ASEAN, long a beneficiary of China’s rapid growth and global supply chain integration, now faces mounting pressures as Chinese industrial overcapacity spills into the region. ASEAN has thus far largely stayed out of growing global trade tensions around China’s industrial policies, much as it did during earlier U.S.-China trade disputes, while benefiting from investment and trade from all sides and deeper integration into Chinese supply chains that support growing exports to global markets.

However, ASEAN faces increasing pressures from four key trends, each of which is accelerating, pointing to a more challenging time ahead for ASEAN policymakers and businesses. These developments are increasingly putting ASEAN in the middle of economic challenges and global reactions to China and its industrial overcapacity.

1. China’s exports to ASEAN are growing rapidly, exceeding its exports to the United States and the European Union (EU) since 2023, and up a further 12% in 2024. While most of this growth has been in intermediate goods, supporting ASEAN’s own exports to advanced economies, increasingly it is also in final goods, displacing local industry and jobs. Meanwhile, ASEAN exports to China have declined 3% since 2022, contributing to growing trade deficits and incipient trade tensions.
2. China’s industrial overcapacity, in lower-end as well as advanced manufacturing sectors—manifesting in surging volumes of artificially low-priced Chinese exports—is displacing ASEAN exports to third markets, threatening the region’s broader industrial health and development.
3. ASEAN is increasingly becoming the key offshore manufacturing base for Chinese companies, particularly in the clean energy sector. While this investment can support the region’s energy transition and enhance global competitiveness in these important technologies, these products are at the center of overcapacity tensions with China, threatening to put ASEAN in the crosshairs of global trade responses.
4. While ASEAN has benefited from integration into Chinese supply chains, the United States, the EU, and other economies, including Japan and India, are intensifying their scrutiny of exports from Chinese companies operating in or processed through third countries.  

ASEAN governments now face a double balancing act: managing growing economic integration with China while contending with mounting pressure from advanced economies to reduce reliance on Chinese supply chains. At the same time, ASEAN must balance leveraging Chinese cheap imports and growing investments to drive industrial growth against the risk of these inputs overwhelming domestic industries and limiting their own industrial development. These tensions ASEAN faces are already building and are likely to be sharpened and accelerated under new Trump administration tariffs and China’s decoupling efforts. These evolving tensions also cast doubt on the extent to which China can meaningfully shift exports to ASEAN and other emerging markets as it faces growing trade restrictions from the United States and the EU.    

To address these challenges, ASEAN must prioritize strengthening trade tools and enhancing regional coordination to manage import surges, while continuing to invest in its own competitiveness. Diversifying its supply chains from increasing reliance on China will be critical to reducing vulnerabilities. Leveraging institutional frameworks under the ASEAN-China Free Trade Agreement (ACFTA) and the Regional and Comprehensive Economic Partnership (RCEP) can help ASEAN navigate external pressures while safeguarding its industrial growth. At the same time, the U.S. and other major economies should proactively engage ASEAN on their overcapacity and de-risking concerns related to China, to help ASEAN remain a key partner in their own supply chain diversification efforts.
 

China’s industrial overcapacity has risen to the top of the global trade agenda, fueled by nonmarket policies to boost certain industries, import substitution efforts to reduce reliance on foreign inputs, and imbalanced macroeconomic policies holding back domestic demand. These policies have led to an unprecedented surge of exports, with China’s manufactured goods trade surplus surging from roughly $1 trillion in 2018 to more than $1.8 trillion in 2023, entrenching global market concentration in key sectors and deepening supply chain dependencies. Beijing’s increasing use of export restrictions on critical inputs where it has a dominant market share, such as gallium, germanium, and rare earth-processing equipment accentuates this concern and underscores the need for diversification.

While much of the focus has been on China’s dominance in clean energy sectors such as electric vehicles (EVs), solar panels, and batteries, overcapacity is spreading across a broader range of industries, including steel, petrochemicals, semiconductors, and electrical machinery. In the EV sector, capacity utilization in China plummeted last year, with more than half of the sector operating at a loss, as a result of overinvestment and excess supply being exported—with China overtaking Japan as the largest auto exporter in 2023. As domestic EV sales in China have lagged rapid capacity expansion, Chinese manufacturers are increasingly relying on third-country markets to absorb their products. Similarly, production of solar panels and lithium-ion batteries in China is expected to exceed total global demand by as much as two to three times over the next few years.

So far, attention has largely focused on U.S. and EU trade responses to these unsustainable trends. The United States has imposed tariffs of 100% on Chinese EVs, 50% on solar cells, and 25% on lithium-ion batteries, while the EU has introduced tariffs of up to 45% on Chinese EVs and initiated counter-subsidy investigations in several sectors, including wind, solar, and electric trains. However, the impacts of China’s overcapacity are not limited to these advanced economies. Countries such as Turkey, India, and Brazil are experiencing surges of Chinese manufactured goods imports, spurring new trade restrictions and incipient trade tensions—a trend likely to intensify.

The ten ASEAN countries, some of the closest and most economically integrated emerging markets with China, stand at the epicenter of these shifts. ASEAN overtook the United States and the EU as China's largest export market in 2023, with Chinese exports to the region increasing by an additional 12% in 2024, while ASEAN exports to China rose by only 2%. Indonesia and Thailand faced a starker imbalance, with Chinese imports surging by nearly 18% and 14%, respectively, in 2024, while their exports to China declined by 4% and 5%, respectively. This influx of Chinese goods, including intermediate goods for reexport and consumer goods for ASEAN markets, has widened trade deficits and intensified pressures on local industries.

