In 2019 China exported a whopping $2.5 trillion worth of goods. It took an economy of $14.4 trillion and 220 million workers to be able to produce so many goods (note China’s total workforce is around 807 million people). Now look at the table below of the top 10 economies of the world. Only the United States has sufficient economic infrastructure to produce such quantities for export but it does not have a spare 220 million workers (total US workforce is 156 million people).
- The composition of what China exports has changed very dramatically over the last 20 years. From low end products, China now produces much more mid-price and technology products. For example, furniture, textiles (knitwear and woven) and toys use to be nearly 34% of exports. Today they represent only 12% and continue to fall. This means that companies have been relocating out of China for years. The current trade war and coronavirus may accelerate, but is not the reason for the relocation trend.
- Many of these goods are products of ‘traditional’ industries that developed economies cannot or is unlikely to want to produce again. On the other hand, China is very competitive in mid priced electrical machinery and electronics which has grown from nearly nothing to over 43% of total exports.
Meaning the industries that are in decline and likely to accelerate out of China are lower value added products such as plastics, knitwear, woven products and toys. These ‘smaller’ exports still amount to a whopping $285 billion. In comparison, Vietnam, a major beneficiary of China’s transformation, has an economy that is just $261 billion. Thus it is unlikely that one or two developing economies will benefit but many developing economies will benefit. In order of benefit, my bet would be:
a. Vietnam – because of its Confucian type culture is easy for other Sino-type cultures to operate here. Productivity is also very high and the Government has adopted many policies that are similar to China circa 1990s. However, there are three important challenges. Vietnam does not have a cotton industry and thus much of the yarn has to be imported creating a ceiling to knitwear and woven growth. Vietnam current tree species is not sustainable creating a ceiling to furniture industry growth.
b. Indonesia – Indonesia has an abundance of raw materials and cheap labour. On paper it looks better than Vietnam but it lacks an export culture. For example, in 2019 Indonesia’s GDP was $1.1 trillion (making it the world’s 16th largest economy). Despite this exports was a mere $180 billion of which more than 65% were energy and commodities. Manufactured goods exported accounted for less than 7% of GDP.
c. Cambodia – If we ranked cultures that are similar to China, Taiwan would probably be a 9.5 out of 10, Vietnam a 8 out of 10 and Cambodia a 7 out of 10. While Cambodia has fewer resources than others down this list, its economy is small, very small. For example, Cambodia’s 2019 GDP was around $26 billion. 10% of China’s textile exports is around $13.8 billion.
d. Others that should also benefit by more than the global average are economies that either have the cheap labour or raw materials or existing industries on which to expand or have special access to the US or EU markets. These could include (in alphabetical order):
Bangladesh – very strong textile tradition but very poor infrastructure
India – large cotton industry but the culture, politics, policies and rural urban divide makes manufacturing in India difficult. Indian service, and in particular It industry, is far more developed
Jordan – its position with respect to US tariffs makes it attract for certain industries such as textiles and toys
Malaysia – already seeing a sharp increase in new investment in a range of industries including electrical goods, electronics, optics and plastics
Myanmar – very resource rich but domestic politics and danger of re-ignition of a civil war is of concern for investors
Rwanda – outside bet. Rwanda has been the surprise of Africa with one of the world’s fastest growing economies. After the massacre, massive industrialization has taken place. Cheap labour and favourable access to the EU makes it attractive for select industries and good soft infrastructure could make it a hub to reach other parts of Africa.
Thailand – already seeing a sharp increase in new investment in electronics and computer related products
Former security guard turns $15k into $7 million.