[Big read] Can ASEAN continue to reap economic benefits from the US-China rivalry?

(Edited and refined by Grace Chong, with the assistance of AI translation.)

In June, Malaysian law enforcement authorities seized 72 servers at Kuala Lumpur International Airport that were being smuggled out of the country and contained advanced artificial intelligence (AI) chips, with the shipment valued at around 52.9 million ringgit (US$12.5 million). Shortly before that, in February, Indonesia reached a reciprocal trade agreement with the US, making numerous concessions in sensitive areas including mutual recognition of standards, intellectual property protection, regulation of state-owned enterprises and export controls. Meanwhile, the US is stepping up scrutiny of Chinese goods being transshipped through Vietnam to circumvent tariffs and rules of origin.

These three seemingly unrelated events all point to the same structural shift: over the past decade, China-US rivalry has pushed large amounts of manufacturing capacity, foreign investment and trade orders towards Southeast Asia. Now, Southeast Asian countries increasingly have to prove to the US exactly whose components go into their exports, whose technology they use and even which Chinese rules their domestic industrial policies are aligning with.

Southeast Asia continues to go to great lengths to avoid “choosing sides”, but the cost of maintaining strategic neutrality and room for policy manoeuvre is becoming increasingly high.

Shrinking geopolitical dividends

Since the China-US trade war erupted in 2018, an increasing number of multinational companies have adopted a “China+1” strategy, extending the assembly, processing and export stages of production for European and American markets into Southeast Asia, while remaining heavily dependent on China for components, raw materials, production equipment and mature supplier networks.

Benefiting from this major industrial shift, Southeast Asia has become a key beneficiary of the restructuring of global supply chains. Between 2018 and 2025, Vietnam’s total exports to the US surged from US$49.1 billion to US$193.9 billion, almost quadrupling. Over the same period, Thailand’s total exports to the US also tripled.

With US President Donald Trump entering his second presidential term in 2025, great power rivalry has entered a new phase. The supply chain model of “Made in China, assembled in Southeast Asia, exported to Europe and the US” has not collapsed, but the rules of the game have fundamentally changed.

Le Hong Hiep, a senior fellow at the ISEAS-Yusof Ishak Institute, told Lianhe Zaobao that Washington threatened last July to impose punitive tariffs of 40% on Chinese goods deemed to have been transshipped through Vietnam. As the average effective US tariff on Chinese goods is currently about 41%, Vietnam still retains a significant cost advantage as a destination for relocated manufacturing.

The more serious challenge, however, is not tariffs, but the far-reaching rules underpinning them. Le pointed out, “The definitions of origin and transshipment remain unresolved, while Washington’s effort to limit Chinese content in goods produced elsewhere in Southeast Asia suggests a broader campaign against the ‘made in China, finished in Vietnam’ model.”

For multinational companies, more resilient supply chains are certainly needed, while Chinese companies are bound to continue expanding their investments in Southeast Asia. The geopolitical dividends generated by China-US rivalry have not disappeared entirely, but the threshold for accessing them has risen markedly. Southeast Asian countries now have to answer not only “Where was the product made?” but also clearly account for “Who invested, who supplied the components, and whose technology was used?”

US draws red lines

The escalation of China-US economic rivalry does not mean Southeast Asian countries will be split into two parallel economic blocs with zero interaction. Commercial realities show that the costs would be staggering if the US forcibly severed all Southeast Asian industries linked to Chinese supply chains. As a result, the prospect of a comprehensive decoupling in general consumer and civilian industries such as consumer electronics remains limited.

Robert Walker, a research fellow at the Lowy Institute’s Indo-Pacific Development Centre, said in an interview that the real concern is the selective fragmentation — and even partial decoupling — in strategically critical industries.

At the forefront are cutting-edge high-tech sectors such as semiconductors, data centres and AI, which are particularly vulnerable to the direct impact of the major powers’ expanding export controls, investment security reviews and rules of origin requirements.

Malaysia’s semiconductor industry is a case in point. The country accounts for about 13% of global semiconductor packaging and testing capacity. Its mature electronics industry, open investment environment and relatively neutral trade and economic position have attracted investment from multinational companies such as Intel.

Now, as the US calls on its allies and partners to tighten controls on the flow of advanced chips to China, Malaysia can no longer simply serve as a neutral processing and transshipment hub. It is instead being forced to take on stringent supply chain compliance requirements and scrutiny over the destination of its products.