While ASEAN has benefited from increased Chinese investment and greater integration into global supply chains—now accounting for nearly 8% of global exports—it faces mounting challenges. As ASEAN absorbs more of China’s exports, both in intermediate and consumer goods, this is likely to provide a sustained disinflationary impulse, helping keep inflation in check across the region. The region’s increasing import dependence on China threatens domestic business and employment, as export opportunities to China diminish. ASEAN is also becoming a test bed for large-scale offshore manufacturing by Chinese companies, even as advanced economies’ scrutiny of Chinese-linked supply chains poses risks to the region’s access to key export markets.

This issue paper examines how China’s industrial overcapacity is impacting ASEAN economies across key sectors, analyzes responses by ASEAN governments and China, and offers policy recommendations going forward.

China’s industrial overcapacity is reshaping regional and global trade patterns, and ASEAN finds itself increasingly exposed to the consequences. Four interrelated trends are driving this shift, creating a more challenging environment for ASEAN economies.

Amid U.S.-China trade tensions and Western efforts to de-risk by reducing reliance on China, ASEAN member states have benefited from greater integration into Chinese supply chains. By 2023, China accounted for 20% of ASEAN’s trade, up from 12% in 2010. However, alongside these benefits, ASEAN has experienced rapidly rising imports of Chinese goods, while its own exports to China have grown more slowly or stagnated, leading to a widening trade deficit that now exceeds $190 billion (see Figure 1).

Traditionally, the majority of China’s exports to ASEAN are intermediate goods, which have supported ASEAN’s own export industries by providing cheaper inputs. Recent analyses indicate that ASEAN’s trade deficit with China has been more than offset by ASEAN’s growing surplus with the rest of the world, particularly the United States, highlighting that the benefits of ASEAN-China economic integration partly depend on booming U.S. final demand.

However, a growing proportion of Chinese exports appears to now target ASEAN as an end market—a development that ASEAN businesses and governments may start to view with more caution. Unlike the processing trade, which creates local jobs, this shift poses greater risks to local industries, as finished goods imports priced at artificially low prices can displace domestic production and employment and deepen economic dependency. Thus far, the impact has been felt most immediately in low-value goods, such as textiles, furniture, and food and beverages, raising concerns in countries including Thailand, Indonesia, and Singapore.

For example, Indonesia is grappling with a surge of Chinese goods sold through e-commerce platforms that have severely undercut local manufacturers. The textile sector has been particularly hard hit, with 80,000 workers laid off in 2024 and 280,000 more jobs at risk in 2025 as 60 companies plan further cuts, according to Indonesian officials. Vietnam has similarly faced an influx of cheap Chinese products through cross-border e-commerce platforms, an estimated 4 to 5 million low-value orders daily, amounting to almost $2 billion per month.

China’s steel overcapacity has also emerged as an immediate threat to ASEAN economies. As domestic demand for steel in China has plummeted and production has yet to correct, China’s steel exports surged in 2023, reaching the highest levels since its last major steel overcapacity round in 2016, and global exports rose a further 23% in 2024. Much of this surge has gone to ASEAN, which received nearly 30% of Chinese steel exports in 2023. Vietnam was the largest market for Chinese steel exports globally, with four other ASEAN countries among China’s top ten export destinations. This surge of cheap steel has led to the imposition and ongoing consideration of further trade restrictions or antidumping duties in Indonesia, Malaysia, Thailand, and Vietnam.

China’s global aluminum exports also surged 17% in 2024, with Vietnam and the Philippines emerging as the top export destinations in the first half of last year. To avoid duties, Chinese producers ship aluminum to Vietnam, where it is extruded—often by Chinese companies—and then exported to the United States, prompting U.S. aluminum extruders to file a new antidumping case on imports from Vietnam.

The global economy is only experiencing the early stages of these trade shifts, with pressures and disruptions to domestic industries in ASEAN likely to increase—especially as China doubles down on industrial production and shows little interest in taking the needed steps to curtail production or promote domestic demand.

Beyond the visible import surges in the sectors highlighted above, China’s industrial overcapacity also poses an increasing challenge to ASEAN’s broader industrial production and development. ASEAN has relied significantly on exports to fuel its industrial development—and its global exports have steadily grown. Export price deflation from Chinese manufacturers is exerting relentless pressure on manufacturers in ASEAN and beyond, however, eroding their export markets in sectors such as petrochemicals and electrical machinery. As significant a threat to ASEAN is surging Chinese production and eventual overcapacity in sectors that ASEAN economies are also targeting to drive their future growth.

Thailand, ASEAN’s most industrialized economy, has borne the brunt of this trend. It’s manufacturing sector—accounting for 25% of GDP—has faced significant upheaval, including factory closures, layoffs, and declining industrial output. Thailand’s Kasikorn Research Center estimates that 4,300 Thai factories have closed in the past two years—in the furniture, electronics, garment, auto, and steel sectors—and expects the trend to worsen in 2025. Malaysia and Singapore may soon face similar challenges as overcapacity in China expands into additional advanced manufacturing sectors. Meanwhile, economists in Indonesia and other ASEAN countries worry that China’s export machine will limit their opportunities to industrialize.

Underscoring the macroeconomic significance, the Bank of Thailand (BOT) has highlighted the adverse effects of China’s manufacturing overcapacity on Thailand’s exports. In multiple public reports, the BOT has linked these headwinds to China’s “dual circulation” policy, which prioritizes domestic self-sufficiency. This policy has reduced Thai exports to China while excess production has flooded ASEAN markets, further contracting Thailand’s export competitiveness. Other ASEAN governments to date have been reluctant to name the issue publicly—though they may be forced to confront it more directly as the threat to their industries grows. The sectors that follow are not facing as visible export surges but may be more significant for ASEAN economies.

