ASEAN faces trade and demand risks as China's excess capacity puts pressure on the region

Southeast Asia is increasingly facing greater economic costs as China's export boom places simultaneous pressure on local producers and regional demand. For ASEAN economies that have long viewed supply-chain shifts as an opportunity arising from U.S.-China tensions, the situation now poses risks to jobs, investment and financing.

China's excess capacity pressures ASEAN producers

The article cites Michael Froman, president of the Council on Foreign Relations, who stated that China's trade surplus was approaching U.S.$1.2 trillion in 2025, while nearly 30% of its industrial firms were operating at a loss. Under such conditions, local governments in China continue protecting jobs, banks roll over weak loans, and companies cut prices to retain market share, allowing production capacity to keep running even as profits come under pressure.

The OECD's industrial subsidy database shows that Chinese companies in a sample of the world's 525 largest industrial firms received government support between three and eight times greater than OECD-based competitors from 2005 to 2024. The OECD attributed nearly 60% of the increase in the global market share of Chinese firms in that sample to such support, reinforcing concerns that ASEAN producers are competing against rivals backed by a financing system willing to absorb losses.

The scale of that capacity adds to the pressure. China's annual solar manufacturing capacity is estimated at around 1,200 gigawatts, roughly twice global installations in the previous year, while electric and plug-in hybrid vehicle capacity has reached around 25 million units, compared with domestic demand of 12 million. Although capacity does not necessarily translate directly into actual output, the existence of production lines, the jobs dependent on them, and ongoing financing flows create sustained pressure to find buyers and cut prices.

The pressure is already evident in Southeast Asia. The European Central Bank found that China's exports to ASEAN rose sharply in 2025 while unit prices declined in most sectors. A Bank of Thailand study in September 2025 found that Thai imports from China nearly doubled over a decade, compared with growth of around 20% for imports from elsewhere, with more than 200,000 Thai small and medium-sized enterprises, employing over two million workers, producing goods that compete with those imports.

E-commerce adds another entry channel, as goods can reach consumers directly while bypassing local retailers. Regional governments have already responded with different tools, including Malaysia's 2024 sales tax on low-value imports, Thailand's VAT in July 2024, and Indonesia's 2024 threat to impose tariffs of up to 200% on certain Chinese goods.

The article also stresses that the usual strategy of “moving up the value chain” does not necessarily provide automatic protection. Germany's example shows that Chinese competition now exists across multiple industrial levels, with German car exports to China falling by two-thirds from their 2022 peak by 2025, while China's own vehicle exports more than doubled. For ASEAN, low-cost Chinese inputs do help some firms become more competitive, but the same cost advantage can become an existential threat to local companies producing similar products.

Risks to trade, tariffs and financial safety nets

An IMF study in 2016 found that every one-percentage-point reduction in China's growth could lower growth in the five largest ASEAN economies by between 0.2 and 0.5 percentage points. Although that estimate is dated, the spillover channels through commodities, components, tourism and investment remain relevant. A joint IMF-World Bank assessment in February that placed Laos under debt pressure also shows how a withdrawal of Chinese external financing could add pressure if Beijing itself faces domestic constraints.

The relocation of factories to ASEAN does not necessarily shield the region from trade tensions. In April 2025, the U.S. Department of Commerce issued final anti-dumping and countervailing duty determinations on solar cells from Cambodia, Malaysia, Thailand and Vietnam, ruling that companies operating in those countries had received Chinese government subsidies. In July 2025, the U.S. also imposed an additional 40% tariff on goods found to have been transshipped to evade duties, although the measure was later dropped following a Supreme Court ruling in February 2026 against emergency-power tariffs.

However, Washington's policy direction has not changed. In March, a Section 301 investigation was launched into “structural excess capacity” in 16 economies, including six ASEAN members, and since 24 July, separate duties have added 10% to related goods from Cambodia, Indonesia and Malaysia. This indicates that parts of Southeast Asia are increasingly being viewed by the U.S. as part of the excess-capacity problem, rather than merely alternative production locations.

Malaysia itself has tightened rules of origin to require at least 25% local content, as investments that contribute only final assembly come under increasing scrutiny. At the same time, ASEAN is also drawing closer to China through the upgraded ASEAN-China Free Trade Area, signed in Kuala Lumpur last October, which covers the digital economy, green economy and supply chains.

The article argues that the policy response needs to be more targeted, including considering sector-by-sector protection, setting common floors for regional investment incentives, strengthening mutual verification of rules of origin, and presenting ASEAN's case to Beijing so that reforms in China boost household consumption. The IMF estimates that social, fiscal and household-registration reforms could raise consumption's share of China's GDP by around four percentage points over five years.

Finally, the article stresses that regional financial safety nets must also be truly operational. The U.S.$240 billion Chiang Mai Initiative Multilateralisation exists on paper, but in May, ASEAN+3 finance ministers were still urging members to complete the required procedures to bring the Rapid Financing Facility into effect. For a region that could face an influx of goods, weak export orders, lower commodity prices and tighter credit at the same time, such procedural delays constrain its ability to respond when a crisis occurs.

In our earlier coverage of efforts to coordinate enforcement over the entry of products and foreign-entity businesses into the local market, we examined government efforts to ensure fairer competition for traders, particularly SMEs. The article also covered plans to draft an e-Commerce Bill, standardise the “Jom Beli Produk Malaysia” logo, and provide allocations under Budget 2027 for the Jom Malaysia programme to help SMEs leverage digital platforms and expand their market reach.