Last July, the Malaysian government announced that exports, transshipments and transits of all US-origin high-performance AI chips would require prior approval from the country’s trade regulator. Malaysian authorities have also begun investigating several cases involving the suspected illegal transshipment of controlled advanced chips and servers, signalling their determination to meet compliance obligations.

Critical minerals another pressure point

Critical minerals are another high-stakes battleground. As the world’s largest nickel producer, Indonesia’s nickel mining industry is deeply bound to Chinese capital, with Chinese companies controlling about three-quarters of the country’s nickel refining capacity.

This puts Indonesia at the crossroads of the China-US contest over critical minerals. The reciprocal trade agreement signed by the US and Indonesia in February this year also covers the minerals sector. Among other provisions, it requires foreign-invested mineral processing facilities to comply with Indonesian mining quotas and strictly limits production above those quotas. The two sides also agreed to strengthen export controls and investment security cooperation involving relevant critical minerals.

Walker pointed out that semiconductor and critical mineral supply chains are highly concentrated, making them more susceptible to being used as instruments of pressure by major powers. “Countries and economies can therefore be more easily excluded from their use, which can be particularly painful, making it both an intolerable vulnerability and a tempting point of geopolitical leverage.”

These two sectors are also important inputs for dual-use technologies, used in both civilian and military contexts. Walker stressed that once military capabilities are involved, geopolitical considerations will naturally take precedence over commercial logic.

Trade policy expands into economic security

Of greater concern to Southeast Asian countries is that US trade policy is expanding beyond tariff negotiations into a comprehensive set of economic security rules.

Although the reciprocal trade agreement between Indonesia and the US reduced the reciprocal tariff from 32% to 19%, the concessions sought by Washington in return go far beyond tariff reductions.

Arianto Patunru, a fellow at the Crawford School of Public Policy at the Australian National University, said in an interview that the agreement reflects a broader shift in US trade policy: market access is no longer unconditional, but is increasingly linked to regulatory, industrial and economic security commitments.

Under the agreement, he noted, Indonesia is required to adjust its domestic legal framework in areas including product content requirements, the issuance of import licences, investment rules, digital trade, intellectual property protection, labour standards and environmental protection. It must also closely coordinate with the US on export controls, investment security reviews and measures to prevent transshipment.

The agreement even extends to economic and national security, as well as Indonesia’s economic and trade relations with third countries. Indonesia must align its export controls with those of the US on sensitive technologies and critical goods, and ensure that Indonesian companies do not fill market gaps created by US restrictions. If Indonesia subsequently signs a new bilateral free trade agreement or preferential economic agreement with a country that “jeopardises essential US interests”, Washington may reassess the US-Indonesia agreement. If consultations fail, it could even terminate the agreement and restore the original reciprocal tariff.

Shrinking strategic autonomy

Some argue that the reciprocal trade agreement could help push Indonesia to address the problems of policy inconsistency and regulatory instability, ultimately benefiting businesses, consumers and the country’s overall competitiveness. Others, however, are concerned that reforms driven under intense external tariff pressure could constrain Indonesia’s room for strategic autonomy as a sovereign state.

Arianto said these concerns are legitimate, but stressed that genuine strategic autonomy means retaining the ability to make independent choices and adjust institutions, rather than insulating the domestic economy from external competition. A rational distinction must be made between structural reforms that are beneficial and unnecessary concessions of policy space.

“Strategic autonomy should not mean preserving every local content rule, import restriction or discriminatory regulation,” he noted. “Some of these policies are costly, unpredictable and ineffective, and Indonesia should reform them in its own interest.”

Strengthening industrial capabilities

Faced with increasingly complex and binding international trade and economic security rules, Southeast Asian countries ultimately need to strengthen their industrial capabilities and indispensability if they are to preserve room for policy manoeuvre.

Cassey Lee, a principal fellow at the ISEAS-Yusof Ishak Institute, said in an interview that most ASEAN countries want to attract higher-quality investment, but whether they can genuinely absorb such high-end capital depends on their own capabilities, particularly the depth of their human capital. In his view, moving into higher-value segments of the supply chain typically requires at least 20 years of sustained accumulation.

The priority for Southeast Asian countries, therefore, is to strengthen their industrial foundations and increase value-added production. Vietnam, for example, has built a sizeable manufacturing base, but its industrial structure remains heavily concentrated in lower-value assembly. The country still lacks sufficient engineering talent, a mature network of local suppliers and home-grown technology.

