ASEAN in the Cracks: How China’s Production Capacity Spillover and Global “De-risking” Are Reshaping the Regional Industrial Landscape

The Identity Shift from “Beneficiary” to “Pressure Point”

Over the past two decades and more, ASEAN has been one of the most direct beneficiaries of China’s rapid economic growth and global supply chain integration: investment, orders, intermediate goods, and market access flowed in simultaneously, enabling this ten-member regional organization to gradually grow into a manufacturing and trade hub accounting for nearly 8% of global exports.

But a newly released issue report by the Asia Society Policy Institute argues that this beneficiary structure is being rewritten. The report’s authors, Brendan Kelly and Shay Wester, point out that as China’s industrial overcapacity spills over beyond the region, ASEAN has been pushed into the middle ground of global economic friction—it is both a recipient of capacity spillover and a party bearing pressure from advanced economies’ “de-risking” agenda.

It is worth noting that ASEAN has so far largely remained outside the global trade disputes surrounding China’s industrial policy, similar to the previous round of US-China trade friction. It continues to obtain investment and trade from all sides and is more deeply embedded in the Chinese supply chains that support its own exports. The problem is that this room to play both sides is narrowing, not expanding.

Export Market Status and Trade Deficit Rise in Tandem

Structural changes are first reflected in the direction of trade data.

In 2023, ASEAN surpassed the United States and the European Union to become China’s largest export market; in 2024, China’s exports to ASEAN grew by another 12%, while ASEAN’s exports to China grew by only 2%. Imbalances at the country level are sharper: in 2024, China’s imports from Indonesia and Thailand grew by nearly 18% and 14%, respectively, while exports from these two major ASEAN economies to China fell by 4% and 5%, respectively.

Over a longer cycle, China’s share of ASEAN trade has risen from 12% in 2010 to 20% in 2023. At the same time, ASEAN’s trade deficit with China has exceeded US$190 billion. This means that while ASEAN is becoming ever more tightly bound to China in supply chains, the imbalance in its bilateral trade account is also expanding in tandem.

The Changing Nature of Imports Matters More Than Import Scale

If one looks only at total volume, it is easy to draw a relatively moderate conclusion: traditionally, China’s exports to ASEAN were mainly intermediate goods, providing cheaper inputs for ASEAN’s own export industries, a typical form of processing-trade complementarity. Recent analysis also shows that ASEAN’s deficit with China is largely offset by its surplus with the rest of the world—especially the United States. In other words, the benefits of ASEAN-China economic integration partly depend on the continued strength of US final demand.

The real risk lies in the drift of import structure. When more and more Chinese exports use ASEAN itself as the final market, rather than merely as a transit processing link, the economic implications change accordingly: processing trade creates local jobs and capacity, while low-priced finished goods imports may directly displace local production and employment, and deepen economic dependence.At present, this shock is most concentrated in low-value-added categories such as textiles, furniture, and food and beverages, and it is already clearly reflected in the Thai, Indonesian, and Singaporean markets. For ASEAN manufacturing, which is dominated by micro, small, and medium-sized enterprises, these categories have the strongest employment absorption capacity and the least buffer against price shocks.

Textiles and Cross-Border E-Commerce: The Earliest Visible Pressure Front

Indonesia is a typical case for observing this pressure. According to data from Indonesian officials, 80,000 workers in the country's textile industry were laid off in 2024, another roughly 280,000 jobs are at risk in 2025, and 60 companies plan further layoffs. For an economy whose manufacturing employment relies heavily on labor-intensive sectors, such adjustments quickly transmit to consumption and local public finances.

Vietnam's situation reveals another transmission channel: cheap Chinese goods pouring in through cross-border e-commerce platforms. Unlike traditional trade, cross-border e-commerce substantially weakens the buffer and visibility provided by tariffs and customs statistics, making import shocks act more directly on local retail and manufacturing. This places new institutional demands on ASEAN countries' trade remedy tools, tax administration capacity, and platform regulatory frameworks.

Dual Balancing: Investment Dividends and Industrial Squeeze Coexist

The report stresses that ASEAN governments face not one-way pressure but a set of dual balances.

The first balance is external: on one side, economic integration with China continues to deepen; on the other, developed economies keep pressing for reduced dependence on Chinese supply chains.

The second balance is internal: on one side, leveraging cheap Chinese imports and growing Chinese investment to drive industrial growth, expand employment, and boost exports; on the other, guarding against these inputs and finished goods in turn suppressing local industries and constraining their own industrialization paths.

