No mere shock absorber: ASEAN setting terms on China trade
China's manufacturing surge – dubbed by some as the 'Second China Shock' – has raised fears that a deluge of cheap Chinese imports could deindustrialize large swathes of Southeast Asia.
Yet framing Southeast Asia as a victim , as the term 'shock' implies, reflects not only a misunderstanding of the region's historical autonomy and strategic agency but is also a misreading of China's intent.
Historically, China's trade with the region has been asymmetrical but stable, often built on complementary strengths rather than competitive overlap.
Historian Wang Gungwu's 'The Nanhai Trade: The Early History of Chinese Trade in the South China Sea', traces this dynamic from the Han dynasty (211 BCE) to the founding of the Song dynasty in 960 CE, highlighting both the economic foundations and imperial attitudes toward maritime commerce.
During this period, kingdoms in the region such as Srivijaya and Ayutthaya exported spices, rice, metals and timber to China in exchange for ceramics, textiles and manufactured goods.
The modern iteration of this relationship is governed by a more institutional framework. The 2002 CAFTA marked a structural shift from tributary privileges to rules-based trade, facilitating a surge in trade between China and Southeast Asia. In 2009, China overtook Japan as ASEAN's largest trading partner.
Today, China–ASEAN trade is projected to reach US$1 trillion, surpassing the combined trade volumes of the United States and the European Union with China and making ASEAN China's largest trading partner.
This new and multifaceted trade sheds light on the nature of China's trade surplus with Southeast Asia, which extends beyond conventional narratives of high-tech dominance or state-driven funneling of overcapacity into the region.
Clearly, the nature of China-ASEAN trade has evolved, driven by the rising value of China's intermediate and finished goods relative to Southeast Asia's commodity exports. This shift, combined with the region's growing middle class and purchasing power, has contributed to the widening trade imbalance.
Yet governments across Southeast Asia have increasingly learned to use access to their fast-growing markets as strategic leverage, positioning themselves not simply as recipients of investment and exports but as active participants capable of demanding reciprocity and shaping the terms of engagement.
The clearest example of this strategic posture can be seen in the politically sensitive defense sector. In 2024, Thailand opted for Sweden's SAAB Gripen over a competing US bid, securing not just a fighter platform but also full operational control of its Link-T datalink and a 144% return on investment via industrial offsets.
Indonesia followed suit in 2025 with its commitment to purchase 48 KAAN fifth-generation fighter jets from Turkey, securing terms for local assembly and capability transfer as part of the deal.
ASEAN states are exercising similar leverage in civilian sectors by using market access to drive industrial upgrading through local content mandates, technology transfer and intellectual property (IP) enforcement.
Thailand now requires EV makers that receive tax incentives to produce core components locally by 2026, prompting China's BYD and Changan to commit to 40%-90% local sourcing. It's part of a Thai policy that attracted over $3.5 billion in Chinese investment and is set to boost national EV output by 40% in 2025.
Vietnam's revised 2025 feed-in tariffs favor projects with battery storage and locally processed polysilicon, aiming to cut $1 billion in import dependency and move up the solar value chain.
Malaysia mandates regional design hubs for licensing China's Pop Mart's Labubu soft toy, encouraging local creative collaboration while strengthening IP enforcement.
Southeast Asia has emerged as the Chinese company's largest and fastest-growing international market, with revenue in the region rising 619% year-on-year to $336 million, nearly half of Pop Mart's overseas earnings.
These country cases all show that ASEAN states are not simply absorbing nor necessarily suffering a so-called 'Second China Shock'. Rather, in many instances, they are actively shaping the terms of their Chinese engagement – an approach that, in fact, aligns with China's own strategic interests.
Global trends are making reliance on single-source manufacturing untenable. According to McKinsey's 2025 survey of 400 Chinese export firms, 58% now use a 'China+1' strategy, with ASEAN as their leading secondary production base.
Overcapacity is another driver: Factory utilization rates for China's EVs fell below 50% (a significant gap from factories' 80% breakeven point) while its solar panel industry faces declining margins due to global supply saturation. Exporting this surplus into politically neutral, fast-growing ASEAN markets is thus a growing strategic necessity for China.
Finally, amid rising geopolitical pressure and uncertainty, China sees stable ties with ASEAN as an important hedge. The 2024 China-ASEAN Free Trade Agreement (CAFTA) upgrade and Regional Comprehensive Economic Partnership (RCEP) underscore Beijing's commitment to trade frameworks that bolster ASEAN's role in global supply chains and their value to China.
What threatens China-ASEAN interdependence today is not economic logic but growing domestic political pressures. In both, public opinion increasingly shapes the boundaries and directions of foreign policy.
Thailand and Cambodia enjoy robust bilateral trade. But a bubbling border dispute has triggered political backlash in both countries, leading to the closure of lucrative border trades.
In Indonesia, President Prabowo Subianto has made clear that economic ties with Israel hinge on Palestinian statehood, a position rooted in domestic sentiments. In the Philippines, nationalist outrage over maritime tensions with China has hardened Manila's stance on broad relations.
Even China faces internal constraints, with domestic nationalism shaping its foreign policy on Taiwan as well as the South and East China Seas.
These dynamics, while not all China-related, underscore that managing China-ASEAN ties requires mutual recognition of domestic political realities and the cultivation of political capital to sustain pragmatic diplomacy and commercial ties.
This is why narratives like the 'Second China Shock,' which suggest ASEAN passivity or acquiescence, should be reconsidered. The shock, if it exists, may be real, but so is ASEAN's capacity to respond to it on its own sovereign and mutually beneficial terms.
Marcus Loh is chairman of the Public Affairs Group at the Public Relations and Communications Association (PRCA) Asia Pacific, which aims to strengthen engagement between industry, government, and civil society across the region.
He also serves on the executive committee of SGTech's Digital Transformation Chapter, contributing to national conversations on AI, data infrastructure and digital policy.
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