KUALA LUMPUR (March 21): Asean economies, particularly Vietnam, Malaysia, and India, have benefited from China's supply chain diversification, primarily in textiles and electronics, according to Moody's Ratings.

In a statement on Friday, the global credit rating agency said the supply chain movements away from China to alternative neighbouring markets are so far limited despite US-China trade tensions. 

"China's value chain dominance makes it difficult for producers to reduce reliance on Chinese inputs, although multinationals are progressing in shifting production closer to suppliers," it said.

However, trade and investment gains have been uneven, with imports from Asean and India remaining low, making up around 9.0% and 3.0% of total US imports in 2024 respectively. 

Meanwhile, China is redirecting exports to Asean, Russia, and the European Union. 

"Foreign investment flows mirror these shifts, with Vietnam and Malaysia emerging as key destinations for greenfield investment as China's share declines," Moody's said.

It also said that in October 2024, the US announced preliminary countervailing duties on solar cells imported from Cambodia, Malaysia, Thailand, and Vietnam, targeted primarily at Chinese-owned companies operating in Southeast Asia that are believed to be receiving unfair subsidies. 

Moody's said the growing dependence on China suggests an indirect impact of tariffs on Asean could be significant. 

"This would have negative knock-on economic effects, particularly for economies reliant on Chinese demand, such as Vietnam, Thailand and Malaysia. 

"The decline in export demand poses risk for economies striving to emulate China's export-led growth model, as competing in an increasingly interventionist trade environment becomes difficult," it said.

Moody's noted that Asean and India would need to develop greater indigenous value-added capacity to increase competitiveness.

This is because the absence of stronger domestic supply chains and improvements in trade policies remain the key challenges hindering faster development of new manufacturing hubs, said the agency. 

It said enhancing investment attractiveness requires improvements in infrastructure, connectivity, and liberalisation of investment and trade policies to attract foreign direct investment (FDI).

Moody's said regional governments had implemented strategic policies, including harnessing Industry 4.0, infrastructure improvements and proactive policies to attract FDI.

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