Petrochemicals: A Case in Point

Petrochemical production and exports have been a traditional strength of ASEAN economies—though this sector is under pressure from China. In pursuit of self-sufficiency, China has expanded petrochemical capacity at a significantly greater rate than other economies despite being a higher-cost producer. This has led to excess capacity that is expected to persist for at least a few years as new Chinese production comes online. Whereas China used to be the largest importer of key products such as polypropylene, including from Singapore and Vietnam, China’s exports of the product exceeded its imports for the first time in May 2024. Exports to Indonesia, Vietnam, and Thailand are now surging as China’s petrochemicals imports from ASEAN collapse.

This overcapacity poses risks to production and employment in multiple ASEAN economies for which the chemicals sector is an important source of jobs and a key growth driver. For example, the sector accounts for an estimated 10% of GDP in Indonesia, 7% in Malaysia, 5% in Thailand, and 3% in Singapore. The risks are compounded by forecasts from consultancy Wood McKenzie that predict that nearly one-quarter of existing production globally may be forced to shut down due to weak margins. These ASEAN economies could face further capacity shutdowns, job losses, and declining economic contributions.

Construction and Electrical Machinery: Growing Pressures

Construction machinery is also experiencing growing Chinese overcapacity, following rapid production growth and declining domestic demand. Major U.S. and Japanese manufacturers, such as Caterpillar, Komatsu, and Hitachi have sizeable manufacturing facilities in Indonesia and Thailand that will face fierce competition as exports from China surge, potentially tying into Belt and Road Initiative (BRI) projects. More broadly, Thailand and Malaysia have substantial electrical machinery sectors that face an increasing threat from China’s exports.

Semiconductors: An Emerging Risk

Potential Chinese overcapacity in mature-node or foundational semiconductors, following massive Chinese investment in the past few years, is a risk that ASEAN governments and businesses need to prepare for. It is a growing concern for policymakers in the United States, the EU, and Northeast Asia, threatening to depress global prices and put at risk existing production and recent investments, such as the U.S. CHIPS Act. These chips are relatively small (cost wise) inputs into finished goods and are challenging to address through tariffs. The Biden administration in December 2024 launched a new Section 301 investigation on foundational semiconductors, handing it over to the Trump administration to pursue. Advanced economies are likely to take additional steps to prevent a surge of Chinese imports from damaging their semiconductor industries. ASEAN producers could face risks to production that involve Chinese inputs or firms.

At the same time, ASEAN is both investing in and benefiting from G7 efforts to diversify the semiconductor supply chain. Singapore already accounts for roughly 10% of global semiconductor manufacturing, responsible for 7% of the city-state’s GDP. Malaysia, while focused more on semiconductor packaging, assembly, and testing, derives an estimated 25% of GDP from the sector. Thailand recently announced investments in advanced production of power semiconductors in the country, while Vietnam is also making a big bet on the sector. However, the potential oversupply from China could complicate these efforts and impede growth plans.

Medical Devices: A Sector to Watch

The medical devices sector is also a target of China’s industrial policies, while being a growth priority for ASEAN economies. ASEAN has seen a steady increase in medical device imports from China following the implementation of the Regional Comprehensive Economic Partnership (RCEP) agreement in 2022, reaching $4.4 billion in 2023. This growth reflects the ambitions of China’s Made in China 2025 strategy, which prioritizes the medical device sector aiming to replace foreign products in its domestic market and then expanding exports. In January 2025, the European Commission found that China is engaging in discriminatory practices in the government procurement of medical devices, highlighting growing international scrutiny in this industry.

ASEAN is rapidly emerging as a key offshore manufacturing base for Chinese companies, which invested a record $17.6 billion in 2023 contrasting with $7.5 billion in 2020. This dramatic uptick is driven by a mix of manufacturing, EVs, technology, mining, and infrastructure development, including digital and renewable energy projects. This investment surge reflects a combination of factors, including China’s desire to avoid trade barriers in advanced economies, seek locations with lower wages, sell to local markets, and capitalize on ASEAN’s strategic position as a gateway to global markets.

ASEAN governments have been nearly uniformly welcoming of and seeking out increased Chinese FDI, even in countries such as the Philippines, where geopolitical tensions persist. ASEAN governments have understandably seen this investment as essential to their drive to grow their economies and gain a competitive advantage in the sectors of the future, particularly where Chinese firms have leading technology and market positions. This includes China’s “new three” sectors of EVs, solar panels, and batteries, in which Chinese manufacturers are building capacity in ASEAN to produce for both domestic and global markets.

At the same time, the growing presence of Chinese manufacturing operations in ASEAN introduces complexities. While Chinese investments support ASEAN’s energy transition and industrial diversification, they also risk displacing existing production and supply chains with potentially negative effects on employment and local suppliers. Chinese companies have often exhibited greater vertical integration or reliance on other Chinese suppliers, in contrast to legacy multinational enterprises that have become more embedded in local value chains. In industries facing consolidation as a result of overcapacity, Chinese firms may face government pressure to shut down overseas operations rather than domestic ones, increasing the risks for ASEAN economies dependent on these investments.

Electric Vehicles (EVs)

As tariffs on Chinese EVs take effect in the United States, the EU, Canada, and emerging markets such as Turkey and Brazil, ASEAN has become more important both as an overseas production base and as an end market for Chinese companies. While ASEAN governments see Chinese investment in EVs as a driver of industrial modernization and economic growth, the influx of Chinese EVs and their vertically integrated supply chains raises concerns for local industries.

