China Is Squeezing Southeast Asia
As Imbalances Grow, a Backlash Is Brewing
Southeast Asia should be benefiting from China’s rise. Beijing has made the region’s growth a priority: Chinese leader Xi Jinping’s Maritime Silk Road—the nautical pillar of the Belt and Road Initiative, China’s global infrastructure and investment program—put Southeast Asia at the heart of Beijing’s geoeconomic strategy and made it a prime target for development opportunities. Southeast Asia has attracted roughly $126 billion in Chinese investment in the last decade, and in 2020, the region surpassed the United States and the European Union to become China’s largest trading partner. As Washington revives tariff threats and global demand slows, Beijing has embraced more trade with countries in the Association of Southeast Asian Nations. In October, leaders signed the China–ASEAN Free Trade Agreement 3.0, an updated version of an accord last revised in 2015, deepening the region’s integration with China.
But what once seemed like a path to shared prosperity now feels like a dead end. China’s economic gravity is suffocating the very economies it has promised to lift. Trade deficits with Beijing have ballooned as local industries, from textile producers in Indonesia to steel makers in Thailand, struggle against a flood of underpriced Chinese goods. Economists often argue that Chinese investment and exports, which primarily include intermediate parts and components used to make other manufactured products, should be creating opportunities for Southeast Asia to grow. But the continued reliance of Chinese investors on supply chains back home means that regional economies are not benefiting from many of the productivity gains, industrial clusters, or technology transfers that often follow such foreign investments.
Part of the challenge is China’s growth model: in the face of falling profits, excessive competition, and meager domestic consumption, Chinese firms must expand to overseas markets to survive. But Southeast Asia’s political institutions play a role, too. Many countries in the region struggle with weak rule of law, entrenched patronage networks, and regulatory capture, in which businesses effectively co-opt the government agencies that are supposed to monitor them. Overseas investors play by local rules—and in Southeast Asia, the rules are too weak to hold them back from taking advantage of, or even worsening, the lack of effective oversight or transparency.
When China entered the global trading system in 2001, economists referred to the sudden impact on jobs and industries in the advanced industrial world as the “China shock.” Now, Southeast Asian countries, squeezed by a glut of Chinese exports, are grappling with a “second China shock.” As Chinese-backed mining projects, infrastructure, and special economic zones—particularly those rife with illicit activities such as gambling and scam syndicates—proliferate in Southeast Asia, local resistance and public unrest is surging. This discontent is not just a diplomatic irritant for China but also a test of one of the goals of its statecraft: to promote stability through economic integration. So far, business elites and governments in Southeast Asia have played nice with Beijing or colluded with Chinese investors. But if regional leaders are to avoid economic stagnation and the upheaval that it fuels, they must put the region in a position where it can benefit from China’s economic expansion, not suffer under its weight.
FLIGHTLESS GEESE
Economists and Chinese officials who are optimistic about Southeast Asia’s growth highlight the flying geese model of industrial upgrading that helped Hong Kong, Singapore, South Korea, and Taiwan develop in the wake of Japan’s early success. In the 1960s, as Japan industrialized and its labor costs rose, the country’s lower-income neighbors adopted its model and took over the industries it was leaving behind. Today, China is flying out front and ostensibly guiding Southeast Asia’s rise. It is moving toward more capital-intensive industries in addition to increasing investment in and trade with countries across the region. The flying geese model suggests that expanding Chinese capital should in turn benefit Southeast Asian countries and support the development of their own industries.
But the economic relationship between China and Southeast Asia is increasingly imbalanced. In 2025, China recorded a global trade surplus of more than $1 trillion, of which ASEAN countries accounted for roughly 23 percent. Their imports from China have surged since 2020, but their exports to China have largely flatlined over the same period, boosting the region’s trade deficit with Beijing from just over $10 billion in 2010 to roughly $140 billion in 2024. Goods from China are flowing to Southeast Asia, but the amount of value created by the region’s manufacturing sector has not kept pace with the expansion of trade. According to UN Trade and Development (UNCTAD) data, in 2023, Southeast Asia contributed only five percent of global value-added in manufacturing—about the same share as a decade earlier. China, by contrast, accounted for 28 percent, about ten percentage points higher than in 2012.
These widening gaps indicate that China—the leading goose—is moving toward higher-value manufacturing without uplifting Southeast Asian economies at the same rate. When Chinese companies invest in Southeast Asia, local economies are not benefiting in the ways that once allowed other countries to thrive under the flying geese model. At the upper end of the manufacturing value chain, in sectors such as electric vehicles, batteries, and solar panels, Chinese firms relocate only the most labor-intensive parts of the production process to Southeast Asia. Beijing encourages companies to keep the highest value-added processes in China and warns against letting core technologies or knowledge transfer to the country where the product is being manufactured. In Indonesia, for instance, Chinese companies control roughly 75 percent of nickel refining and are developing a $6 billion battery complex. Indonesia captures only about ten percent of the value added during the full production process, from mining ore to assembling battery components. The rest of the money flows back to the initial investors in China as profit and to repay loans.
