[Big read] He Dong: Trump’s tariffs could spur ASEAN integration

(Edited and refined by James Loo, with the assistance of AI translation.)

If ASEAN is perceived as a single economy, it would soon overtake Japan. According to IMF estimates, ASEAN’s combined GDP would hit US$4.25 trillion in 2025, almost on a par with Japan’s US$4.28 trillion — the tipping point for overtaking Japan is already clearly in sight.

With this historic moment on the horizon, a key question would inevitably arise: does ASEAN truly possess economic “muscle”, or is it just an “overweight mass” loosely stitched together by 11 countries?

Indeed, with a population of around 670 million and an average growth rate exceeding that of the developed world, at first glance, ASEAN’s mass brings to mind a hefty slab of pork belly — marbled with layers upon layers of fat.

The member states of this regional grouping vary widely in their economic development. Singapore boasts a highly developed economy, with a per capita GDP exceeding US$90,000, while Laos and Myanmar remain at an early stage of development, with per capita GDPs below US$2,000. Vietnam, by contrast, experienced rapid growth of 8% in 2025, whereas Brunei saw almost no growth, at just 0.1%.

These disparities in wealth and growth make ASEAN appear highly internally uncoordinated, akin to a pile of loose sand and more hollow than cohesive as a grouping.

However, in the eyes of He Dong, chief economist at the ASEAN+3 Macroeconomic Research Office (AMRO), this might be a weakness — but it is also a unique endowment that ASEAN can rely on to survive and even leap ahead in a world of geopolitical rifts and supply chain reconfiguration.

A comparison to draw would be: ASEAN’s development to date has been a process of “building muscle”. In the past, it hosted vertically relocated segments of foreign industrial chains. Now that it has some muscle, it needs to build horizontal regional coordination and beef up a set of muscle groups that can work together.

He pointed out an example of how in the 1980s and 1990s Japanese firms produced cars in Thailand. Japan provided capital and technology, Thailand supplied labour, and the products were ultimately exported to Europe and the US. This was a clear case of vertical integration, with trade flowing in a single direction.

Today, ASEAN members should no longer simply build the same kind of contract manufacturing factories, but instead divide labour and integrate horizontally according to their respective resource endowments. For instance, Singapore could handle design, Indonesia could manufacture batteries, while Thailand could assemble vehicles, forming a complementary industrial chain.

“ASEAN’s future integration is heading in this direction,” He says. “The market needs to be integrated along with the production networks in order to truly drive deeper cooperation.”

He pointed out that the most direct benefit is economies of scale. “The market will no longer be fragmented into tiny single markets. Firms can operate and plan across a larger region, distributing different production stages across multiple locations. Done this way, they can scale up, lower costs and improve efficiency.”

ASEAN has always been compared with the EU when it comes to market integration.

He pointed out that the difference is that the EU is a supranational economic entity whose members have broadly similar levels of development.

In contrast, ASEAN is a treaty-based economic grouping whose members differ widely in resources and development. Achieving a unified market would allow intra-regional trade in intermediate goods to flow in multiple directions even more. If such trade expands, the share of intra-ASEAN trade could rise from about 20% today to more than 40% in future.

To achieve this, He proposed a concrete path for leapfrogging growth: “promote production through investment, and promote trade through production”. In other words, leverage investment to expand output, and then use that output to drive trade. Attracting global investment remains crucial for building out different segments of the region’s production chain and sustaining long-term growth.

In the past, most of ASEAN’s foreign direct investment (FDI) came from Europe and the US, accounting for around 40% of total FDI stock. In recent years, however, Chinese investment has surged, now approaching 12% of the stock, while China has also overtaken the US as the region’s largest source of final demand for exports.

Amid rising geopolitical tensions, foreign capital from multiple global powers is converging on ASEAN, sometimes coexisting, sometimes clashing. Could this affect ASEAN’s development or even spark divisions among its members?

He feels that more capital flowing in from around the globe is a good thing. “It allows ASEAN to absorb technology and capital from different places, and it makes risk diversification easier.”

He explained that ASEAN’s market integration can be seen along two key dimensions. First, the region must integrate more deeply into global supply chains while boosting domestic value-added production, ensuring that growth is both meaningful and sustainable. Second, ASEAN should avoid relying on a single major economy for trade and instead diversify its partners to spread risk.

ASEAN at present is inundated by very different waves of capital. Chinese firms are going abroad on a large scale, often choosing ASEAN — especially Singapore — as their first stop.

This has sparked controversies over “Singapore-washing”; the idea that Chinese firms set up entities in the region to “rebrand” their origin, in order to skirt geopolitical risks or tariff barriers.

The influx of Chinese firms has also introduced intense competitive pressure, or “involution”, disrupting the relatively comfortable environment for local companies. Opinions on this are mixed, but He sees it as precisely the starting point for deeper regional integration.

In the food and beverage sector, local adaptation is essential; Chinese brands that do not adjust will not succeed in local markets.

He commented that “to grow in a market such as Singapore, you must respect local laws, meet very high hygiene standards and adapt to the local marketing culture”.

What seems like mere survival of the fittest is actually a process of localisation that gradually transforms a firm’s national identity.

“In the end, whether it is a Chinese company or a Singaporean one is no longer the key question. For a Chinese firm to truly succeed, it must understand the local culture and integrate deeply with the local environment.”

At the same time, China is not only a competitor but also a technology provider.

Chinese firms are global leaders in green technologies such as electric vehicles and photovoltaics. ASEAN today is in a position similar to that of China in the past, using Western investment to climb up the value chain.

