Towards a New Flying Geese Model in Southeast Asia

At a time when Southeast Asian nations are experiencing economic tremors in their industrial structures due to tariffs, transshipments, and supply chain disruptions, the long-standing Flying Geese Model (FGM) is valuable for designing new approaches to industrial transformation and development. This is particularly true when regional countries have been hit by US reciprocal tariffs and China’s growing dominance in supply chains.

The FGM was initially conceived by Kaname Akamatsu in the 1930s, with articles written in Japanese, and it was first introduced in English in 1962. The model describes a pattern whereby industrial activities progressively migrate from more advanced to less-developed economies as cost structures and comparative advantages shift, generating regional production networks. This regional upgrading process was notably led by Japan, followed by South Korea, Taiwan, and then some Southeast Asian countries.

Akamatsu’s original insight was that as nations accumulate capital and strengthen their industrial linkages, their comparative advantage evolves, shifting them up the value chain and enabling successive waves of industrial upgrading. Japan underwent an accelerated industrial revolution from 1968, following the Meiji Reform. The post-Second World War period served as a textbook example of FGM. The upgrading progressed from textiles to chemicals, steel, automobiles, and ultimately, electronics. As labour costs rose, early-stage industries moved to lower-cost economies, a path later followed by South Korea and Taiwan in the mid-20th century.

The World Bank’s seminal report, “The East Asian Miracle”, published in 1993, credited much of the region’s economic dynamism to this pattern. For decades, Southeast Asian economies, such as Malaysia, Thailand, Indonesia, and the Philippines, actively positioned themselves to receive outgoing waves of industry. This was done by implementing policies designed to attract foreign direct investment (FDI), build human capital, and foster export capabilities.

Today, however, new forces — including China’s dominance in supply chains and shifting Western tariff regimes — are causing Mr Akamatsu’s flying geese to fly into turbulence.

Since the early 2000s, China’s impressive rise has shifted the centre of gravity in Asian manufacturing. Today, China not only absorbs tremendous manufacturing activity but also increasingly exports lower technology industries, such as garments to Bangladesh, light manufacturing to Ethiopia, and nickel processing to Indonesia. This shift has led some observers to argue that China is now promoting a new variant of the Flying Geese model, wherein Chinese companies invest heavily in overseas manufacturing clusters and infrastructure as part of its broader initiatives, such as the Belt and Road Initiative (BRI).

Recent works, such as Dan Wang’s “Breakneck”, note this transformation and argue that China’s ‘engineers’ are setting new industrial paradigms, supplying technologies and management practices to lower-income countries. The consequence for Southeast Asia is twofold: growing opportunities for collaboration and learning, and heightened vulnerability to external shocks and supply chain disruptions.

Currently, Southeast Asian policymakers are confronting twin shocks: China’s dominant role in production networks and aggressive Western (mainly US) tariff regimes targeting re-exported goods.

Southeast Asia stands at a crossroads. As ‘longue durée’ factors like artificial intelligence and geopolitical rearrangements unfold, the region’s industrial trajectory will be shaped by its ability to respond to US tariff policies and outward Chinese FDI.

China’s near-total control of its supply chain complicates traditional catch-up strategies, making outward investment and network creation vital. Significant investments, such as the expansion of China’s automobile and battery industries in Southeast Asia, reveal both opportunities and competitive pressures for regional economies.

The Trump 1.0 administration’s policies prompted Chinese firms to use transshipments via Vietnam and Mexico to circumvent tariffs, leading the US to threaten further penalties on goods processed or forwarded through Southeast Asia. Reciprocal tariffs, now averaging 19 per cent for Vietnam and most other ASEAN states, have added complexity to regional trade and forced countries to reconsider their export-led strategies.

In response, ASEAN Member States have generally maintained low intra-regional tariffs (below 0.2 per cent since 2017). However, high transshipment charges could fracture the regional consensus, incentivising some nations to negotiate bilateral terms with the US. This fragmentation risks undermining coordinated ASEAN industrial policies, highlighting the need for adaptive and responsive policy frameworks.

Facing new geopolitical challenges, three main industrial policy tools are reshaping the region’s economic landscape. The first is commodity-based industrial policies. For example, Indonesia’s downstreaming policy in nickel, which bans raw exports and seeks to attract investment in refining and EV batteries, exemplifies such new commodity-based industrial strategies. The government’s efforts have attracted over US$7 billion in Chinese BRI investments and expanded its market share to account for more than half of global refined nickel output. President Prabowo’s ambitious plan aims to secure US$600 billion in additional investments across minerals, oil and gas, and fisheries, but success will depend on integrating domestic firms into upgraded value chains.

The second are economic zones. Southeast Asia has at least 1,600 special economic zones (SEZs), which have become essential to attracting FDI and creating jobs. From Thai border SEZs and Philippine free ports to Vietnam’s expansive industrial parks, these zones offer fiscal incentives and institutional support for a diverse range of industries. Indonesia and Malaysia have developed dedicated parks for nickel, electric vehicles, and semiconductors. Thailand is rapidly expanding its electronics production zones.

Production network integration is the third industrial policy tool. By participating in fragmented production networks, ASEAN countries may be able to accelerate their industrial development. Embedding themselves in multi-country value chains also allows nations to access technology, diversify exports, and build resilience. The threat of US transshipment penalties, however, may trigger strategic realignment. Vietnam, for instance, might prioritise direct negotiations with the US. Cambodia is seeking deeper integration with China.

Southeast Asia stands at a crossroads. As ‘longue durée’ factors like artificial intelligence and geopolitical rearrangements unfold, the region’s industrial trajectory will be shaped by its ability to respond to US tariff policies and outward Chinese FDI. Commodity-based industrial policies, special economic zones, and embedded production networks reflect the ongoing logic of Flying Geese adaptation.

However, an updated model is needed, one that responds to global shifts, integrates climate and sustainability imperatives, and enables collective action by China, the US, and Europe to ensure shared development gains. For Southeast Asian countries, future success will depend on agile policy-making, strategic integration into global networks, and targeted investments in upgrading domestic capabilities.

2025/339