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The New Cold War: Can Southeast Asia Weather the US-China Storm?

8 February, 2025

The US-China trade war has accelerated the diversification of manufacturing away from China, presenting an opportunity for Southeast Asian countries to pursue reindustrialization. However, the region has struggled to capture value from this supply chain reshuffling. Image: SCMP

While investment inflows have surged, the value captured remains limited

The US-China trade war has provided Southeast Asian countries with an opportunity to boost industrialization and growth as multinational companies diversify their manufacturing bases away from China.

However, many foreign investment projects in the region are primarily aimed at tariff avoidance or taking advantage of other policy incentives, without bringing substantial benefits to the local economies.

This is the assessment of Chris Miller, a professor of international history at the Fletcher School at Tufts University and the author of “Chip Wars” in an article published in the Financial Times on February 6th.

According to the article, Southeast Asia, a region with strong economic linkages and a tradition of political neutrality, has become a laboratory for efforts to not only minimize the costs of trade conflicts but also to exploit them.

The US-China trade war escalated as Beijing announced retaliatory tariffs in response to President Donald Trump’s order to raise tariffs by an additional 10% on goods from the world’s second-largest economy.

Some Southeast Asian leaders saw this as a golden opportunity for reindustrialization – reviving the region’s old industries. Countries like Thailand and Malaysia were once known as the rising “economic tigers” of Asia. However, after the 1997 Asian financial crisis, China joined the World Trade Organization (WTO) and attracted a significant amount of foreign direct investment (FDI), drawing potential FDI away from Southeast Asia.

Now, this trend has shifted. Not only are Western companies seeking production bases outside of China with lower tariffs and competitive costs, but Chinese companies are also looking to assemble products abroad to circumvent tariffs and other trade restrictions imposed by the US.

As a result, investment inflows into Southeast Asia have increased. However, capturing value from these inflows has proven more challenging than expected. Foreign companies are adept at exploiting the competitive investment landscape in Southeast Asian countries to demand subsidies and tax incentives.

Moreover, foreign investors seeking policy incentives often do not bring substantial economic value. Malaysia has benefited from a boom in data centers, partly due to its surplus electricity, but also because the US, until recently, allowed unlimited exports of AI chips to the country.

While some data centers in Malaysia serve the domestic market, others provide AI cloud computing services to Chinese customers who cannot access these services at home.

“Up to $25 billion has been invested in data centers in Malaysia. But how much value is being captured by local companies?” asks Professor Chris Miller.

Malaysia can sell its surplus electricity to data centers and create construction jobs. However, the most significant costs of a data center are the chips and servers inside, which are mostly imported from abroad. According to Professor Miller, the profits from cloud computing primarily go to chip manufacturers and software providers, not necessarily to the countries hosting the data centers.

Difficulty in participating in China’s “closed” supply chains

Some Southeast Asian officials share similar concerns about Chinese manufacturing plants in the region. When Western companies set up factories, they aim to access local labor and components. However, Chinese companies coming to Southeast Asia tend to import most components from China and often bring their own workers as well.

The question arises as to whether Southeast Asian countries can convince Chinese companies to purchase local technology or share their technology.

China’s economic growth over the decades has been partly attributed to its policy of forcing foreign companies to transfer technology to local partners. As a result, China would oppose any technology transfer requirements imposed by foreign governments on Chinese companies.

Beijing is implementing export controls on electronic assembly equipment and electric vehicle technology due to concerns about aiding the development of these industries abroad. It is also restricting the outflow of highly skilled personnel to stem the “brain drain.”

While reindustrialization is an appealing slogan in Southeast Asian capitals, China, the world’s largest industrial producer, views it as a competitive challenge. Local manufacturers in Southeast Asia also often see new Chinese factories in their countries as rivals.

Southeast Asian officials often praise Chinese investment. However, the region’s manufacturing and assembly base has evolved to be deeply integrated with Western supply chains. For example, for decades, Japanese automakers have been buying parts from Thai suppliers, while Malaysian chip assembly and testing plants primarily served Western semiconductor companies.

Professor Chris Miller argues that the global market share expansion efforts of Chinese companies in the automotive or chip industries will only benefit the Southeast Asian economy if these companies integrate into the region’s supply chains.

However, business leaders in the region complain that this rarely happens. China’s leading electric vehicle companies are racing to set up factories in Southeast Asia. Yet, these companies are highly vertically integrated, and their input sources are predominantly from Chinese companies. Small and medium-sized companies in the region, which have learned to sell into Western supply chains, find fewer opportunities to sell to Chinese manufacturers.

The idiom “when elephants fight, it is the grass that suffers” is often cited by smaller nations feeling squeezed by the competition between the two superpowers, the US and China. However, amidst concerns about Trump’s tariffs and China’s export growth, Southeast Asian countries are also trying to seize opportunities arising from the trade war. Taking advantage of the neutral ground during this conflict between the world’s two largest economies is an obvious strategy as multinational companies seek safe havens for investment.

“However, capturing value from supply chain shifts has proven more challenging than Southeast Asian countries expected,” concludes Professor Chris Miller.

Le Linh (According to Financial Times)