ASEAN-China integration is already deep. Whether it produces durable, broadly shared gains will depend on the local linkages governments and firms build across ASEAN economies.
Debate over China’s industrial rise is increasingly polarized. One side sees subsidized overcapacity and the risk of a second China shock. The other sees innovation, scale and affordable technologies that can support development and the green transition. Neither captures the whole story. Both tend to separate China from the rest of the world. That framing fits East Asia poorly, where production, investment and demand are already deeply intertwined.
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ASEAN offers an important vantage point. China is simultaneously a major market, a source of capital and technology, a supplier of competitively priced inputs and an increasingly important competitor. These roles coexist.
Two-way goods trade exceeded USD 1 trillion in 2025. Most ASEAN economies run bilateral deficits with China, and the aggregate gap has widened. But bilateral balances alone are a poor measure of gains and losses, especially since most ASEAN economies remain in current account surplus or close to balance. Weak Chinese domestic demand, partly reflecting the property downturn, has weighed on its imports even as ASEAN has continued to buy machinery and production inputs.
The composition of trade is therefore important. Intermediate and capital goods make up close to 90 percent of two-way trade, with intermediate goods alone accounting for roughly two-thirds. Much of the relationship consists of inputs moving through a regional production system. This does not make every bilateral deficit benign but changes the policy question from how much ASEAN imports to what those imports enable its economies to produce.
AMRO’s value-added analysis reveals supply linkages hidden by gross trade. By 2022, Chinese value added accounted for around one-fifth of the foreign value added embodied in ASEAN exports, while ASEAN contributed more than one-eighth of the foreign value added embodied in China’s exports. Both shares had risen substantially since 2000, from 4 percent and 8 percent, respectively. Gross trade statistics record the full value of a product when it crosses the border, obscuring the income and production generated on both sides of the chain.
Demand is becoming more regional and reciprocal. China is now ASEAN’s largest foreign source of final demand; the nominal value of ASEAN production absorbed there has nearly quadrupled since 2000. ASEAN, in turn, is China’s second-largest foreign source of final demand after the United States, with its share roughly tripling to more than 9 percent by 2022. ASEAN is more than a production platform serving distant consumers. China and ASEAN increasingly produce for one another.
Both sides have strong reasons to deepen these links. ASEAN gains access to China’s market, industrial capabilities, capital and competitively priced technologies. China gains complementary production capabilities and proximity to a diverse market of nearly 700 million people. ASEAN’s younger population and room for income and consumption growth make it an important source of future demand as China ages and its population decline. A more prosperous ASEAN would be a stronger production partner and a larger market for Chinese firms.
The same shift is visible in investment. Annual Chinese foreign direct investment into ASEAN rose from about USD 8 billion in 2012 to USD 26 billion in 2025, with more than one-third going to manufacturing. China is now one of ASEAN’s leading sources of new investment, although its accumulated presence remains smaller and its local institutional relationships less established than those of US, European and Japanese investors. Yet investment volume is not the same as domestic capability. A factory can raise output and employment while remaining weakly connected to the host economy. A locally rooted ecosystem brings domestic suppliers into production networks, develops skills, embeds engineering functions and eventually supports innovation.
Thailand, host of this year’s IMF and World Bank Annual Meetings, offers a useful comparison. In the 1960s, its automotive industry mainly assembled imported kits with few local supplier links. Domestic parts production emerged gradually under localization policies in the 1970s and 1980s. A competitive export base came later. The shift from shallow assembly to a substantial regional cluster took several decades.
Nor was the ecosystem built by Japanese firms alone. Successive Thai governments provided infrastructure, investment incentives, supplier-development institutions and evolving product strategies. Japanese assemblers and component makers created sustained demand, introduced demanding production standards and invested repeatedly in supplier training. Japanese public support also mattered: official development assistance helped finance Eastern Seaboard infrastructure and human-capital development, while Japanese technical cooperation supported Thai SMEs and supplier development. The ecosystem was co-produced through decades of learning and adjustment by governments and firms on both sides.
Chinese investment in Thailand’s electric-vehicle industry is much younger. Manufacturers are establishing local production and bringing suppliers, while Thai agencies seek to deepen domestic sourcing and upgrade local firms. Still, these are early elements of ecosystem formation. Local content can come from Chinese-owned suppliers without strengthening Thai-owned firms, and investment pledges alone do not demonstrate sustained technology transfer.
Its shorter history matters, but Chinese firms are entering an economy with infrastructure, skilled workers and supplier institutions inherited from earlier investment. That foundation should allow localization and upgrading to proceed faster. Thailand is also one of ASEAN’s more industrially capable economies; outcomes elsewhere will depend even more on domestic capabilities and policy execution.
The next phase of ASEAN-China integration will also require action from China. Chinese policymakers can support stronger domestic consumption and more predictable access to China’s market for competitive ASEAN producers. Chinese public institutions can complement outward direct investment with technical cooperation, skills development and supplier-upgrading programmes designed with host governments. Chinese firms can deepen local procurement, train workers and place more engineering and research functions in the region.
ASEAN governments, for their part, cannot assume that FDI spillovers will emerge automatically. They need to define the capabilities they want investment to create, invest in skills, standards and supplier capacity, and build institutions that connect foreign investors with domestic firms. Incentives can be assessed against observable outcomes such as local procurement, workforce development and engineering activity, then adjusted as industries evolve. Deeper intra-ASEAN integration would give regional suppliers the scale to participate, while targeted, rules-based remedies can address demonstrable injury without retreating from integration.
ASEAN-China integration will endure, but its consequences are not predetermined. Its next phase should be judged less by trade volumes and factory announcements than by the value and domestic capabilities it creates. Thailand’s experience offers a clear lesson: ecosystems take time, but time alone does not build them. They emerge through sustained investment, learning and adjustment by governments and firms on both sides.
A version of this article was first published in The Bangkok Post on October 3, 2026.
