ASEAN walks a tightrope amid complex US-China ties

Geo-economics officially entered the lexicon of the Association of Southeast Asian Nations last year. It came in response to renewed tariff pressure from the United States when the ASEAN Geoeconomic Task Force was established in May. 

Despite its limited advisory mandate, the initiative signals concern from the region’s governments about collective economic security – given Washington’s mercurial sanctions and policy behaviour.

Discussions on geo-economics often adopt the simplistic geopolitics analogy. They assume that economic instruments are used to pursue political objectives or that economic policy must follow security alignments. 

This is not the case in Southeast Asia, where governments have generally emphasised “pick-and-choose” economics-first strategies, as opposed to “pick-one-side” security alignments. 

For Southeast Asia, the economic realm is of fundamental strategic importance because growth is closely tied to regime security. The international security realm derives its importance from the need to protect these economic imperatives. 

This is considerably different from the idea that sustaining a “balance of power” in international security is vital while economics is just a means to geopolitical ends.

Tariff pressure

So far, Southeast Asian responses to US-China rivalry and Trump tariff pressure do not indicate realignment towards either great power. Instead, two long-standing features of the region’s political economy are intensifying – diversification and “corridor” development.

This is evident in the way ASEAN states continue to deepen economic cooperation with China while negotiating reductions in tariffs, market access and US strategic investment. 

Persisting with these traditional two-way economic partnerships with the two great powers is more complicated now given US disruptions. But the fear of over-exposure to a single country compels such diversification.

Indonesia illustrates this logic. Like others, Jakarta has been reeling from the Trump tariffs. But it also has other major economic priorities, including energising its valuable critical minerals sector, especially nickel. 

Here, Jakarta’s priority remains reducing Chinese capital and processing dominance. To do so, it is engaging the US as part of a broader investment diversification effort, using its sovereign wealth fund Danantara to strengthening domestic control.

Geo-economic challenges are also reinforcing Southeast Asia’s penchant to benefit from being a “corridor” connecting adjacent economic regions. One significant geo-economic shift since 2024 is the continued relocation and diversification of global supply chains away from China.

Instead, it is moving towards multiple Southeast Asian locations, as key ASEAN economies try to embed themselves in higher-value strategic networks.

In the “China+1” phase, which accelerated following the Covid-19 pandemic, firms retained operations in the world’s second-largest economy while expanding capacity elsewhere for other global markets. 

Southeast Asia emerged as the top “+1” destination, producing deeper economic integration within the region and with China across specialised clusters. The “friendshoring” phase followed between 2022 and 2023. 

Supply chains

Multinational companies relocated or duplicated low-value assembly from China to ASEAN countries while upstream inputs, midstream materials and proprietary technologies remained largely China-linked even as assembly diversified.

Since 2024, “friendshoring” moved beyond relocation towards the construction of production networks in “friendly” economies through supply chains and state-bilateral agreements. This de-risking architecture acted as an alternative to the China-centred supply chains.

Last year, a trade deal between Kuala Lumpur and Washington involved a pledge by Malaysia not to restrict rare earth exports to the United States. In return, it secured investment into higher-value processing and cell manufacturing capacity. 

Alongside parallel Washington agreements with Canberra and Tokyo, a new Australia-Malaysia-Japan-US critical minerals corridor appears to be emerging.

Southeast Asia also sits at the crossroads of advanced semiconductor and artificial intelligence hardware supply chains. From 2023, American export controls were tightened for advanced AI chips to China. 

In response, Chinese firms shifted parts of model training and chip procurement to ASEAN states,  particularly Singapore, Malaysia, Thailand and increasingly Indonesia. They used regional intermediaries, data centres and re-export channels to maintain access.

This has been lucrative for the region, but it also poses new challenges for how to balance between Chinese supply chain relocation and US regulatory demands. 

The effectiveness of Washington’s restrictions depends on regional enforcement, such as Singapore’s corporate structures and Malaysia’s permit system.

This exposes the region to the risks of secondary controls and to the opportunities of becoming a trusted “friendshoring” destination if not credibly policed. Geo-economically, this upgrades Southeast Asia to being an active gatekeeper in the global AI hardware system.

AI ecosystem

Washington might come to treat the region as a conditional corridor whose access to US chips depends on its export control enforcement. At the same time, Beijing is re-prioritising ASEAN states as offshore corridors – making the region an extension of China’s AI ecosystem.

Geo-economics Southeast Asian style is fast-moving in this climate of opportunities for diversification in a region that has constantly leveraged its position as a strategic crossroads. 

Yet, as supply chains become simultaneously more integrated and more compartmentalised, the costs of mismanaging strategic exposure, either to the US or to China, have increased.

Evelyn Goh is the Shedden Professor of Strategic Policy Studies and Director of the Southeast Asia Institute at The Australian National University. Jascha Ramba is pursuing a Master of Strategic Studies at The Australian National University.

This edited article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy of China Factor.