How China and Japan are Competing for Economic Dominance in Southeast Asia

Few economic areas are currently more affected by geo-economic turbulence than the European Union. The global system of open trade and the international industrial division of labour – which has underpinned Europe’s growth and prosperity for decades – is being fundamentally challenged. China is undermining the principles of fair and open trade through unfair practices and state subsidies for its export companies. Meanwhile, the “reciprocal” tariffs that have been threatened by the Trump administration have the potential to upend the entire system of the international division of labour. For Europe’s already-sluggish economies, a lasting US withdrawal from the international open-market system could have serious economic consequences. This is particularly true for Germany, whose economy is more closely intertwined with the US and China than any other in Europe.

Against the backdrop of US tariff policy, one thing has become clear: Europe needs new economic and trade partners in order to generate fresh momentum. Increasingly, attention is turning towards Southeast Asia. The emerging economies of the region with their often very-high growth rates – such as those in Malaysia, Indonesia, and Vietnam – form the most dynamic economic region in the world. Although the countries of Southeast Asia cannot replace the enormous economic importance of China and the US for the European economy, they offer major opportunities for companies seeking either to reduce dependence on China through a China+1 strategy¹ or to tap into new markets in response to US tariffs.

At the same time, Southeast Asian economies are increasingly at risk of being caught in the crossfire of the US-China rivalry. China dominates the region economically, using local markets and supply chains to bypass American trade restrictions and to create alternative buyers for its heavily subsidized export products. Meanwhile, Southeast Asian states face the threat of steep US tariffs. Vietnam, for instance, was initially threatened with one of the world’s highest duties – up to 46 per cent. In the end, a deal was reached that puts tariffs at 20 per cent for Vietnamese products. Unsurprisingly, countries across the region are thus looking to broaden their trade and economic partnerships.

With its vast internal market and highly advanced industrial base, the EU is an attractive candidate for such a broadening. However, in the race to forge new economic alliances in Southeast Asia, Europe risks falling behind. In recent years, China and Japan in particular have both adopted coordinated strategies that closely align politics and business. The two countries have significantly increased their economic footprint in the region and have forged deep, mutually beneficial partnerships with numerous Southeast Asian states. Europe should thus learn from how its competitors have adjusted their strategies. China and Japan each rely on different models of government-business cooperation, but both countries use these models as part of a comprehensive strategy to support market entry and investment by their companies in Southeast Asia. By contrast, the EU and its member states still lack a foreign economic policy that effectively integrates their own commercial interests with the goals and tools of trade, economic, and development cooperation.²

China’s path to becoming the dominant economic power in Southeast Asia

China’s economic rise in Southeast Asia began in the early 2000s when then-President Jiang Zemin launched the country’s “Going Out” strategy. However, it was Deng Xiaoping’s reform government that had laid the groundwork two decades earlier, actively steering the economy to drive industrialization. This aim was primarily achieved through state-owned enterprises (SOEs), which were funded first by the government and later by the country’s powerful sovereign wealth funds. Under the “Going Out” strategy, Chinese SOEs – along with private companies – were encouraged to invest abroad, to build supply chains outside China, and to access new markets.

In 2013, President Xi Jinping took this strategy further by launching the Belt and Road Initiative (BRI). The BRI aims to create infrastructure networks linking countries across Asia, Europe, and Africa. It focuses on emerging economies that are heavily reliant on investment to expand their infrastructure. Many of these countries also possess vital raw materials that China urgently needs for its fast-growing industrial and technology sectors.

As with the earlier “Going Out” policy, state-owned enterprises are a key instrument for implementing BRI projects. These SOEs also play a central role in China’s own infrastructure development. Today, China is widely regarded as a global leader in this field, with the world’s largest high-speed rail network³, the fastest internet connections⁴, and the top-ranked container port⁵.

The implementation of the BRI by SOEs is clearly visible across Southeast Asia. Major infrastructure projects in the region carried out by Chinese SOEs include the Jakarta-Bandung high-speed rail line in Indonesia, the Laos-China railway, the Bicol South railway project in the Philippines, the Phnom Penh-Sihanoukville Expressway, and the Siem Reap-Angkor International Airport in Cambodia as well as the East Coast Rail Link and the Malaysia-China Kuantan Industrial Park in Malaysia. Well-equipped both technologically and financially, Chinese SOEs typically carry out these projects as joint ventures with local SOEs in Southeast Asian countries. In nations such as Singapore, Malaysia, Indonesia, Vietnam, Thailand, and Myanmar, SOEs also dominate large parts of the economy. Often negotiated at the very highest political level, these SOE-SOE partnerships provide China with access to regional markets. However, such partnerships can undermine fair competition because non-Chinese companies are frequently excluded from submitting bids. Many BRI projects are also carried out in a context of opaque ties between business and government – conditions that would fall short of conventional Western governance standards.

