For a decade, Southeast Asia has sold a rather attractive story about the US–China rift: let the giants throw furniture at each other; we will take the factory bookings. 

Production relocates. Supply chains diversify. Investors arrive with spreadsheets, site plans and an urgent need for somewhere else to build. Whatever happens between Washington and Beijing, someone still has to make the goods. Asean has land, workers and a ribbon-cutting ceremony ready to go. 

It is a compelling pitch. It also assumes that another factory means another opportunity. In a market already swimming in goods, another factory can mean another casualty. 

Michael Froman, president of the Council on Foreign Relations, argues in Foreign Affairs that China has grown too large to keep exporting its way around weak demand at home. The next global economic crisis, he warns, could be made in China. 

Read that from Kuala Lumpur, Jakarta or Bangkok, and the warning lands rather closer to the kitchen table. 

Asean is exposed twice over. Chinese overcapacity undercuts the region’s producers. Meanwhile, the region depends heavily on Chinese demand, which rests on households that are not spending enough. Southeast Asia needs China’s customers to open their wallets while its manufacturers try to survive the output of China’s factories. 

These risks are often presented as a tidy sequence: first comes the flood of goods; later, if China’s economic model buckles, comes the slowdown. 

Economics has declined to respect the running order. Weak demand at home is a large part of why China exports so aggressively in the first place. Both pressures are already here, sharing the same front door. A Chinese crisis would turn up the volume on both. 

Consider the machinery behind the flood. 

China’s trade surplus approached US$1.2 trillion (RM4.9 trillion) in 2025, according to Froman’s figures, while nearly 30% of its industrial firms were losing money. Elsewhere, losses on that scale would eventually force capacity out of the market. In China, local governments protect jobs, banks roll over weak loans, and firms slash prices to hang on to market share. 

The factory keeps running. The losses keep accumulating. The goods keep looking for somewhere to go. 

The OECD’s industrial subsidies database offers a sense of the financial scaffolding holding this up. Across its sample of 525 of the world’s largest industrial firms, Chinese companies received between three and eight times the government support of OECD-based competitors from 2005 to 2024. The OECD links almost 60% of those Chinese firms’ global market-share gains to that support. 

This is a sample, not a census, and the OECD calls its estimate conservative. Those qualifications matter. So does the uncomfortable conclusion: Asean manufacturers are competing against rivals backed by a financing system willing to tolerate losses. 

Try explaining that to a factory owner whose bank expects the loan repaid on schedule. 

The sheer scale of the capacity makes the problem harder to shrug off. Froman puts China’s annual solar manufacturing capacity at about 1,200 gigawatts, roughly twice the previous year’s global installations. Its capacity for electric vehicles and plug-in hybrids stands at about 25 million units, against domestic demand of 12 million. 

Capacity is not output. An available production line does not automatically become a finished car. But it creates relentless pressure to find buyers, cut prices or swallow losses. When the machinery is there, the jobs depend on it and the financing keeps coming, switching it off becomes a remarkably unpopular suggestion. 

Much of the resulting pressure washes up in Southeast Asia. 

The European Central Bank found that Chinese export volumes to Asean rose sharply in 2025 while unit prices fell in most sectors. More goods, cheaper prices: a cheerful combination for the purchasing department, a rather less cheerful one for the factory down the road. 

A September 2025 Bank of Thailand study found that Thai imports from China had nearly doubled over a decade, compared with roughly 20% growth in imports from everywhere else. It counted more than 200,000 Thai small- and medium-sized enterprises, employing over two million workers, making goods that compete with those imports. 

That is a measure of exposure, not a tally of closures. It should not be dressed up as one. But two million workers is a large number of livelihoods to leave sitting beneath an increasingly heavy cloud. 

Then there is e-commerce, which gives the flood another entrance. Goods can reach consumers while bypassing local retailers altogether. The competition now arrives on the phone screen, complete with a checkout button.

