If capital and investment moves out of East Asia and into South Asia, the manufacturing renaissance that the latter region has been hoping to get for years could finally get under way.
| Photo Credit: REUTERS
April 2025 has been an absolute whirlwind. Tariffs have been announced and tariffs have been suspended. So with retaliations. Markets have risen at their fastest in modern times and fallen sharply in the same day. The shock to the global system as a result of all this is unlikely to fade away soon. It has already left too many scars.
When the world changes, what will be next? For South Asia, which has not really been the focus just yet, what will the future be?
Deficits and surpluses
Since at least the early 1940s, the world has been living under a dollar-based system. Since the 1970s, this dollar-based system has additionally taken on the form of a U.S.-deficit system. As the consumer of the first and last resort, it has been the U.S. household that has been buying the world’s products, in many cases by borrowing from the world itself. As different countries rose and fell in their role as the factories of the world, money flowed across these different players. If any country or region was lucky enough to be the intermediate between these flows, it benefited.
For quite a while, this became East Asia and the varied countries in the region. From the mid-2000s, this became a more singular story. China emerged as the clear and increasingly singular counterparty to the U.S. deficit. It was the rise of China’s factories that led to cheaper goods across the world, to money that flowed between the U.S. and China through the rest of the world, and to a growth boom across the developing world. For the U.S., this singular counterparty was one of stability. No longer did shifts in capital create crises in the same way. The deficit ran strong and the U.S. even started growing faster itself.
Today, this world looks like it’s behind us. Direct trade between the U.S. and China is effectively embargoed at tariff rates north of 100%. Trade across the rest of the world is also higher. Regardless of the specifics of where the tariffs end up, at this point it looks increasingly clear the world will find it hard to credibly depend on the U.S. as the consumer of the first and last resort for too long. The world of trade looks like it’s changing. Where will it go from here?
Changing roles
In the previous global economic order of U.S. deficits and East Asian surpluses, South Asia played a relatively clear role. South Asians were, on the whole, net importers — more of a household than a factory. In that role, they borrowed from the capital stockpiles of the world — directly from East Asia in some cases, and indirectly through other beneficiaries. This borrowed capital then helped drive strong growth in the region.
On a smaller scale, South Asia also served as an intermediary of trade. On the whole, the region has a trade deficit with East Asia and a trade surplus with the U.S. Small amounts of trade (small compared with the size of South Asia’s economy) then flowed from East Asia, value-added in South Asia, and consumed in the U.S. This was not by any means the most important part of the South Asian economy — household consumption was. But a decent chunk of the region’s foreign earnings came from this route nevertheless. All this changes if the world is no longer one of U.S. deficits or East Asian surpluses. If the U.S. stops consuming from the world, or at least reduces it to some extent, East Asia no longer accumulates as much capital. That capital now does not flow across to the rest of the world, and the global balance says exactly the same; that would probably mean South Asia does not get as much capital into its borders. If East Asia is to maintain its surpluses, someone other than the U.S. needs to be able to buy what it produces — and here, the South Asian consumer might have a say.
Factory or consumer?
This creates two divergent pathways for South Asia. If capital that allows for consumption slows down, South Asia is almost forced to act in a way to build up local production. There is already some idea that money will flow out of East Asia given how much their economies might suffer as a result of a global recession — East Asia has its exports-to-GDP ratio well above the relatively low levels in South Asia. South Asia’s export weakness might ironically benefit it here. Any capital and investment that then moves out of East Asia and into South Asia begins to be far larger than in the past. The manufacturing renaissance that the region has been hoping to get for years could finally get under way.
Factory Asia, with its current headquarters in East Asia, might be looking to move towards the Indian Ocean in this world. Of course, South Asia’s pluralistic societies have strengths and weaknesses that might make it a bid harder to go down the low-cost, low-consumption manufacturing pathway that East Asia has. Upward economic mobility is far more important to the average South Asian and consumption is a much bigger part of their life — around 70% of GDP compared with around 40% for East Asia. Strong consumption, especially of services, has been South Asia’s strength, just like cheap manufacturing has been East Asia’s. If East Asia doubles down on whatever strengths made them the factory of the world, South Asia might instead see a lot of cheap imports and the capital to import them with. That is a recipe for strong growth for the region, even faster than the recent past has been. That is a world where South Asia the consumer becomes an increasingly important player in the global system of trade. If its markets develop further in depth here, even further growth cannot be ruled out at all.
Not static
Whether the world changes quickly over a few days or slowly over the next few years is a bit out of anyone’s ability to guess right now. Things are moving way too fast to have a clear sense where it will end up in. What is clear, however, is that things are changing. When the world changes so dramatically, there can be no key player that can move through it unscathed. But South Asia has an advantage. It’s already poised for change. In some ways, change is what South Asia has always been great at. Perhaps it will be so this time as well.
(Chayu Damsinghe is the Head of Macroeconomic Advisory at Frontier Research, a Colombo-based firm that engages in macroeconomic research and advisory for corporate and investment clients in Sri Lanka, South Asia, and South East Asia. Views are personal)
Published – April 23, 2025 12:20 am IST