By 2026, Chinese companies plan to produce more than 1 million vehicles in ASEAN countries, with approximately 600,000 of these expected to be EVs—more than half of China's overseas production capacity. Countries such as Thailand, Indonesia, and the Philippines are positioning themselves as regional hubs for EV production, benefiting from Chinese investments and government policies supporting EV adoption.

Chinese EV Sales in ASEAN: Can Emerging Markets Offset Lost Advanced Economy Demand?

China’s EV overcapacity highlights a broader shift: as advanced markets impose barriers, Chinese automakers are pivoting to emerging markets such as ASEAN. With a rapidly growing middle-income population of more than 200 million and supportive government policies for EV adoption, ASEAN presents an opportunity to absorb some of China’s excess capacity. Thailand and the Philippines ranked among China’s largest EV export markets in 2024, according to the China Passenger Car Association, while Indonesia is among the fastest growing.

However, ASEAN faces significant limitations to serving as a sizeable end market for Chinese EVs. Outside their capitals, populations in Indonesia and the Philippines are spread across thousands of islands, making charging infrastructure more challenging. Motorcycles dominate these markets and are likely to retain a significant share.

In Malaysia, ASEAN’s second-largest auto market, domestic brands Perodua and Proton control two-thirds of the market, and the government will not be eager for them to be supplanted by Chinese brands—though Proton has benefited from its partnership with China’s Geely. In Vietnam, where Chinese EVs are entering the market, domestic champion VinFast is a competitor making EVs an industry where imports from China are more of a direct threat, rather than an input to Vietnam’s export machine.

While ASEAN offers growth opportunities for Chinese automakers, structural and market-specific challenges suggest it is unlikely to fully offset the demand lost in advanced economies.

Thailand, ASEAN’s leading auto producer—accounting for more than 10% of GDP and 12% of exports—has targeted Chinese EV investment to maintain its competitive edge. The country eliminated tariffs on Chinese EVs under the ASEAN-China Free Trade Agreement (ACFTA) and in 2022 announced reduced import and excise duties, along with subsidies, to attract investment. To qualify for these incentives, foreign manufacturers must produce at least as many vehicles in Thailand as they import. These policies secured more than $1.5 billion in new production facilities from Chinese manufacturers, including BYD, which inaugurated its first overseas EV factory in Rayong, Thailand, in July 2024. This facility, capable of producing 150,000 vehicles annually, is BYD’s largest overseas production base to date.

These policies have had unintended consequences for Thailand’s domestic production and supply chains. A surge in Chinese EV imports has pressured local production, primarily by Japanese joint ventures. Subaru closed its factory in Thailand in December 2024, and Suzuki and Nissan have announced that they will close factories in Thailand by the end of  2025. Equally significant has been the impact of local auto parts suppliers, with media reports indicating that at least a dozen businesses have shut down as Chinese EV manufacturers primarily rely on their own supply chains.

Batteries

ASEAN economies are benefiting from Chinese EV battery investments—balanced by investment from Japanese and Korean firms—though over time, as in other sectors, they face risks from China’s overcapacity and dominance in the sector. Indonesia, Vietnam, Thailand, Malaysia, and the Philippines are all seeking to build domestic battery production, including through large investments by Chinese market leaders. Indonesia has the largest nickel reserves globally and 50% of the world’s nickel production, helping it secure a $5.8 billion investment from China’s Contemporary Amperex Technology Co., Limited (CATL). Vietnam’s VinFast is developing its own lithium-ion battery technology while at the same time partnering with China’s Gotion in a joint venture. Meanwhile, Chinese SVOLT Energy began producing EV battery packs in early 2024 through a partnership with Thailand’s Banpu Next.

Local content requirements for EV subsidies in ASEAN, both national policies and under RCEP, encourage Chinese manufacturers to use batteries produced there, but broadening exports to global markets may prove challenging. Indonesia and Thailand aim to develop domestic lithium processing as well, as a core input to batteries, yet China’s control of more than 70%–80% of the lithium value chain highlights a risk from Chinese coercion, such as denial of export licenses by China.

Solar Panels

ASEAN has emerged as a key production hub for Chinese solar manufacturers, particularly for export to the United States, to avoid U.S. antidumping and countervailing duties imposed on exports from China and other markets. Thailand, Malaysia, Vietnam, and Cambodia have developed significant solar panel production from Chinese-owned solar companies, accounting for an estimated 40% of solar module production capacity outside of China and more than two-thirds of U.S. solar imports in 2023. Increasingly, Chinese solar exports are targeting ASEAN as an end market also, which may benefit the green energy transitions in these economies.

In 2022, the Biden administration ordered a two-year tariff reprieve on solar panel imports from Malaysia, Thailand, Cambodia, and Vietnam to prevent disruptions in U.S. solar panel deployment while domestic manufacturing scaled up. The moratorium expired in June 2024, and in December, the U.S. Commerce Department announced preliminary tariffs of 21% to 271% on imports of Chinese solar panels from these countries, with a final decision expected in mid-2025.

These duties have led to significant disruptions in ASEAN’s solar manufacturing sector. According to Chinese and local media, Longi Solar halted five production lines in Vietnam and began winding down operations in Malaysia, while Jinko Solar closed a plant in Malaysia, and Trina Solar initiated maintenance shutdowns in Thailand and Vietnam. Some manufacturers have shifted production to Indonesia and Laos, which currently do not face U.S. tariffs.

