.

In addition to direct suppression of China， the US government also gangs up with its allies to contain China. During his visit to Japan， US President Joe Biden announced on 24 May 2022 the launch of the Indo-Pacific Economic Framework （IPEF） which included 14 Asia-Pacific economies. This framework seeks to strengthen cooperation in the Asia Pacific centering on the four pillars of trade， supply chains， clean economy， and fair economy. The US proposed the Chip 4 Alliance with Japan， South Korea， and China Taiwan in March 2022， and held its first senior officials meeting on 16 February 2023. The country also initiated a trilateral economic and security dialogue mechanism with Japan and the ROK on 28 February 2022 in Honolulu for discussions and cooperation on improving the resilience of supply chains for critical and emerging technologies， semiconductors， batteries and key minerals， and protecting sensitive technologies. At the end of the day， these measures by the US government seek to exclude China from high-tech industries such as semiconductors， and to establish its so-called “rules-based” exclusionary global supply chains， industrial chains and value chains led by the US. In this way， the US hopes to maintain its industrial hegemony while containing the rise of China.

Paths to Steady Development and Transformation of Regional Supply Chains

The steady development of global supply chains is a prerequisite and foundation of Chinas economic security. The backlash against globalization is driving the trends of regionalization and sovereignty of global supply chains， and gives rise to non-market-oriented changes of East Asian supply chains. Amidst these changes， the “China+1” model has become the preferred choice of many multinational corporations. As East Asian supply chains are becoming an important gateway for Chinas participation in the world economy， their steady development and transformation is crucial for the security， stability and sustainable development of Chinas global supply chains.

In 2020， China put forward a new development paradigm featuring “dual circulations” in light of the changing international environment and its development needs， in a bid to reduce over-reliance on the international market. This development paradigm can minimize the impact of external uncertainties and risks， and at the same time facilitate the international circulation through smooth domestic economic circulation. It lays a solid foundation for Chinas economic growth. While the US tries to gang up its allies， Asian partners in particular， to decouple from China， more wisdom and more effective measures are needed to ensure the sound development of East Asian supply chains with China as the center since the 21st century and to see the domestic and international circulations reinforcing each other.

For starters， broader and higher-quality market opening-up can boost foreign businesses confidence in the Chinese economy， attract more multinationals to China， and promote supply chain expansion. At present， there is a common sense of unease， concerns， and uncertainty among multinationals in China about the countrys development environment due to US suppression. In this context， further opening up and a better business environment are crucial to the confidence of foreign enterprises including those from East Asia in investing in China. To this end， more proactive and effective measures should be taken to accelerate the opening-up process with the focus shifting from commodities and factor mobility to institutional opening-up.

Specifically， efforts should be made to put in place a trading regime that is fair， inclusive， well-regulated， and transparent， and foster a world-class business environment that is market-oriented and law-based by giving full play to the role of pilot free trade zones and ports that follow high standards and international rules and by deepening reforms on all fronts. The foreign investment negative list should be further reduced， especially in the service industry. The pre- and post-establishment national treatment system should be improved. Intellectual property rights should be better protected by enhancing top-level design and stepping up law enforcement. Rules for digital trade should be introduced to explore high-level opening up in emerging areas and reduce transactional cost.

Secondly， Chinas new growth model can lead and promote the transition of the regional growth model from a production network to an economic circle. East Asia， in particular China， is known as the worlds factory. Both the Flying Geese Paradigm and the 21st century East Asia production network essentially center on supply with the demand for final products on the side of the US. This model of unbalanced international division of labor makes East Asian economies highly dependent on the US market and very vulnerable， which is naturally unsustainable in the long run. The open and free international market which underpins the traditional growth model of East Asia has been profoundly changed due to sluggish global growth in the wake of the 2008 financial crisis， the increasing trend of de-globalization， as well as supply chain regionalization and sovereignty. It is therefore difficult for East Asia to continue to rely on external markets like the US and Europe as the primary driver of growth. A long-term task for East Asian economies is to foster， through economic rebalancing and readjustment， a new model of division of labor in supply chains with intra-regional demand as the focus and balanced development within and outside the region， and to realize steady and sustainable growth for countries in the region.

To foster the East Asian economic circle， the key is to expand the regions final consumer goods market. In light of regional countries consumption power， the only one with the potential to achieve this goal is China. Translating this potential into reality will require a shift in Chinas growth model from one driven by investment and export to one led by domestic demand. What is worth mentioning is that it means not only consumption of more domestic goods but also increased import especially from its East Asian neighbors. The so-called attractive economic power will see more import into the huge Chinese market and closer interdependence between the Chinese market and multinationals. Such interdependence can cushion the decoupling efforts by the US and its Asia-Pacific allies and， in turn， ensure the steady development of East Asian supply chains.

Thirdly， the entry into force of the Regional Comprehensive Economic Partnership （RCEP） and Chinas application to the Comprehensive and Progressive Trans-Pacific Partnership （CPTPP） are opportunities to deepen regional cooperation， and promote stability， adjustment， and restructuring of regional supply chains. The RCEP provides a great boost to regional cooperation in East Asia. China can seize the opportunity to work with member states to follow the example of high-standard CPTPP， and add clauses on environment， regulatory consistency， stricter intellectual property rights， e-commerce， government procurement， and investor-government dispute settlement， so as to expand and elevate the free trade regime. Efforts can be made to speed up the implementation of the free trade agreement by helping member states improve governance capacity. More should be done on promotion and training to make the RCEP more relevant. China can also take the pact as a starting point to accelerate the negotiation process on the China-Japan-ROK FTA. All these can enhance mutual trust of East Asian nations， and facilitate stability and orderly adjustment of East Asia supply chains. From a global perspective， this can also enable East Asia to remain the region of the greatest economic vitality with sustained， massive inflow of foreign capital， and increasing import and export.

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Liu Hongzhong is Professor at the Shanghai Academy of Global Governance & Area Studies， Shanghai International Studies University