This requires long-term and consistent policy support. Lee said, “The government can also do their part by ensuring their economic policies remain sound and conducive to foreign investments. This includes sound macroeconomic stabilisation policies.”

Second, Southeast Asian countries are also diversifying their export markets, capital sources and technology channels to reduce excessive dependence on any single trading partner.

In recent years, Malaysia has used agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the UAE-Malaysia Comprehensive Economic Partnership Agreement to expand export markets beyond China and the US. Last year, its exports to markets such as Mexico and Canada increased significantly.

Indonesia, meanwhile, established a US$4 billion joint investment fund with the Qatar Investment Authority last year, while also partnering with the sovereign wealth funds of Australia and China.

In the foreseeable years ahead, most Southeast Asian countries are likely to continue maintaining deep ties with both China and the US, while making different choices in different areas based on their own interests. Whether they can continue to avoid “choosing sides” will ultimately depend on whether they possess enough industrial assets that the major powers need and that cannot easily be replaced in the short term.

Southeast Asia’s ‘five cards’

Viewed as a whole, Southeast Asia has most of the key elements needed in a complete industrial chain. Take Vietnam, Indonesia, the Philippines, Malaysia and Singapore: each has hard-to-replicate industrial strengths and a distinctive model of economic development.

Vietnam’s strengths lie in its large-scale, cost-competitive manufacturing base, as well as the rapidly expanding downstream industrial base in electronics and semiconductors in recent years. ISEAS’ Le pointed out that Vietnam’s structural weaknesses include a lack of substantial critical mineral resources, deep capital markets and advanced design capabilities. “Other ASEAN economies can fill those gaps,” he said.

Natural resources, meanwhile, are Indonesia’s strength. Arianto said that while Indonesia supplies critical minerals and other resources for regional manufacturing and the clean energy transition, it also draws on its huge population and consumer market to build Southeast Asia’s most promising base for end-market consumption.

The other three countries can each fill other critical gaps in the industrial chain. Singapore has capital, research and development capabilities and advanced technological expertise; Malaysia has a mature semiconductor ecosystem, particularly in packaging and testing; while the Philippines has a strong services sector capable of supporting the digital services and back-office operations surrounding manufacturing.

If these strengths could be combined, ASEAN would in fact possess most of the ingredients needed to build a more complete and resilient regional supply chain.

A ‘five-in-one’ economic bloc?

After decades of regional economic integration, ASEAN is more integrated than ever. Yet significant practical obstacles remain before the region can truly realise its ambitious vision of becoming a “five-in-one” economic bloc.

Deborah Elms, head of trade policy at Hinrich Foundation, said in an interview that bottlenecks to deeper regional integration remain widespread. This ranges from issues like border challenges, inconsistent standards and regulatory policies, to closed or fragmented services markets. “It all makes business across countries in ASEAN more difficult and expensive, thus decreasing the attractiveness of the region to investors,” she said.

The process also faces political challenges. ASEAN has spent decades discussing regional economic integration, yet its member states often continue to act independently when attracting investment, engaging in intense rivalry to secure the same types of foreign manufacturing projects.

In 2024, intra-ASEAN exports accounted for just 22.5% of total exports, while intra-regional imports accounted for 20.3%, indicating that economic circulation within the region remains relatively limited.

Le put the key choice facing ASEAN bluntly: “The real question now is whether ASEAN countries continue competing for individual investments, or start treating one another as complementary parts of the same supply chain. That choice may ultimately matter as much as how each country manages its relationship with China or America.”

Going it alone, most ASEAN member states would struggle to develop a complete industrial system spanning resources, manufacturing, technology, capital and services. Elms believes now is the right time for ASEAN to deliver on its long-standing promise to build an “integrated manufacturing and production base”.

She said, “With global investors eagerly looking to diversify their businesses and governments wanting to create more resilience, having greater integration in ASEAN would likely deliver strong economic growth.”

Vietnam does not need to replicate Indonesia’s abundant natural resources, nor does Indonesia need to reproduce Vietnam’s entire manufacturing system. The key is whether institutional links can seamlessly connect these dispersed but complementary strengths. For Southeast Asia, the most realistic path forward is to turn these five cards into a winning hand.

This article was first published in Lianhe Zaobao as “地缘红利被美国红线压缩 东南亚突围须整合硬实力”.

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