While Chinese investments in solar manufacturing have supported ASEAN’s renewable energy transitions, the region’s heavy reliance on such investments to serve third-country markets exposes it to production relocations driven by tariff policies. Strengthening local value chains and diversifying market strategies will be important for ASEAN to mitigate these risks.

Steel

China is also ramping up investment in steel production in ASEAN, exacerbating global overcapacity concerns and risking antidumping measures being applied to ASEAN economies. The OECD warns of worsening steel overcapacity globally, with ASEAN economies at risk of becoming both production hubs and dumping grounds for excess Chinese steel. The Philippines is welcoming Chinese investments to revive its steel industry, including a recent announcement of a $1 billion investment by a Chinese company to build a steel manufacturing plant, while Chinese investment has generated more blowback in Indonesia and Vietnam.

ASEAN’s deepening integration into Chinese value chains, while a driver of economic growth, poses new risks as the United States and other advanced economies ramp up scrutiny of trade diversion or tariff circumvention by Chinese companies operating through third-country markets. The U.S. crackdown on solar panel exports from Chinese companies in ASEAN is likely a harbinger of more to come. As developed economies work to reduce their reliance on Chinese inputs in critical supply chains, ASEAN’s dependence on these inputs for their manufacturing sectors threatens its access to these developed markets. Other emerging markets may impose similar trade restrictions, encouraging Chinese investment and production in their domestic markets rather than welcoming goods produced by Chinese companies in ASEAN.

Both the United States and the EU have been developing a broader set of economic tools driven by a heightened focus on economic and national security. These extend beyond traditional trade remedies to encompass broader supply chain security, particularly in sectors that are critical for defense, energy, and technology, as well as human rights, labor, and environmental concerns in their supply chains.

For the United States, the Inflation Reduction Act (IRA) incentives for EVs already include tough Foreign Entity of Concern (FEOC) provisions, withholding U.S. subsidies for vehicles with significant inputs from companies in China or controlled by China. While the Trump administration may seek to roll back some parts of the IRA, it is likely to retain, or tighten further, any FEOC restrictions targeting China. The Department of Commerce has also expanded its scope for trade investigations to include transnational subsidies, enabling greater scrutiny of Chinese companies operating in third countries. Lastly, Commerce’s first major rule making under the Information and Communications Technology and Services Supply Chain (ICTS) authority on connected vehicles could effectively bar imports of Chinese EVs produced anywhere. This authority is expected to be used on additional high-tech ICTS products in the future.

The EU has rolled out a number of new tools that could impact ASEAN exporters with Chinese supply chain ties, including its expansive Foreign Subsidies Regulation. The EU's Carbon Border Adjustment Mechanism (CBAM) may add compliance costs and scrutiny, particularly in carbon-intensive goods such as steel, aluminum, and cement but potentially also provide leverage for ASEAN economies to press investors from China to meet higher environmental standards and reduce carbon intensity.

Other major economies are developing similar measures, albeit at a slower pace. Japan is considering broadening its antidumping duties to cover products diverted through third countries while strengthening its ability to investigate suspected circumvention. India is exploring policies to address Chinese exports entering through ASEAN to avoid duties.

Together, these initiatives point to a potentially far-reaching push toward stricter rules of origin and enhanced security requirements in trade, posing significant challenges for ASEAN economies. As economic security and supply chain diversification take on greater importance, new rules and applications of these concepts are likely to proliferate going forward. Moreover, uncertainty around these evolving policies could slow Chinese investment into ASEAN as an alternative production site, as companies hesitate to commit resources without assured market access.

As ASEAN contends with increasing pressures from these trends, each country’s response reflects its unique economic structure, trade ties, and strategic priorities. At the same time, Chinese companies and the government are pursuing their own strategies to maintain their competitiveness and manage growing scrutiny.

China’s industrial overcapacity has impacted individual ASEAN nations’ economies in similar, yet different ways, with each country responding based on its unique economic structure and relationship with China. Many ASEAN business leaders have voiced concerns about the impact of low-cost Chinese imports on local industries, calling for stronger trade defense tools and protective measures to shield vulnerable sectors. Policymakers face the difficult task of balancing protection of domestic industries with maintaining important economic ties to China. They are strengthening their trade toolbox and working to diversify their economies and export markets, aiming to harness the benefits of Chinese investment without compromising local industries.  Below are specific examples of how major ASEAN economies are responding.

Thailand: Struggling to Compete in Manufacturing

Thailand, with ASEAN’s most diversified manufacturing sector, faces the greatest threat from Chinese overcapacity. In response, the Thai government has implemented antidumping duties on Chinese steel products ranging from 3.22% to 145.31% and is considering further measures in other industries such as aluminum. The Federation of Thai Industries also reported that more than 12 million tons of steel capacity financed by Chinese firms is being built in Thailand, prompting calls for government intervention to restrict China-backed steel mills to protect domestic manufacturers. Supavud Saicheua, Chairman of the National Economic and Social Development Council, highlighted growing concerns among Thai policymakers, stating, "The Chinese are now trying to export left, right and centre. Those cheap imports are really causing trouble."

Thailand's experience in the EV sector reflects the complex balancing act it faces. The government actively seeks Chinese investment to position Thailand as the hub for EV production in Southeast Asia but faces concerns over the limited benefits for local suppliers due to the vertical integration of Chinese supply chains.

Thailand has also begun to address the influx of low-value goods from China. In 2024, the government approved the collection of a 7% value-added tax (VAT) on imported goods sold for less than $41 (1,500 baht), a move partly aimed at leveling the playing field for domestic producers. Additionally, an interagency task force was established to review and revise measures, aiming to enforce compliance with global trade rules while addressing concerns about illegal and underpriced imports.

