Asia-Pacific Southeast Asia Amidst US-China Economic Competition

Ann Marie Murphy is professor and director of the Center for Foreign Policy Studies at Seton Hall University. This piece was written for Perry World House's 2023 workshop "Economic Security and the Future of the Global Order in the Indo-Pacific."

In recent years, Southeast Asia has emerged as a key focal point of US-China strategic competition. There is a consensus in the international relations literature that the safest environment for small- and medium-sized states – like those in Southeast Asia – is one of a rough balance of power, in which they can secure political and economic benefits from all sides. In contrast, the most dangerous environment is one of great power transition, such as that between the United States and China, because both sides pressure others to align with them. As geostrategic competition has become increasingly zero-sum in recent years, the mantra of Southeast Asian states has been, “Don’t make us choose sides.” Until recently, strategic competition and economic integration in Asia were relatively siloed, as illustrated by the old dictum that Southeast Asians looked to the United States for security and to China for prosperity. For Southeast Asian states heavily dependent economically on both the United States and China, this was a welcome situation. Today, trends toward economic decoupling and friend-shoring illustrate that the United States and China are competing economically in an increasingly zero-sum manner that could negatively impact Southeast Asian states.

This paper will make five key points. First, Southeast Asian states have benefitted from competition in infrastructure and vaccines. Second, Southeast Asian states, among the world’s most diverse in terms of size, political regime, and religion, are also diverse economically. Therefore, there is no single “Southeast Asian” perspective on US-China economic competition. Third, the United States and China may be the Association of Southeast Asian Nations (ASEAN)’s most important economic partners, but they are viewed very differently by Southeast Asian elites, who overwhelmingly fear China’s growing economic influence. Fourth, the trade war between the United States and China, while unwelcome, created opportunities for some Southeast Asian countries to benefit economically. Fifth, as the United States and China seek to decouple economically, Southeast Asian states may be pressured to choose sides.

Southeast Asia Benefits from Competition in Infrastructure and Vaccines

As Washington and Beijing compete for influence, Southeast Asian countries have benefitted in areas such as infrastructure and COVID-19 vaccines. To compete with China’s Belt and Road Initiative, the United States created the International Development Finance Corporation, which, for the first time, permits a government agency to make limited equity investments. In the early days of the COVID-19 pandemic, China committed vaccines to Southeast Asian countries when Western countries like the United States refused to do so until their own citizens were vaccinated. As of June 2021, Southeast Asia accounted for 29 percent of China’s vaccine donations and 25.6 percent of its vaccine sales worldwide. After ramping up domestic vaccination programs, President Biden stated the United States would become the world’s “arsenal of vaccines,” an attempt to compete with Xi Jinping, who had called China’s vaccines a “global public good.” Three of the top ten recipients of the US COVID-19 vaccine donations are in Southeast Asia. Southeast Asia is extremely vulnerable to climate change, and many Southeast Asians hope that the United States and China will compete by providing financial and technical support to help countries adapt to, and mitigate the effects of, climate change.

Southeast Asia’s Economic Diversity

As the data in Appendix A of the region’s six major economies illustrate, Southeast Asian economies vary tremendously, so the impact of great power economic competition will vary as well. Singapore, a city-state of 5.5. million people, is the richest Southeast Asian state with a per capita income of approximately $73,000. It consistently ranks as one of the most trade dependent countries in the world, with a trade dependency of 333 percent. Singapore is also the regional country most dependent on foreign direct investment (FDI), making Singapore extremely vulnerable to the US-China trade war, global economic contractions, and investment slowdowns.

At the opposite end of the spectrum, Indonesia is the region’s largest country and economy with approximately 275 million people, but a per capita income of only $4,333, or less than 6 percent of Singapore’s per capita income. Extremely rich in natural resources, Indonesia is a major commodity exporter. It has a long history of economic nationalism and a large domestic market, so trade only accounts for 40 percent of GDP, well below the global average of 52 percent. FDI accounts for only 1.8 percent of GDP, making Indonesia much less vulnerable to trade wars and investment slowdowns. Vietnam, Thailand, and Malaysia are all highly integrated into regional supply chains and therefore heavily dependent on trade like Singapore. In contrast, the Philippines has a trade dependency ratio of 64 percent and is therefore less vulnerable to trade wars.

Trade, Investment, and Perceptions of the United States and China

Since 2009, China has been the largest trading partner of the ten Southeast Asian member countries of ASEAN collectively. The United States ranks second, but its trade of $364 billion is approximately half of China’s $669 billion. China is also ASEAN’s fourth largest investor. In contrast, the United States leads in investment in the region; US investments rose by 41 percent in 2021 to $40 billion, while Beijing's investments rose by 96 percent to nearly $14 billion.

The United States and China may both be critical economic partners for Southeast Asia, but they are viewed differently. China is perceived by Southeast Asian elites as the region’s most influential economic actor. In 2023, however, that percentage dropped to 59.9 percent, a significant decline from 2022 when the figure was 76.7 percent. In contrast, only 10.5 percent of respondents view the United States as the most influential regional economic power. However, 64.5 percent of Southeast Asians worry about China’s growing regional influence while only 35 percent welcome it. This is the reverse of the United States; 65.7 percent welcome the US economic influence and only 34 percent worry about it. When asked why many do not see prospects for improved ties with China, the use of economic coercion was cited by 32 percent of respondents.

