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Garment workers making men's suits in a factory in Hanoi, Vietnam.

Moving Factories Out of China Is a Very Slow Process, IIF Says

Oct. 16, 2019
Despite the mounting trade-war pressure on factories to seek cheaper countries to operate in, most southeast Asian countries can't compete with China's technology levels and developed supply chains.

Southeast Asian countries looking to capitalize on factories moving out of China due to the trade war could be disappointed: Any relocation is happening very slowly, and likely won’t accelerate rapidly in the near future.

That’s the takeaway from a study by Gene Ma, chief China economist at the Institute of International Finance. Southeast Asian countries are either too small to absorb the huge size of China’s processing and assembly trade, or they lack the technology and supply chains to handle more complicated production. Either way, the process of manufacturing moving from China to lower-cost nations is happening “very slowly,” Ma said.

“People would assume China’s foreign direct investment to fall over the past year because of the tariffs and the trade war, but actually it has held up,” Ma said, referring to investment into China. “Vietnam, for example, is morphing into a new assembling place after China, but its export sector is too small to make it the real ‘next China.’”

If companies keep production in China longer, that can help ease concerns about the drop in the current account surplus as a percentage of gross domestic product. That ratio has declined rapidly in recent years as China transforms into a consumption-led economy, but the nation still continues to purchase large amounts of commodities such as gas, oil, soybeans and iron ore.

“The current account of the manufacturing sector will remain at a relatively high level,” Ma said. There was concern that “China has to act like other emerging market economies such as Turkey and Argentina to depreciate its currency to balance the current account,” but that isn’t happening, he said.

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