Vietnam: Beneficiary and Competitor Challenger

Vietnam is the largest beneficiary of supply chain shifts thus far, attracting significant Chinese investment, particularly in its electronics and solar panel manufacturing sectors, which have boosted Vietnamese exports. While welcoming Chinese trade and investment, Vietnam has also implemented trade restrictions to protect key industries, including antidumping duties and ongoing antidumping investigations on imports of steel, textiles, and wind turbines.

The steel industry remains particularly vulnerable with local producers struggling to compete with China’s scale and pricing. The Vietnam Steel Association has called for additional trade remedies and stricter regulations on the quality of imported steel, but industry experts warn that existing trade remedy tools are inadequate, as Chinese goods continue to undercut domestic production costs.

Vietnam is also addressing a surge of e-commerce imports from China by planning a VAT on low-value imports and also promoting domestic consumption of Made-in-Việt Nam products. These efforts aim to support local businesses and reduce reliance on foreign goods, reflecting Vietnam’s dual role as a key beneficiary of Chinese investment and a competitor in manufacturing.

Indonesia: Resource Nationalism and Industrial Ambitions

Indonesia’s response has been shaped by its resource nationalism and ambitions to move up the value chain, particularly in the EV and battery sectors. Jakarta has welcomed substantial Chinese investment in its nickel and battery industries, viewing this as crucial for developing its EV supply chain. However, concerns are growing as the government struggles to enforce high environmental standards in Chinese-backed nickel-smelting operations. In regions where these operations are concentrated, pollution has become a major issue, raising questions about whether the economic benefits justify the environmental costs.

Additionally, much of the value-added processing still takes place in China, limiting the positive effects on Indonesia's economy. Indonesian economist Faisal Basri estimates that Indonesia only receives 10% of the value-added from Chinese mining investments, with little boost to household income in affected areas. In his first state address, President Prabowo Subianto emphasized the need for Indonesian citizens to benefit more and capture more value from the country’s natural resources.

In December 2023, Indonesia attempted to tighten monitoring of more than 3,000 imported goods, but the regulation was reversed after some domestic industries argued it disrupted the flow of essential materials for local production. The government has since shifted its approach, considering steep tariffs on a range of imported goods, including textiles and consumer products, while also establishing a task force to crack down on illegal imports and review antidumping measures. Officials have emphasized that these measures are not aimed at any particular country but are part of a broader strategy to protect and promote local industries. Critics, however, worry that such tariffs could violate the country’s trade obligations and potentially trigger retaliation from China. Some industry experts suggest that instead of relying on tariffs, tighter monitoring of import channels to address illegal imports, alongside efforts to boost productivity and competitiveness within domestic industries, would be a more effective and sustainable solution.

Despite these concerns, Indonesia continues to pursue Chinese investment across multiple sectors. In the textile industry, where job losses have been significant, government officials have secured commitments from major Chinese companies to build large textile factories that promise to create tens of thousands of jobs. More broadly, in late 2024, Indonesia’s Investment Minister Rosan Roeslani announced $7.5 billion in new commitments from Chinese firms across sectors such as automotive, petrochemicals, and solar panels.

Malaysia: Beneficiary Thus Far, but Risks Growing

Malaysia has enjoyed significant benefits from supply chain shifts, with booming economic growth in 2024 driven by an influx of investment, including from China. However, a widening trade deficit with China, particularly in low-value goods, has raised concerns among small and medium-sized enterprises (SMEs). To address this, the government introduced a 10% tax in January 2024 on items priced below $150 (RM500) bought online and delivered from abroad, aimed at leveling the playing field for local businesses.

Malaysia has taken a measured approach toward Chinese overcapacity, reviewing its antidumping legislation, while launching antidumping investigations into steel and plastic-packaging imports. The government has also encouraged Chinese FDI in the automotive sector, including China's Geely Holdings partnering with Malaysia's Proton to develop EVs. However, Malaysia also prohibits imports of lower-cost EVs while providing incentives for using local components, thereby limiting China’s market access.

Malaysia continues to balance protecting local industries while maintaining its role as a regional investment hub. As Prime Minister Anwar Ibrahim has stated, Malaysia aims to be a "neutral and nonaligned location," navigating global trade tensions with a focus on economic openness and strategic neutrality.

Philippines: Navigating Chinese Pressures amid Limited Integration

The Philippines faces unique pressures from Chinese overcapacity despite having low integration into Chinese manufacturing supply chains. While this limited role in China-centered export production offers some protection, surging imports of low-cost Chinese goods, particularly in steel, machinery, autos, and consumer products, have challenged domestic manufacturers and widened the trade deficit to more than $33 billion in 2024. South China Sea tensions have complicated economic ties and raised concerns about retaliation, with China cutting banana imports from the Philippines by nearly 50% in 2024.

In response, the Philippines has sought to balance its economic ties with China by strengthening partnerships with the United States and Japan, while also advancing diversification efforts through new free trade agreements—recently concluding one with South Korea and actively negotiating with the United Arab Emirates and the EU.

Singapore: Leveraging Chinese Investment while Managing Risks

Unlike other ASEAN nations, Singapore’s economy—focused on finance, technology, and professional services—is less exposed to pressures from Chinese overcapacity. Its trade surplus with China and strong high-value exports help offset rising imports in areas such as advanced chemicals, refined and specialty metals, and industrial machinery. In 2023, Singapore attracted more than 40% of ASEAN's inward FDI from China, with companies including Alibaba, ByteDance, and Shein establishing regional headquarters.