Chinese companies also prefer to not use local suppliers in their Southeast Asian factories. Cutting-edge Chinese firms have built largely self-contained systems at home in which they control production at every stage from raw materials to final assembly. This prevents them from integrating with local manufacturers and sometimes even crowds the host country out of the industry. The opening of the electric carmaker BYD’s first overseas factory, in Thailand in 2024, brought a surge of imported intermediate goods from China, including high-end battery systems, motors, and basic structural components, to be assembled into automobiles at the new plant. But the influx of cheap steel auto parts caused a 20 percent drop in sales from existing Thai suppliers, which have traditionally provided such components to Japanese carmakers in Thailand. Chinese solar investments in Vietnam, too, function more as an export-processing hub than a manufacturing base, prompting critics to suggest that Southeast Asia is merely a byway for China to ship its goods elsewhere.
Beijing’s push for technological self-reliance is also undercutting Southeast Asian countries in advanced sectors in which the region is gaining ground, including semiconductors. Malaysia, Singapore, and Vietnam supply chips for autos, industrial equipment, and consumer electronics. But demand from China is likely to weaken as Beijing subsidizes domestic companies to wean themselves off imports. Within five years, China will likely be able to produce most of its own legacy chips, which rely on older technology but are still essential for the majority of products on the market. As Chinese firms substitute local components with Chinese chips in semiconductor production, another avenue for Southeast Asian development is constrained.
Meanwhile, China is not shedding the labor-intensive industries that might be expected to migrate to Southeast Asian countries with lower costs. Industries in Vietnam, for instance, face immense pressure from the millions of cheap orders—worth $2 billion monthly—that flow into the country every day from Chinese e-commerce platforms. Imports of cheap Chinese textiles and garments contributed to Indonesia shedding nearly 80,000 jobs in those sectors in 2024. Local producers cannot compete with the scale and efficiency of China’s world-leading industrial ecosystem. More than 2,000 economic development zones in China offer firms access to both upstream and downstream suppliers all in one place. A large renewable energy firm like Trina Solar, which assembles panels at an industrial park in eastern China’s Jiangsu Province, for example, can find tempered glass, aluminum frames, and other essential components within arm’s reach. Other Chinese firms have turned to robotics and factory automation to offset rising labor costs without moving production abroad. Midea Group, the home appliances giant, has invested billions to convert its facilities into highly automated “lights out” factories that can operate with as few as ten percent of the workers required previously. Government policy has reinforced this shift with national directives and heavy subsidies to promote industrial automation, particularly in the low-skill manufacturing sectors most vulnerable to offshoring.
INSTITUTIONAL FAILURE
The crisis Southeast Asia now faces from the second China shock has as much to do with governance as with economics. Closer economic ties with Beijing have exposed—and, in many cases, worsened—the region’s institutional weaknesses that hinder its global competitiveness. Political and business elites across Southeast Asia regard Chinese capital as indispensable to catalyze growth, but they now face mounting repercussions from this dependence. Labor disputes, environmental degradation, and criminal activities are on the rise.
Indonesia is a prime example. China is now the country’s largest trading partner and principal financier of major infrastructure, including its high-speed rail. But Chinese-backed projects have led to unrest. At Chinese-owned nickel smelters in Sulawesi and Maluku, local workers have organized since 2020 to protest unpaid wages, unsafe work conditions, and the hiring of Chinese over Indonesian laborers. Widespread deforestation and severe pollution of the air, rivers, and oceans from Chinese mining operations have stirred outrage and even led to deadly riots. Public skepticism is mounting over the Indonesian government’s ability to hold Chinese investors accountable. In 2023, the forced eviction of local residents to make way for a $4 billion Chinese-backed industrial park on Rempang Island, near Singapore, sparked mass protests and violent clashes with the police. Even a high-speed rail project linking Jakarta to Bandung, touted by President Joko Widodo as a symbol of Indonesia’s modernization during his term in office from 2014 to 2024, has drawn increasingcriticism for its costs. The current president, Prabowo Subianto, cast the railway as a symbol of the country’s excessive dependence on Chinese debt when he was an opposition leader; now, his administration is facing renewed scrutiny as the project’s losses mount.