Governments have responded with different tools. Malaysia’s 2024 sales tax on low-value imports was largely an exercise in fairness, closing a tax gap that allowed overseas online sellers to undercut local ones. Thailand followed with VAT in July 2024. Indonesia’s 2024 threat of tariffs of up to 200% on some Chinese goods came with a more openly protective message. 

And for anyone tempted to prescribe the usual cure, “move up the value chain”, Germany offers a sobering exhibit. 

Froman reports that German car exports to China fell by two-thirds from their 2022 peak by 2025, while China’s own vehicle exports more than doubled. The old development ladder assumed that poorer countries would inherit industries as richer ones moved on to more sophisticated work. 

That ladder becomes considerably less useful when the world’s largest manufacturer is competing on every rung. 

Cheap Chinese inputs still help many Asean firms become more competitive. That benefit is real, and governments should count it. But the very same bargain can be an existential threat to the local company making the product. 

One firm’s cheaper input is another firm’s disappearing order book. Policy has to read both sets of accounts. 

The demand side of the relationship brings its own complications. 

Weak Chinese consumption does not automatically mean falling Chinese demand for Asean goods. China can underconsume while importing more chips, ores and other industrial inputs. Asean–China trade continued to grow in 2025. 

Yet China’s imports rose just 0.5% in yuan terms last year, against 6.1% growth in exports. The outward conveyor belt was moving considerably faster than the inward one. And Southeast Asia’s dependence on Chinese final demand runs deeper than direct export figures suggest. 

The IMF’s 2025 assessment of Malaysia estimates that about 8% of the country’s domestic value added was ultimately absorbed by Chinese final demand in 2022. That is an exposure measure, not a forecast of losses. It nevertheless shows how much Malaysian economic activity ultimately depends on a customer in China, even when the route between the two is less than obvious. 

A 2016 IMF study found that every percentage point shaved off Chinese growth could reduce growth in the five largest Asean economies by between 0.2 and 0.5 percentage points. The estimates are dated. The channels through which the damage travels remain very much in business. 

Commodities. Components. Tourism. Investment.

Froman recalls China’s investment slowdown between 2012 and 2015, when copper, oil and iron ore prices fell hard. For economies selling into China’s appetite for construction and industry, a change in that appetite can quickly become a problem at home. 

Alongside the pressures from goods and demand sits a third channel: finance. 

An IMF–World Bank assessment in February placed Laos in debt distress. Chinese lenders were its largest creditors, and Chinese debt-service deferrals were providing relief. If a crisis at home forced Beijing to pull back overseas lending, sustaining that flexibility could become harder. 

The creditor with room to accommodate you today may have its own cash-flow meeting tomorrow. 

Put these channels together and a Chinese downturn offers Asean little prospect of a breather. The region could face more discounted goods, fewer export orders, weaker commodity prices and tighter credit, all arriving together. 

A clearance sale outside the factory gate is scant comfort when customers are cancelling orders and the bank is becoming less accommodating. 

Nor does moving a factory into Asean provide an automatic escape route from the trade war. A new address is useful. It is not a geopolitical invisibility cloak. 

In April 2025, the US Commerce Department made final anti-dumping and countervailing duty findings against solar cells from Cambodia, Malaysia, Thailand and Vietnam. It ruled that firms operating there had received Chinese government subsidies, in one of Washington’s first findings of transnational subsidies. 

The factory had crossed a border. The subsidy question had followed it. 

That case was a preview. A July 2025 US order added a 40% tariff on goods found to have been transshipped to evade duties. Chinese inputs or Chinese ownership alone did not establish evasion, an important distinction that should survive the political shouting. 

The measure fell with the Supreme Court’s February 2026 ruling against emergency-powers tariffs. Washington’s broader direction, however, has not changed. 

In March, it opened Section 301 investigations into “structural excess capacity” in 16 economies, including six Asean members. Since July 24, separate duties have added 10% on covered goods from Cambodia, Indonesia and Malaysia. 