To safeguard critical sectors amid growing scrutiny of foreign investments, Singapore enacted the Significant Investments Review Act in January 2024. Senior Minister Lee Hsien Loong has acknowledged overcapacity concerns in specific sectors such as steel and solar panels but views China’s primary challenge as macroeconomic imbalances, such as its high savings rate and low domestic consumption, rather than systemic manufacturing overcapacity. He emphasized that Southeast Asian companies must respond by upgrading, transforming, and competing at a global level.

Chinese authorities have been slow to meaningfully respond to ASEAN concerns on the growing trade imbalance, pushing for more trade integration. Chinese leaders have made half-hearted promises to increase imports from ASEAN, thus far mostly on low-value-added fruits and vegetables. Chinese officials have focused on touting the benefits of global value chains and Chinese investment, explaining growing trade deficits as reflecting market conditions.

In response to local criticism and pressure, Chinese companies have started to increase their use of local inputs. In July, Thailand's Ministry of Industry required Chinese EV manufacturers to use at least 40% local components when assembling EVs to support Thailand's automotive supply chain. In response, China's Changan Automobile promised to begin production with 60% local content and increase this proportion to 90% over time, with similar promises from Shanghai-based Neta Auto. However, Chinese EV manufacturers have recently asked to delay requirements to produce in Thailand the same number of vehicles they have imported from China.

Chinese EV manufacturers are reportedly already facing competing pressures between the objectives of host governments and the priorities of Chinese authorities. ASEAN governments seek to leverage Chinese FDI to build domestic industrial capabilities and move up the value chain over time. At the July 2024 opening of its new Rayong plant, BYD promised to “bring technology from China to Thailand.” Bloomberg reported in September that Beijing was advising its automakers to ensure that key technology and production stayed in China, while exporting “knock-down” kits to foreign plants—essentially enabling the assembly of vehicles overseas from key parts produced in China.

China has also placed a priority on upgrading the ASEAN-China Free Trade Agreement (ACFTA)—to at least maintain a public narrative of increasing connectivity even as tensions grow beneath the surface. The two sides announced the substantial conclusion of upgrades to this agreement at the October 2024 ASEAN-China Summit, including new chapters on the digital economy and the green economy. The update also includes a chapter on supply chain connectivity—likened by one ASEAN contact to the Indo-Pacific Economic Framework’s (IPEF’s) supply chain cooperation agreement. Language on easing transactions for SMEs may be a nod to the growing concerns among ASEAN SMEs, but the Chinese government has appeared to be effective in preventing public criticism from ASEAN governments on the increasingly imbalanced trading relationship.

Meanwhile, China's broader economic strategy offers little immediate signs of a rebalancing through boosting domestic consumption or even reducing low-value manufacturing—as it seeks to grow advanced manufacturing. With China’s economy and labor markets facing serious headwinds, local governments may be even less likely to let unprofitable Chinese companies and factories shut down, meaning ASEAN countries will face continued low-cost competition from China across a range of industrial sectors, challenging policymakers’ plans to use these industries to spur ASEAN’s next phase of growth.

While unspoken publicly, a key factor cautioning ASEAN from criticizing China or imposing trade restrictions is the risk of retaliation and coercion from China. China often imposes retaliatory tariffs in response to other countries’ tariffs on Chinese goods and has extensively used informal regulatory or trade restrictions to punish countries taking such actions. China is the largest source of tourism in ASEAN, providing a significant economic contribution to ASEAN economies. Much of this is through organized tour groups from Chinese state-owned agencies, giving China an easy tool to turn off tourist flows by canceling these tours—as China did during its 2012 South China Sea dispute with the Philippines.

ASEAN policymakers and businesses face a more challenging environment ahead as they navigate growing pressures from China's industrial overcapacity and shifting global trade dynamics. To address these pressures, ASEAN members will need to enhance their trade response mechanisms and strengthen regional coordination to push back on China where necessary. Diversifying sources of industrial inputs and foreign direct investment will also be critical to maintaining ASEAN’s export opportunities and managing risks going forward.

Building on existing efforts, the following recommendations are offered to help ASEAN address these challenges.

