Would the growing competition from Chinese industrial exports de-industrialize Southeast Asia (SEA), returning SEA to being a primary commodity exporter? Or would there be sufficient lucrative niches within the manufacturing production chains that SEA could specialize in? Our simulations of the G-Cubed Asia Pacific model suggest that the full integration of China's huge labor force into the international division of labor could deindustrialize SEA. However, de-industrialization would happen only if SEA allows the drop in FDI inflow to lower the rate of technological diffusion to its economies. If SEA could prevent itselffrom falling behind technologically, it could find lucrative niches within the international manufacturing production chains. The policy implication is that SEA must give the highest priority to deepening and widening its pool of human capital by speeding up the diffusion of new knowledge to its scientists and managers, and providing appropriate retraining programs for the displaced workers.
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