The report specifically highlights two dimensions that are easily overlooked. First, ASEAN is increasingly becoming a "testing ground" for large-scale offshore manufacturing by Chinese companies, which brings capacity, technology, and jobs, but also the risk of local industries being squeezed by integrated Chinese capacity. Second, as developed economies tighten scrutiny of supply chains linked to China, ASEAN's access to key export markets may be jeopardized—that is, the realization of investment dividends depends on whether external markets remain willing to accept ASEAN products bearing the imprint of Chinese supply chains.

External Environment: Tariffs, De-risking, and the Feasibility of Export Diversion

Trade responses to China's overcapacity had previously been concentrated mainly in developed economies. The United States has imposed a 100% tariff on Chinese electric vehicles, 50% on solar cells, and 25% on lithium-ion batteries; the EU has added tariffs of up to 45% on Chinese electric vehicles and launched anti-subsidy investigations into multiple sectors including wind power, photovoltaics, and electric trains.

But the impact is clearly not limited to developed economies. Turkey, India, Brazil, and other countries have likewise experienced surges in imports of Chinese manufactured goods, followed by new trade restrictions or emerging signs of trade friction. This trend is expected to spread further.The capacity backdrop further illustrates the persistence of the problem. In the EV sector, China’s automobile industry capacity utilization fell sharply last year, with more than half of enterprises operating at a loss; in 2023, China overtook Japan to become the world’s largest automobile exporter. In the photovoltaic and lithium-ion battery sectors, China’s capacity is expected to be two to three times total global demand in the coming years.

Against this backdrop, the report questions “whether China can effectively divert exports to ASEAN and other emerging markets”: as US and EU trade restrictions continue to escalate, a new round of tariffs from the Trump administration proceeds alongside China’s own “decoupling” efforts, the room for export diversion is not unlimited. This directly bears on the actual upper limit of pressure ASEAN can bear as a recipient.

A macro side that is often overlooked is that ASEAN absorbing more Chinese intermediate goods and consumer goods will bring a persistent disinflationary effect, helping keep regional inflation under control. But this “dividend” at the price level may precisely obscure structural shocks at the industrial level, causing policy responses to lag.

Institutional Tools: ACFTA, RCEP, and Regional Coordination Capacity

The policy path offered by the report is clear and pragmatic.

For ASEAN, the priorities are to strengthen trade instruments and enhance regional coordination capacity to respond to import surges, while continuing to invest in its own competitiveness; promoting supply chain diversification to reduce vulnerability is listed as a key task. At the institutional level, the China–ASEAN Free Trade Agreement (ACFTA) and the Regional Comprehensive Economic Partnership (RCEP) provide ready-made frameworks that can be used to safeguard regional industrial growth space under external pressure.

For the United States and other major economies, the report’s recommendation is: they should proactively communicate with ASEAN on overcapacity and “de-risking” concerns, rather than exerting one-way pressure, so as to help ASEAN continue to be a key partner in their supply chain diversification process.

Long-Term Judgment: How Regional Division of Labor Will Be Rearranged

Observing the above clues within the framework of the ASEAN Economic Community and regional industrial chains, several possible medium- to long-term trajectories can be seen.

First, interests in the industrial division of labor within ASEAN are not aligned. There is a marked difference in sensitivity to import surges and trade remedies between countries that take over Chinese offshore manufacturing (such as Indonesia, Vietnam, Thailand, and Malaysia) and members that serve as regional headquarters, financial, and trade hubs (such as Singapore). This will directly affect whether ASEAN can form a unified collective trade response stance.

Second, ASEAN’s external accounts have structural dependencies. Its deficit with China depends to a considerable extent on surpluses with end markets such as the United States to balance. Once US demand or the tariff environment changes, the sustainability of ASEAN’s deficit with China, and even the stability of the region’s processing trade model, will be tested at the same time.

Third, the rise of tariff and non-tariff barriers will push Chinese enterprises to accelerate localized operations in ASEAN to circumvent restrictions. This is both an opportunity for investment, employment, and technology transfer, and will intensify competition in local markets, and may keep ASEAN exports under pressure from rules-of-origin and supply chain scrutiny.Fourth, the center of gravity of regional trade flows is shifting from the one-way chain of “China–ASEAN–Europe and the United States” to a more complex multi-directional network. Whoever can occupy an irreplaceable intermediate link in this network will determine the industrial position of ASEAN member states over the next decade.

Conclusion

ASEAN is unlikely to choose sides between China and the United States, but the cost of “not choosing sides” is rising. The real policy space lies not in taking sides externally, but in internal capacity: more effective import monitoring and trade remedy tools, more coordinated regional industrial policies, more resilient supply chain structures, and greater bargaining power through more proactive communication with all parties.

At the intersection of two forces—Chinese capacity spillover and global de-risking—ASEAN is both a passive recipient and still has the opportunity to become an active rule participant and industrial organizer. The window of opportunity will not remain open for long.