1. Strengthen Trade Tools and Regional Coordination 
   • Enhance Trade Response Mechanisms: ASEAN member states should strengthen national antidumping and countervailing duty frameworks, building institutional capacity to investigate and enforce trade remedies effectively. A regional mechanism for sharing best practices and standardizing procedures could enhance consistency and enforcement, reducing the risk of intra-ASEAN trade friction.
   • Develop a Regional Trade Remedy Database: Enhance the ASEAN Trade Repository (ATR) to track trade remedy cases, including antidumping and countervailing duties. This expanded platform would facilitate transparency and enable more coordinated responses to trade surges.  
   • Address E-Commerce Imports: ASEAN should collectively tackle the influx of underpriced imports on digital platforms by incorporating targeted e-commerce provisions into the ongoing negotiations of the Digital Economy Framework Agreement (DEFA). These provisions should aim to establish fair competition, enhance transparency, and promote accountability on digital platforms to ensure a level playing field for local businesses.  
   • Engage China on Overcapacity and Trade Imbalances: ASEAN should leverage its position as China’s top trading partner to push for constructive dialogue on overcapacity and trade imbalances, starting with sectors where ASEAN firms face the greatest pressure. As part of this effort, ASEAN should leverage institutional frameworks under the RCEP, particularly its Joint Committee and its Committee on Goods, alongside mechanisms within the ACFTA, to address trade surges and promote more reciprocal market access. These platforms provide mechanisms to enhance cooperation on trade remedies, ensure effective implementation of agreements, and improve transparency. An ACFTA upgrade, substantially concluded in October 2024, introduces new provisions on supply chain connectivity, competition, and technical standards, which may offer additional avenues to address overcapacity concerns.
2. Increase Supply Chain Monitoring and Industry Coordination 
   • Develop an ASEAN Supply Chain Early Warning System: ASEAN should develop a digital platform to monitor supply chain disruptions, import surges, and shifts in global markets. This system would enable timely identification of vulnerabilities and coordinated responses, drawing lessons from similar mechanisms by other groups, such as U.S.-Japan-Korea and UK-U.S.-Australia. 
   • Create a Private Sector Supply Chain Working Group: To enhance supply chain resilience and information sharing, ASEAN could create a working group of private sector leaders and regional businesses. This group would provide real-time market insights, feedback on trade disruptions, and industry-specific data support for policy decisions. This would provide ASEAN economies with tools to identify risks early and better coordinate responses.
   • Collaborate with Dialogue Partners: ASEAN should deepen engagement with dialogue partners such as the United States, the EU, and Japan through formal mechanisms to address supply chain vulnerabilities and economic resilience. Coordination with these partners would enhance ASEAN’s capacity to monitor and respond proactively to trade disruptions.
   • Enhance Enforcement against Illegal Imports: ASEAN should strengthen regional enforcement mechanisms to combat illegal imports and ensure compliance with trade regulations. Expanding successful initiatives, such as the 1st Joint Customs Control (JCC) Operation to cover broader product categories would be a positive step. Accelerating the implementation of the new generation ASEAN Single Window,  including interoperability with the private sector and dialogue partners, could also improve monitoring and strengthen regional enforcement.
3. Promote Strategic and Sustainable Investment
   • Investment-Screening Mechanisms: ASEAN governments should enhance or establish narrowly focused investment-screening mechanisms to address national security risks in strategic sectors. Building on models such as Singapore’s 2024 Significant Investments Review Act, which targets specific critical entities, such a mechanism should focus on mitigating security risks and excessive dependencies while avoiding broad restrictions that could deter beneficial investment. Sharing best practices regionally could help maintain flexibility for national priorities while enhancing transparency and investor confidence and discouraging overly broad application of investment screening for protectionist purposes.
   • Promote Sustainable and Diversified Investment across ASEAN: Building on existing initiatives, ASEAN should strengthen sustainable investment standards to attract responsible FDI aligned with regional growth goals. Common investment principles should emphasize transparency, accountability, local industry development, and technological capacity, particularly in strategic sectors including EVs and critical minerals. To diversify investment sources and reduce reliance on any single country, ASEAN governments could introduce incentives—such as tax benefits, streamlined regulations, and preferential market access—that support projects meeting these standards. 
   • Strengthen Domestic Industries and Regional Integration: Workforce development is widely recognized by economists and industry experts in ASEAN as one of the most effective ways to maximize FDI benefits and enhance industrial competitiveness. ASEAN should prioritize targeted investments in workforce skills, productivity, and innovation to attract high-value FDI and support high-value-added production. This includes incentivizing technology adoption, advancing industrial upgrading, and establishing regional R&D hubs and logistics centers. Strengthening intra-ASEAN trade and supply chains, while expanding export markets and diversifying trade ties, will enhance regional resilience and drive sustainable growth.
    

U.S. engagement with ASEAN is crucial as the region navigates Chinese trade pressures and U.S. supply chain priorities. The current administration should prioritize collaboration on supply chain resilience and diversification, particularly as concerns grow about Chinese industrial overcapacity and potential U.S. decoupling measures. The U.S. government could do the following:

1. Negotiate Sector-Specific Supply Chain Agreements: The United States could collaborate with ASEAN countries on targeted agreements in strategic sectors such as semiconductors and green technologies. These agreements should combine aligned standards and provisions for trade facilitation and supply chain resilience and consider trade benefits, including tariff reductions, where appropriate.
2. Strengthen Critical Minerals Cooperation: Agreements with key ASEAN suppliers, particularly Indonesia, the Philippines, and Vietnam, would secure sustainable and resilient supplies of critical minerals. These agreements should incorporate trade benefits and technical support for sustainable processing. Alongside these agreements, the United States should expand the role of ASEAN countries in frameworks similar to the Mineral Security Partnership (MSP).
3. Supply Chain Information Sharing and Risk Assessment: The U.S. Department of Commerce’s Supply Chain Center, building its own capacity over the past few years and rolling out a new diagnostic supply chain risk assessment tool—known as SCALE—could offer technical assistance focused on risk assessment tools and data analytics. Additionally, the United States and other G7 countries should include relevant ASEAN economies in discussions on China’s industrial overcapacity in specific sectors, such as legacy semiconductors, and how to address this risk.
4. Targeted Development Finance: The U.S. government could increase the U.S. Development Finance Corporation’s investments in sectors such as renewable energy, digital infrastructure, and advanced manufacturing focusing on areas where ASEAN faces gaps in current investment to provide a tangible alternative to Chinese investment.

ASEAN's ability to successfully navigate the challenges posed by China’s industrial overcapacity will be crucial for the region's economic future. By strengthening trade tools, enhancing supply chain monitoring, fostering industrial competitiveness, and implementing investment standards, ASEAN can mitigate these risks. Proactive measures, both immediate and long term, are essential to ensure that economic integration with China supports rather than undermines ASEAN’s own industrial development aspirations while building a more resilient and sustainable regional economy.