He commented that “in China’s own economic rise, many European and American companies initially treated China only as a contract manufacturer; China later developed its own R&D capabilities building on that base”.

“ASEAN can strengthen its learning capacity so that even as Chinese technology companies enter the region, they develop local research and development capabilities instead of remaining limited to simple contract manufacturing.”

Despite the grand vision, a close look at reality reveals hidden reefs.

The 2025 border clashes between Thailand and Cambodia, and the ongoing internal turmoil in Myanmar, show that the ASEAN grouping remains fragile. In some markets, a weak rule of law and sluggish administration meant that companies could be hit by sudden policy reversals or hefty fines, effectively paying a high “hidden tax”.

In spite of this, He felt that ASEAN’s economic size and strong desire for integration continue to make it attractive for foreign firms.

He also argued that uncertainties in some markets, such as doing business in Indonesia, are transitional frictions that will be offset over time by the significant benefits of accessing a larger economy.

He pointed out that a more hidden yet widespread challenge is non-tariff barriers. On paper, internal tariffs in ASEAN are largely zero, but in practice, invisible obstacles are everywhere.

A major non-tariff barrier in ASEAN is the inconsistency of technical standards and licensing requirements, affecting service sectors such as professional services, finance and telecommunications. These obstacles hinder the free flow of services trade and have long been the most significant stumbling block to deeper regional integration.

He explained that “this is fundamentally about vested interests. Some companies fear that if markets are opened up, firms from other ASEAN countries will come in and compete with them.”

He observed an interesting recent development: in the face of US President Donald Trump’s steep tariff threats and a rapidly changing external environment, ASEAN has in fact been pushed to dismantle some of its internal non-tariff barriers.

“In a sense, the US tariff hikes are ‘a crisis not to be wasted’. They create a stronger incentive for ASEAN to reduce internal non-tariff barriers, boost production through investment, and drive trade through production, thereby advancing regional integration.”

In the long run, ASEAN will have to forgo the short-term benefits of protecting specific domestic industries and open up regional trade in services if it is to achieve true integration.

To push integration further, ASEAN must also tackle two basic issues: payments and electricity.

At a point in time, the streets of ASEAN nations were cluttered with payment QR codes that were not interoperable across borders. Today, the Project Nexus cross-border payments initiative is taking the lead in ending this chaos by linking up payment systems across the region.

Singaporeans can already use PayNow to scan local merchant codes and make payments in Thailand and Malaysia.

Unlike the EU, which uses the euro as a single currency, ASEAN is instead pursuing connectivity in payments.

In He’s view, building interoperable payment systems is one of the fastest-moving and most promising areas of ASEAN integration. The region is attempting to use digital finance to achieve integrated regional payments.

For example, traditional banks face high costs in serving micro-enterprises and often demand physical collateral, a practice which excludes countless firms. Digital finance can support inclusive finance and change this — micro-enterprises devoid of assets can obtain loans based on solid digital footprints, such as their payment behaviour and social credit.

In addition, the use of blockchain in digital finance can improve the portability of financial data.

He explained that at present, financial institutions’ data are isolated “data islands” that do not communicate with one another, making it hard to switch banks. Blockchain can break down these barriers and greatly improve the overall efficiency of the financial system.

However, technological innovation could also undermine ASEAN’s social fabric.

He especially issued two warnings. First, consumers must guard against over-indebtedness: easy digital borrowing without proper oversight can trap financially illiterate and vulnerable groups in debt.

Second, systems must be protected against money laundering risks. Against a backdrop of rampant telecoms fraud and money laundering in Southeast Asia, preventing financial innovation from becoming a conduit for criminal funds is a major “grey rhino” risk.

Only by plugging these loopholes can digital finance become a driver of ASEAN’s growth rather than a poison.

If digital finance activates ASEAN’s internal “blood vessels”, then power grid connectivity energises its “meridians” — the backbone that could support the region’s future as a global hub for AI computing and green manufacturing.

Currently, Malaysia is rapidly becoming a regional hub for data centres and AI computing, but this is bringing power systems close to overload.

He stressed that AI computing requires far more energy compared with traditional manufacturing, making improvements in grid efficiency crucial if ASEAN is to develop this new sector.

In this regard, Laos — with its abundant water resources and dubbed the “battery of Southeast Asia” — can play a key role by exporting renewable power to areas like Singapore and Malaysia.

“Creating a relatively unified energy market within ASEAN, balancing production and consumption across locations and even adjusting power flows in accordance with different time periods, would all greatly improve the region’s overall efficiency.”

Muscles strengthen through stress and recovery. Likewise, ASEAN must navigate short-term frictions and adjustments to build new growth engines. The goal is not to copy the EU or China, but to develop its own unique “muscle groups”, distinct strengths shaped by the region’s diversity.

By absorbing technology and capital from Northeast Asia while staying open to Western markets, ASEAN can build its own rules and safeguards and secure its place in a fragmented global landscape. In He’s words, “ASEAN has the chance to become an indispensable middle layer and a key provider of intermediate technologies. I believe this goal can be achieved in the foreseeable future.”

He Dong’s recommended booklist

Mr Keynes’ Revolution by E.J. Barnes

Mr Keynes’ Dance by E.J. Barnes

Homo Deus by Yuval Noah Harari

Home in the World by Amartya Sen

This article was first published in Lianhe Zaobao as “区域增肌蓄力待谱经济新篇”.

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