The slowdown currently taking place in advanced economies is being felt by the economies that rely on exports of goods and services to these markets. 

This is notably the case in developing countries in Asia and the Pacific. The downturn in the property sector in the People’s Republic of China also dents the growth prospects of its key trading partners in the region. But to gauge exposure to any foreign demand shock, we should look at value-added exports, not total exports.

Think of your smartphone: it may be designed in the Republic of Korea, have all its components from the People’s Republic of China, and be assembled in Viet Nam. Now what happens if, say European consumers buy fewer phones? Looking at total exports will tell you that Viet Nam will take the hit because this is where the phones are ultimately shipped from.   

But value-added exports will tell you that the Republic of Korea and the People’s Republic of China should also suffer; and that Viet Nam might in fact not take that much of a blow as it was only assembling the final product. In other words, value-added exports provide better insights into the true exposure of economies to foreign demand.

While Asia and the Pacific’s exports are about 30% of the region’s GDP, only 17% of the region’s domestic value added is actually exported. The region is thus less exposed to external demand than total exports would suggest. This is particularly the case in East Asia and Southeast Asia, whose economies have specialized in value chains involving many different steps taking place in different countries. In Singapore and Viet Nam, value-added exports are even more than 60% lower than total exports.

Even looking at value-added exports, East Asia and Southeast Asia remain more exposed to external demand than Asia’s other subregions. In East Asia (excluding the People’s Republic of China), 7% of domestic production is directed towards Europe and the US, and another 7% towards the People’s Republic of China. Southeast Asia is slightly more exposed to Europe and the US, and slightly less to the People’s Republic of China.

Exposure to the US is most striking in Singapore and Viet Nam, where 10% of domestic production is bound for the US. Exposure to Europe reaches 16% of total output in the Maldives as about 40% of the tourists visiting the country come from Europe. And Mongolia has the largest reliance on the People’s Republic of China, with 36% of its output bound for its neighbor in the south.

 The Caucasus and Central Asia are less exposed to external demand, with Europe playing a larger role among export markets. And South Asia is the most inward-looking subregion. Its linkages are relatively more intense with Europe, particularly for textile exporters such as Bangladesh and Pakistan, and much less with the People’s Republic of China.    

Some sectors are more exposed to fluctuations in external demand.

For the region’s exports to Europe and the US, electronics and machinery play a crucial role, accounting for 37% of the total. In East Asia, this sector alone accounts for 59% of value-added exports to these markets. 

In South Asia, business and financial services take the lead, with India as a significant player. And they are also an important sector for Hong Kong, China; and Singapore.

Textiles and footwear hold substantial importance in South Asia, accounting for up to 88% of value-added exports in Bangladesh. 

Lastly, for Bhutan, Fiji, and Maldives, tourism accounts for the lion’s share of value-added exports to Europe and the US.

Electronics and machinery, and food and commodities each contribute about a third to Asia and the Pacific’s exposure to the People’s Republic of China.

For East Asia, electronics and machinery are more than half of value-added exports to the People’s Republic of China.

And food and commodities are about half of the value-added South Asia and Southeast Asia export to the People’s Republic of China. This sector even reaches 94% of Mongolia’s value-added to the People’s Republic of China (mostly copper and coal), 82% for Cambodia (largely bananas and rice), and more than 70% for oil exporters such as Indonesia and Kazakhstan. 

Given the current downturn in Europe and the US, and weakening growth in the People’s Republic of China, exposure to these markets also dents growth prospects in the economies supplying them.

This contagion via global value chains is most obvious for East Asia and Southeast Asia, which are largely exposed to this external demand. This has prompted some of the largest downward revisions the region’s growth forecasts for 2023 in these areas, particularly in Singapore and Viet Nam.

This blog post is based on data from the September 2023  Asian Development Outlook.