Rightsizing the Risks of China’s Export Redirection to Southeast Asia

A shadow has been hanging over Southeast Asian nations since the US’ “Liberation Day” tariffs: a potential export redirection and “tsunami” of Chinese goods flooding their markets. The World Trade Organization (WTO) Global Trade Outlook 2025 predicts a 6 per cent increase in Chinese goods exports to Asia (excluding China) as a result of export redirection.  The risks of such an export cascade are real. By rightsizing and contextualising these risks, these countries can gain a more informed, data-based and balanced perspective to avoid being overwhelmed by these concerns. In the absence of such an approach, there is a temptation to make “gut-feeling reactions” which could spiral into system-wide increases in protectionist measures in the Asian region.            

ASEAN countries exhibit significant diversity in their reliance on China for imports. Using the latest available data (2021-2023), five ASEAN countries — Indonesia, Myanmar, Cambodia, Laos and Vietnam — sourced at least 25 per cent of their imports from China. Various factors contribute to the high shares of import dependence on China. These include geographical proximity to China, high dependence on Chinese debt financing, and close backward participation in Chinese supply chains (importing Chinese inputs for further processing and export). In contrast, other ASEAN countries had import shares from China ranging between 14 and 20 per cent.

Not all Chinese imports engender risks to domestic producers — in fact, they also help domestic producers stay competitive in the international markets. Imports can be categorised into four types following UN Trade and Development (UNCTAD) metrics: capital goods (manufactured assets that are used in the production of other goods such as machinery), intermediate goods (raw materials or semi-finished goods), consumption goods (goods intended for final consumption), and other goods. Between 2019 and 2022, imports from China to ASEAN countries (minus Laos, where data is not available for 2022) increased by 43.5 per cent, with capital and intermediate goods playing a pivotal role in this growth (Figure 1). On average, about 74.2 per cent of ASEAN countries’ imports from China during this 2019-2022 period consisted of capital and intermediate goods, which are needed for domestic production and exports as well as technological upgrading.

This aggregate import pattern at the regional level reflects similar characteristics at the individual country level. With the exceptions of Singapore, Vietnam, and the Philippines, a substantial portion of imported Chinese goods — from 69-90 per cent — are intermediate and capital goods (Figure 2). Meanwhile, Chinese consumption goods account for less than one-fifth of imports in all ASEAN countries.

Chinese Imports Help Southeast Asian Countries Stay Sharp

Figure 1: ASEAN’s Imports from China

 Figure 2: Chinese Imported Goods to Southeast Asian Countries, by Category

The spotlight cast on ASEAN countries’ increasing trade in goods deficit with China overlooks the trade in goods surpluses that the grouping’s economies enjoy with the rest of the world (Figure 3).  Imported Chinese intermediate and capital goods — including parts and components for solar panels, EV batteries, and two-wheeler EVs — help Southeast Asian countries remain competitive in the international markets. This is because Chinese goods have become more sophisticated and cost-competitive in part due to substantial manufacturing investment, technological upgrading and highly competitive logistics sectors. ASEAN economies now account for 8 per cent of global trade and 5 per cent of global manufacturing value added, a relatively modest figure which represents a steady increase since ASEAN’s inception in 1967. This compares to corresponding figures of 15 per cent and 29 per cent for China.         

When Chinese Imports Are a Good Thing

Figure 3: Rising trade deficits with China are accompanied by rising trade surpluses with the rest of the world

The surge of Chinese greenfield manufacturing FDI in the last five years into ASEAN — particularly in automotives, ICT and electronics, renewable energy, and consumer goods — boosts growth, creates jobs, and helps ASEAN economies industrialise. However, it is expected that at least in the early phase of investment, Chinese manufacturers in the region would continue to use parts and components from China. The correlation between investment and imports is well documented in the literature (see, for example, the case of Mexico).  The need for deeper local value chain linkages by using domestically produced parts and components, however, has prompted some ASEAN countries, such as Thailand, to impose stricter local content requirements and offer investment incentives to localise production.

At the macroeconomic level, overall goods and services trade balances matter. Hence, there is a need not only to examine the trade in goods but also the trade in services, in which ASEAN has an increasing surplus with China. Although ASEAN’s goods trade deficit with China currently dwarfs its services trade surplus, ASEAN has a lot of potential in services exports, including in tourism, digitally delivered professional services, transportation, and logistics. As technology enables services to be more tradeable, global services trade is expected to grow significantly.  While the volume of global goods trade is estimated to decline by 0.2 per cent in 2025, the volume of global services trade is estimated to increase by 4 per cent in 2025.          

Common gut-feeling reactions to protect domestic industry from cheap imported Chinese goods would be to heighten tariffs and non-tariffs measures (NTMs), such as Indonesia’s plan last year to impose tariffs up to 200 per cent on some Chinese goods and relocate the main entry gates of imports to ports outside Java to choke the surging flows of imports, particularly targeted at Chinese products.

However, raising trade barriers against Chinese imported goods does not necessarily protect the domestic industry. They may make domestic firms that are shielded from international competition less competitive. In most cases, it is more important to reduce or eliminate rather than to raise tariffs and introduce new NTMs (especially for capital and intermediate goods) to boost export competitiveness. For example, a recent World Bank study found that NTMs in Indonesia actually make local businesses less competitive in the global market — not more. More than 68.3 per cent of Indonesia’s textile imports in 2023, for example, are subjected to various NTMs to protect the domestic textile industry. Indonesia has had such measures since 2008, but its participation in the international textile market declined from 1.7 per cent in 2018 to 1.4 per cent in 2023.

Imported Chinese intermediate and capital goods — including parts and components for solar panels, EV batteries, and two-wheeler EVs — help Southeast Asian countries remain competitive in the international markets.

Instead of being overwhelmed by the risks of export redirection, the region could use existing frameworks such as WTO, Regional Comprehensive Economic Partnership and ASEAN-China FTA 3.0 to open dialogues and express concerns about export redirection. Accelerating ASEAN’s own regional supply chain integration could also help reduce ASEAN countries’ dependence on Chinese imports.

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