Washington increasingly sees parts of Southeast Asia as belonging inside the overcapacity problem. The region’s carefully marketed refuge now appears on the inspection list.

Malaysia has already tightened its origin rules to require at least 25% local content. Investment that contributes little beyond final assembly now attracts scrutiny in precisely the markets it was supposed to unlock. 

Meanwhile, Asean is drawing closer to China. The upgraded Asean–China Free Trade Area, signed in Kuala Lumpur last October, extends into the digital and green economies and supply chains. 

Deeper integration may be the right decision. It also makes getting the rest of the strategy right considerably more expensive to neglect. 

This is where the regional communiqués tend to become soothing. 

Diversify. Improve enforcement. Attract higher-value investment. 

All worthy ambitions. None tells a minister what to do when the steelmaker, the construction company and the foreign investor turn up with three incompatible requests before lunch. 

The actual choices are harder, and Asean’s members approach them from very different positions. Singapore, Vietnam, Cambodia and Laos do not stand in the same place relative to China. A shared acronym does not produce a shared balance sheet. 

Start with the choice between protecting producers and protecting the firms that buy from them. 

Safeguard duties on Chinese steel, ceramics or textiles can shield local manufacturers. They also raise costs for the many more firms using those goods as inputs. Governments should decide sector by sector, using evidence, and say plainly who will pay. 

A tariff does not become free because somebody puts a flag beside it. Blanket barriers would likely hurt Asean more than China. 

Then comes the competition for investment. 

Asean members routinely bid against one another for the same Chinese projects, offering tax holidays and cheap land. Investors get to compare the menus while governments compete to make the bill smaller. 

A common floor on incentives, tied to local sourcing, training and research, would give the region a stronger hand. It would also restrict each government’s freedom to strike its own bargain and require a degree of coordination Asean has rarely managed. 

That is the price of avoiding an auction in which the bidder keeps paying more to receive less. Joint verification of rules of origin should be part of the bargain, before Washington takes on the job for the region. 

Someone also needs to make Asean’s case to Beijing.

A China whose households can buy more would be a better partner than one whose factories must keep selling more. The IMF estimates that social, fiscal and household-registration reforms could raise China’s consumption share of GDP by about four percentage points within five years. 

That is a substantial opportunity for China and its trading partners. It also demands a conversation some Asean members have stronger incentives to avoid. Cambodia and Laos are particularly reluctant to confront Beijing. Indonesia, Asean’s only G20 member, can and should carry the region’s case into that forum. 

Froman’s model is a Plaza-style accord. Beijing, however, has studied what happened to Japan after Plaza and will be wary of a repeat. Any adjustment will need to be framed as China’s own reform. 

Asean’s position as a neighbour and customer, rather than a rival, gives it a better opening than Washington to make that argument. It has every reason to use it. 

Finally, the region should check whether its financial safety net can actually catch anyone. 

The US$240 billion Chiang Mai Initiative Multilateralisation exists on paper. In May, Asean+3 finance ministers were still urging members to complete the procedures needed for its Rapid Financing Facility to take effect. 

The word “rapid” is doing a lot of work there. 

A facility that cannot be drawn on quickly provides little comfort when the money is needed quickly. Finish the procedures. Test the mechanism with real money. A fire drill is more reassuring when somebody has checked that water comes out of the hose. 

A crisis is not inevitable. China retains policy room, and Asean has considerable strengths of its own. There is still time to make better choices. 

But Southeast Asia has spent years counting containers, factory openings and investment pledges as evidence that its relationship with China is working. Those numbers look splendid in speeches. They tell us how much activity is taking place. They tell us much less about how well the region would withstand a shock. 

A crowded port can sit beside a vulnerable economy. A new factory can arrive with old dependencies packed inside. 

Froman is right that adjustment must come before a crisis makes the choices for everyone. For Asean, the first step is to recognise that its largest trading partner’s problem has already become its own. 

The factories are in China. The bill is already arriving in Asean.

Abbi Kanthasamy is a Canadian entrepreneur, photographer and writer.