Given Southeast Asia’s overall reliance on trade, most member states welcome free trade agreements. ASEAN has a free trade agreement with China, and all ASEAN countries are also linked with China in the Regional Comprehensive Economic Partnership (RCEP). ASEAN members would welcome greater market access arrangements with the United States, and a key critique of US policy toward the region is the absence of such proposals. Only 46.5 percent of Southeast Asian elites view the Indo-Pacific Economic Framework for Prosperity positively.

The US-China Trade War Disrupts Supply Chains

Southeast Asia’s reliance on trade means that Sino-US economic competition that injects uncertainty into the market is detrimental to regional countries that want a stable economic environment. In 2018, then-President Donald Trump launched a trade war by imposing tariffs of up to 25 percent on China, aiming to pressure Beijing into changing what Washington views as unfair Chinese trade practices, including forced technology transfer, limited market access, intellectual property theft, and subsidies to state-owned enterprises. China retaliated with its own tariffs, creating uncertainties and disruption for Southeast Asian states with the region’s largest trading partners.

The dilemma for Southeast Asian states is that although they are significantly impacted by Sino-US economic competition, they have little influence over it. As then-Malaysian Prime Minister Mahathir Mohamad stated, ASEAN states were caught in the middle. Regional leaders attempted to convince Washington and Beijing that it was in their interests to call off the trade war, to no avail.

Unable to influence the course of the trade war, Southeast Asian states responded by marketing themselves as alternative production destinations as firms sought to divert manufacturing away from China. Assessing the impact of the trade war on Southeast Asia is difficult for a few reasons. First, rising labor rates in China were leading some companies to leave China even before the trade war began. Second, the COVID-19 pandemic closed borders, exerting an exogenous shock to global trade and supply chains. Third, China’s Zero-COVID policy and manufacturing closures led many firms to diversify away from China entirely or explore “China plus 1” strategies.

Despite the difficulties of disentangling the impact of the trade war from other factors, there appears to have been some displacement of production and investment away from China to Southeast Asia with Vietnam as the biggest winner. Its share of US imports, already on an upward trajectory, jumped from 1.9 percent in 2018 to 3.4 percent in 2020. While China’s share of US imports of telecommunications equipment, including mobile phones, fell from its peak of 61.5 percent in 2018 to 52.8 percent in 2020, Vietnam’s share rose from 5.2 percent to 14 percent in the same period. From 2020 to 2021 alone, Vietnam jumped five places in the world rankings of FDI inflows, joining the top 20 list at number 19.

According to the Economist, US imports have risen by a third since 2018, but American imports of Chinese goods rose only 6 percent, producing a decline in China’s market share from 21 percent to 17 percent since President Trump launched his trade war. At the same time, exports from Cambodia are up over 225 percent, Vietnamese exports rose 170 percent, and exports from Thailand rose 80 percent. Indonesia has seen its exports to the United States jump 60 percent, while those from Malaysia and the Philippines have grown approximately 40 percent and 35 percent, respectively. It is important to note that China is still a critical supplier of intermediate goods to Southeast Asia, so some Chinese goods flow back to the US through regional supply chains.

Economic Decoupling

Many analysts had hoped that economic interdependence would mitigate conflict between the United States and China, but those hopes have been dashed and today the two countries are taking steps to reduce their economic ties. The supply chain disruptions caused by the pandemic, particularly in critical goods like personal protective equipment and microchips, revealed the vulnerability caused by far-flung supply chains. At the same time, the pandemic exacerbated US-China rivalry as President Trump blamed China for causing it. As a result, the United States is taking a dual approach to making supply chains less vulnerable, both moving key industries back onshore and friend-shoring others to reduce geostrategic risk. Carnegie Endowment for International Peace Vice President for Studies Evan Feigenbaum has stated that the United States is trying to elicit “voluntary compliance” from its friends for its efforts to limit technology goods to China but that if support is not forthcoming, Washington “is going to bring the hammer down.”

China has also adopted a dual strategy to reduce its dependence on the United States and the West. First, it is pursuing its own domestication strategy and seeking to increase domestic demand. Second, China also aims to diversify trade away from reliance on the United States and Europe to lessen its vulnerability to political pressures from the West. For China, ASEAN countries are viewed as critical markets and friendly countries for its own friend-shoring strategies.

Today, it is unclear how decoupling and the rise of domestication strategies in the United States and China will impact a country like Malaysia, which accounts for 10 percent of global trade in microchips, in the long run. What appears to be clear is that Southeast Asian countries are at risk of morphing from states experiencing the fallout from great power economic competition to becoming objects of it. In contrast to a trade war in which the objectives are primarily economic, friend shoring is a strategy of great power competition with geostrategic objectives. This is not a welcome phenomenon in Southeast Asia.

For the first time, the annual “State of Southeast Asia Survey” in 2023 included “fears of Sino-US decoupling” among the 8 issues that it asked respondents to rank as the top threats facing the region. Respondents ranked it 5th, below unemployment and economic recession, climate change, increased military tensions, and widening socio-economic gaps but above domestic political instability, deteriorating human rights conditions, and terrorism. As Singaporean Prime Minister Lee Hsien Loong recently stated, reshoring and friend shoring can “shut off avenues for regional growth and cooperation, deepen divisions between countries, and may precipitate the very conflicts that we all hope to avoid.”

In conclusion, Southeast Asian states have benefited from US-China competition in infrastructure and vaccines, but the challenges facing ASEAN countries from great power economic rivalry are rising. Southeast Asian countries faced challenges from the trade war, but they were not objects of competition and most benefited from it. Economically dependent on both the United States and China, Southeast Asian countries do not want to choose between them but may find themselves pressured to make stark choices in areas like technology.