China’s economic footprint has also expanded through criminal networks in Southeast Asia. In Myanmar, where the military wrested control from the democratically elected government in a 2021 coup, Chinese-funded industrial zones have become hubs for scam syndicates, drug production, and human and narcotics trafficking. In Cambodia, Chinese capital spurred a real estate and casino boom that transformed the port city of Sihanoukville into a hub for money laundering and human trafficking; today the city is struggling with debt, derelict buildings, and disillusionment. Even Singapore has not been immune. A 2023 investigation uncovered a vast money laundering network tied to Chinese syndicates, revealing how illicit capital linked to China has seeped into the region’s most regulated market.
But widespread public discontent has not compelled the region’s governments to introduce the reforms needed to address these issues. Weak oversight, fragmented bureaucracies, and entrenched patronage networks across much of Southeast Asia leave governments ill equipped to manage the consequences of an expanding Chinese footprint. In many cases, rather than promoting policies to protect their own economies from harm, local political elites collude with Chinese investors. Such connivance further solidifies the power of patronage and weakens public accountability. In Cambodia and Laos, government officials have even adopted Beijing’s coercive approach to dealing with popular dissatisfaction. They have repeatedly suppressed local protests against Chinese investment projects, at times with direct support from Chinese security forces and surveillance technologies.
At this point, China is so vital to Southeast Asian economies that the region’s leaders are reluctant to confront problems that threaten long-term growth. A 2025 study by the IMD Business School in Switzerland found that, with the exception of Indonesia, ASEAN countries have placed countermeasures on less than seven percent of Chinese exports subsidized by Beijing, whereas G-7 countries took action on 12 to 15 percent. Problems related to Chinese investments are rarely brought up at high-level diplomatic meetings.
FACING THE MUSIC
So far, the frictions have not slowed China’s expansion into Southeast Asia. But they expose the limits of Beijing’s development model and the contradictions of its economic statecraft. Chinese leaders hoped that Chinese capital would bring countries together and cement regional goodwill. Yet the backlash its investments have generated is intensifying socioeconomic instability in Southeast Asia. Governments and local leaders have tended to ignore or suppress the rising unrest, but that only increases the risk of sporadic discontent morphing into large-scale disruption. The rapid outbreak of violent protests in Jakarta and across the country, in August 2025, shows how grievances can explode if the economy stagnates and jobs vanish.
For Southeast Asia, China’s economic influence demands a reckoning. There is no viable scenario in which the region rejects China or decouples from its economy; the connection is far too deep. But regional leaders must address the challenges stemming from their countries’ deepening economic integration with China or they will find it increasingly difficult to create a pathway for growth that will quell the rising discontent.
One strategy is to expand the region’s network of trading partners. Singapore and Vietnam, for instance, have signed trade agreements with the European Union. Like Malaysia and Brunei, they are also part of the Japanese-led Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Such agreements offer Southeast Asian economies a chance to integrate more deeply into global markets, diversify their manufacturing bases, and climb up global value chains. They also give Southeast Asian countries the opportunity to absorb new technology, raise productivity, and embed higher labor and environmental standards in their domestic industries. And whereas Chinese investors are reluctant to transfer more advanced processes to host countries, investors from Europe, Japan, and the United States can help Southeast Asia attract more value-added production in the semiconductor, artificial intelligence, and biopharma industries.
Southeast Asian countries should also prioritize integration among themselves. One reason that countries in the region have struggled to benefit from China’s rise is their lack of leverage in bilateral relations. Only as a bloc can they build collective strength to stand up to Beijing—or any other major economy. For years, ASEAN has struggled to integrate effectively because of nontariff barriers such as varying technical standards, complex customs procedures, and strict licensing requirements, as well as the bloc’s requirement for consensus-based decision-making. The recently launched Digital Economy Framework Agreement offers some hope, however, by seeking to dismantle many of these barriers to promote intraregional e-commerce.
Competing with China also requires recognizing where Beijing has excelled and trying to learn from it. China’s rise was driven not only by infrastructure but also by large-scale state support for education and innovation. ASEAN countries need deeper investment in human capital. Upgrading workforce capabilities by enhancing higher education and vocational training is indispensable to competing in high-productivity sectors. Current initiatives, such as Malaysia’s state-backed vocational “foundries” in Penang, are designed to bridge the gap between the supply of skilled labor and the evolving demands of high-tech industries.
Ultimately, Southeast Asia’s fate rests on its own institutions. Without stronger governance, a firmer rule of law, and more effective regulation, the region will suffer. ASEAN’s strategic road map for economic integration and development over the next five years, published in 2025, lays out concrete steps for member states to strengthen institutions, enforce labor and environmental standards, and improve investment governance and transparency. But success hinges on the political will to face up to the challenge and implement these commitments. Only then can the region build a foundation from which it can finally take flight.