Should Southeast Asia Fear the Second China Shock?

Southeast Asia’s merchandise imports from China reached over half a trillion dollars last year. The region’s collective trade deficit with China was around USD290 billion. It has grown further since. Should Southeast Asia’s policymakers be concerned? Or perhaps even join the United States and Europe in pushing back on Chinese imbalances?

Globally, China’s burgeoning exports and trade surplus since around 2020 have been dubbed the second “China shock”. China’s customs trade surplus reached USD1.2 trillion last year while its exports reached USD3.8 trillion (Figure 1).

The fear is a repeat of the first China shock after its 2001 entry into the World Trade Organization. In the United States, surging Chinese imports were blamed for job losses in American manufacturing towns. For developing countries, China’s export dominance was associated with “premature deindustrialization”.

Yet today’s China shock is very different to the first.

The first saw China serving as an assembly hub, reliant on inputs and technology from others, exporting finished goods to high-income countries, and crowding out exports from other developing countries. Meanwhile, China mostly recycled its resultant large current account surplus into US treasuries.

Today, China primarily exports parts and components that feed other countries’ production and exports, as well as the machinery and equipment needed to make things. China has become “factory to the factories”. China is also channelling more of its current account surplus into capital flows to developing economies, including manufacturing investment. Through all this, China is exporting its own technologies — from clean energy products to industrial robots.

Southeast Asia is at the forefront of these new dynamics.

To be sure, a surge in low-cost Chinese imports may have contributed to concentrated pain in some sectors. For instance, amid an influx of competing Chinese imports, Indonesia’s textile industry shed 80,000 jobs in 2024 alone while Japanese auto manufacturers in Thailand are either closing down or scaling back. Acute import surges can justify targeted safeguard-like measures, such as anti-dumping tariffs and curbs on online imports, as several Southeast Asian governments have introduced. Social protection is also vital for supporting affected workers and fostering labour market adjustment.

One should not, however, overlook the simultaneous positive impact of the China shock on other parts of the economy — via intermediate inputs, capital goods, and investment that bring in new technologies, networks, and higher productivity. All of which can, in turn, enable increased industrialisation and job creation.

Around 90 per cent of Southeast Asia’s imports from China are either intermediate inputs or capital goods, rather than final consumer goods. Meanwhile, Chinese investment is flooding in. Direct investment from China into Southeast Asian manufacturing was USD15.4 billion in 2024, up from USD5.7 billion in 2019. Total direct and portfolio investment from China has tripled to around USD75 billion, or almost 2 per cent of Southeast Asia’s GDP. Data tracking greenfield foreign investment suggests that the average Chinese investment project in Southeast Asian manufacturing created almost twice as many local jobs as investment from other countries — reflecting its higher labour intensity, notably in electronics assembly.

… the signs are that Southeast Asia has overall been gaining alongside China, rather than being crowded out.

Perhaps Southeast Asia would be doing even better if China were not running such a large trade surplus, soaking up global demand while giving little back as China’s own imports have flatlined. Yet the signs are that Southeast Asia has overall been gaining alongside China, rather than being crowded out.

China’s merchandise exports grew by 5 per cent in 2025 and are up by 51 per cent since 2019. Southeast Asia’s exports are up by 13 per cent and 54 per cent respectively. China’s customs trade surplus rose by 20 per cent last year and 178 per cent since 2019. Southeast Asia’s collective trade surplus is up by 39 per cent and 142 per cent respectively (despite the larger trade deficit with China). China’s share of world exports in key global value chain sectors (textiles, electronics, machinery, and autos) rose from 22.8 per cent in 2019 to 24.6 per cent in 2024. Southeast Asia’s share has risen from 9.2 per cent to 11.3 per cent.

It is also important to look at value-added exports. This reflects the contribution of domestic production to the value of exports, accounting for China’s role as a supplier of intermediate inputs and highlighting Southeast Asia’s role mostly lower down the value chain. It also helps account for Chinese transshipment via the region aimed at circumventing US tariffs. China has done much better on this metric. Yet, Southeast Asia has also done well. China’s value-added exports in key global value chain sectors rose by almost 40 per cent between 2019 and 2022 (the latest available data). Southeast Asia’s grew by 24 per cent.

These broad patterns mostly hold across major Southeast Asian economies. Though not all have done equally well. Those that are more open and competitive, such as Vietnam and Malaysia, have done best. Those less so, such as Indonesia and Thailand, are lagging.

There are also risks. Southeast Asia is fast becoming heavily reliant on Chinese supply chains, capital, and technology. This could heighten trade tensions with the United States, which remains fixated on reducing its indirect dependencies on China. It also highlights that reforms and public investments to increase competitiveness and domestic capability will be vital for turning the near-term benefits of the second China shock into sustained industrial upgrading, while maintaining diversified trade and investment linkages and avoiding dependency.

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