It is looking increasingly likely that the economic rivalry between the US and China will lead to a significant redrawing of global supply chains, especially for goods that are considered to be of strategic significance. To some extent, that transition is already under way — US imports of electrial equipment from China peaked in 2018 and have since declined, while those from the world as a whole have have surged over the past few years. But the real question going forward is who, if anyone, has the ability to replace China’s role in global supply chains?
In this regard, Vietnam and India have been attracting headlines in recent weeks, given President Biden’s visit to Vietnam, and India’s hosting of this month’s G20 summit. Neither country is particularly close to replacing China as the world’s largest manufacturer — together, the two countries represent less than 4% of global merchandise exports, compared to China’s share of around 15%. Moreover, while Vietnam’s share of global trade has increased by around 0.9 percentage points over the last 10 years, roughly trebling from 0.5% to 1.4%, China increased its share in global goods exports by around 3 percentage points.
Of course, just because these two countries do not currently export as much as China, does not mean they could not do so in the future. One way to consider what might be possible is to look at the three countries’ ‘revealed comparative advantages’, or RCAs — i.e., their relative specialisms in producing certain goods and services. The chart below shows how these indicators compare for China, Vietnam and India. Jake Sullivan, the US National Security Advisor, has described his country’s approach to critical technologies as one of “small yard, high fence” — i.e., that his country is likely to erect strong barriers around a small set of technologies.
Of the sectors where China has a comparative advantage (i.e. those for which the RCA is greater than one), only machinery (which includes electrical equipment) arguably falls into the critical technologies category, presumably making it the likeliest to see its supply chains rerouted out of China. The obvious next question is whether either Vietnam or India could benefit from this? Interestingly, Vietnam actually has a higher RCA than China in machinery, implying that it might be well positioned to take over, should it be required to do so. India by contrast has a relatively low RCA in machinery — it tends to be much more specialised in service-related exports. Indeed, while Vietnam’s RCAs generally appear very similar to China’s (they have a correlation of 75%), India’s show almost no correlation with China (only 7%).
However, one area where Vietnam might be hampered is the size of its economy. In the long run, how much a country can produce will depend on how many workers that country possesses and how productive each of those workers can be. The concept of ‘number of workers’ is closely related to the population of working age (typically assumed by economists to represent those aged 15–64). China and India are broadly comparable on this metric now; but in the near future their fortunes are expected to diverge significantly, with the PRC’s working-age population expected to fall dramatically in the coming years. By contrast, India’s working-age population is expected to continue growing until the mid-2050s. Vietnam has a much smaller population and its potential labour force is expected to peak in the mid-to-late 2030s.
Overall, it seems as though Vietnam possesses many of the specialisms required to replace China’s role in global supply chains, but its economy and workforce perhaps lack the scale. Meanwhile, India appears to have the scale but perhaps lacks the specialisms. In short, restructuring the global economy will not be any easy feat. However, while there may be no single silver bullet, that does not mean that it is impossible.
The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
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