Shandre Mugan Thangavelu
Global value chains have featured as a development strategy in most emerging economies in the 21st century. But economic and political shocks now hinder their growth at both the regional and global level.
According to the World Bank, the growth of global value chains peaked in 2007 and dwindled after the onset of the 2007–8 global financial crisis. Following the global financial crisis, international trade growth has been subdued, a trend exacerbated by the onset of the COVID-19 pandemic. These global shocks are associated with inherent economic policy uncertainty. This has resulted in a ‘wait-and-watch’ problem for firms, where firm uncertainty induces inactivity and reduces their level of investment.
Economic policy uncertainty is becoming more apparent with strategic alliances driven by the United States and Europe such as the Indo-Pacific Economic Framework. These alliances represent attempts to isolate China’s activities in global value chains and contain technological change in East Asia. The brewing uncertainty fuelled by strategic alliances creates investment uncertainty around the potential for offshoring, nearshoring and friend-shoring.
Strategic alliances directly weaken the market-based and rules-based trading activities that drive global value chain efficiency and deepen regional integration. Decoupling affects both the backward and forward linkages of global value chain-related activities and increases the vulnerability of both supply chains and domestic firm activities. The effects of this policy uncertainty are likely to be felt more by countries that are positioned higher up in the value chain compared to those lower down in regional and global value chains. The implications of strategic alliances will be more salient for countries like Indonesia, Malaysia, the Philippines, Thailand, Singapore and Vietnam as a result.
The behaviour of firms in response to uncertainty can also alter the landscape of activity in global value chains throughout East Asia. Economic policy uncertainty is higher in global value chains than for other trade due to their interlinkages and interdependence of intermediate trade.
This has a direct impact on the investment decisions of firms and can cause firms to choose to postpone their investments. A 2024 Jeffrey Cheah Institute paper on the impact of economic policy uncertainty on global value chain integration for Indian manufacturing firms showed that global value chain resilience and participation are dependent on firms’ ability to withstand economic shocks. That study also highlights that the entry and exit of firms from global value chain activities are likely to be affected by the uncertainties associated with global trade.
The key to mitigating economic policy uncertainty is to make global value chains more resilient to shocks and improve rules-based and market-based trade in the region.
This makes it important to maintain an open trade and investment environment and strengthen regional economic cooperation.
ASEAN can play an important long-term role in maintaining and strengthening rules-based and market-based trading arrangements in the region, and a foundation for sustainable growth and development. But there has been a growing tendency to disregard multilateral trading rules in favour of discretionary and bilateral arrangements that are likely to deepen regional fragmentation. Strategic alliances might weaken the regional integration commitments of ASEAN and East Asian member countries.
The Regional Comprehensive Economic Partnership (RCEP) — the ASEAN-centred multilateral free trade agreement that is the largest free trade agreement in the world — is expected to provide the new rules-based institutional framework to ensure sustainable economic development in the East Asian region.
RCEP is a ‘living’ agreement and the RCEP Joint Committee has the potential to create a wider regional integration agenda to address pressing issues such as the environment, climate change, skills development, green transformation and the development of digital and smart urban centres. The built-in institutional features within the RCEP agreement — Chapter 18 — that include ministerial meetings serviced by a joint committee could be used for the progressive liberalisation of regional and global trade and to address issues beyond trade and investment.
Cutting-edge firms participating in global value chains often have to participate in both manufacturing and service-related activities. The ability of domestic firms to understand and unbundle their production structure will be critical to creating more agile and resilient firms in the region.
There is also need for regional cooperation to support the structural transformation of firms in digital and green technologies to increase the efficiency of their value-added activities and participation in global value chains. It is critical for firms in the global value chain to understand the upstream and downstream emissions of their activities so that they can improve their energy efficiency.
Cultivating a more flexible and agile skilled labour force in the region through upskilling and reskilling is necessary to unbundle workers’ skills and enhance productivity and mobility. Regional economic cooperation increases the technical and vocational skills of vulnerable workers at a time when critical skills are important for mitigating the effects of decoupling that may result from strategic alliances in the region. This is the most pressing regional challenge as the weakness of the labour force increases its vulnerability to regional and global economic policy uncertainties.
ASEAN should focus on both economic and social protection of vulnerable groups in the region. The vulnerability of workers is likely to increase with greater economic policy uncertainty.
Regional cooperation is vital to offsetting the effects of policy uncertainty stemming from global shocks and strategic alliances across the region. RCEP and ASEAN should seek to complement firms’ global value chain integration strategies as these chains become even more important to ensuring sustainable growth in East Asia in the coming years.
Shandre Mugan Thangavelu is Head of the Jeffrey Cheah Institute for Southeast Asia and Senior Fellow at the Jeffrey Sachs Centre for Sustainable Development, Sunway University.