While the Chinese government uses the BRI to offer new business and investment opportunities for its SOEs, especially in infrastructure, it also actively encourages private companies to “go out” and strengthen their position in Southeast Asia’s industrial and technology sectors. As a result, Chinese private companies have gained a significant market share across the region at a remarkable speed. The Chinese government identifies key industries, focuses on strategic investments, funds research and development, drives innovation, and promotes the creation of integrated regional supply chains.

With the help of private companies, China is making deeper inroads into the markets of Southeast Asia and is seeking to overtake its established Western competitors. This situation is especially evident in the technology sector, where firms such as Alibaba, Huawei, and BYD are rapidly expanding their presence. The advance of Chinese private enterprises in Southeast Asia has been supported by the Chinese government’s strategic and active trade policy in the region. Shortly after joining the World Trade Organization in 2001, China proposed the creation of the ASEAN-China Free Trade Area (ACFTA). ACFTA was ultimately implemented in 2010 and has since been expanded at China’s initiative. China is also a member of the Regional Comprehensive Economic Partnership (RCEP) – the world’s largest free trade agreement – which includes all ASEAN countries along with Australia, New Zealand, South Korea, and Japan.

As a result, China has become Southeast Asia’s most important economic partner. In the past five years alone, the trade volume with ASEAN countries has nearly doubled.⁶ However, not only are Chinese companies expanding into Southeast Asian markets, but they are also increasingly dominating the region’s industrial supply chains. In fact, more than 80 per cent of China’s exports to the region are industrial goods.⁷ In 2021, China accounted for around 30 per cent of all imports of industrial intermediate products to Vietnam, Indonesia, Thailand, and the Philippines.⁸ These figures are likely to have risen further because the intensifying economic rivalry with the United States is pushing China to deepen its engagement with the region. China needs alternative markets to absorb its industrial output. Above all, however, Chinese companies have increasingly relocated parts of their supply chains to Southeast Asia in order to circumvent US tariffs and sanctions. In Vietnam, the British magazine The Economist recently reported an almost 100 per cent correlation between the monthly increase in imports from China and the rise in Vietnamese exports to the United States.⁹ Although similar data are not available for other countries in the region, there is strong evidence that the same pattern may apply elsewhere, such as for automotive parts from Thailand or for solar panels from Malaysia. Against the backdrop of ongoing tariff negotiations, the Trump administration made it clear to Southeast Asian governments that taking a tougher stance on China’s economic influence in their countries would be a prerequisite for concluding any trade deals. Given China’s growing dominance in the region and the deepening economic dependence of Southeast Asian economies on Beijing, however, it is questionable whether these governments are willing or even able to comply with such demands.

Japan’s response to China’s dominance: A strategic shift in Southeast Asia

Within just a few decades, China has displaced Japan as Asia’s leading economic power. Like many European firms, Japanese industrial companies have lost ground in the face of growing competition from China. In response, Japan has in recent years embarked on a fundamental shift in its foreign economic policy, actively seeking to counter China’s rising dominance in the region. Japan is working with countries that are closely aligned with China (such as Cambodia and Laos) as well as with countries that maintain a greater distance (such as the Philippines). The aim is to offer all countries in the region an alternative to China’s economic influence and to prevent China from gaining a monopoly position in Southeast Asia.

In 2016, Japan developed its own strategy for a Free and Open Indo-Pacific (FOIP) as a direct response to China’s Belt and Road Initiative (BRI). FOIP serves as a framework for channelling Japanese investment into the least developed countries in Southeast Asia. One of its main goals is to support the development of infrastructure that these countries urgently need. In order to achieve this goal, Japan has promoted the creation of so-called economic corridors.¹⁰ One example is the East-West Economic Corridor, which stretches from Da Nang in Vietnam through Laos and Thailand to Mawlamyine in Myanmar. This corridor – inter alia – helps secure Japan’s access to India and the rapidly growing economies of South Asia. Japan has also established a Southern Economic Corridor, which runs through Ho Chi Minh City in Vietnam, Phnom Penh in Cambodia, Bangkok in Thailand, and Dawei in Myanmar. These corridors are becoming increasingly important not just for Japanese investors, but also especially for local small and medium-sized enterprises. By 2024, some 1,100 businesses – both local and foreign – were operating along these two corridors.

In 2024, Japan signed an agreement with the United States to create a new economic corridor – the Luzon Economic Corridor – in a bid to expand its economic presence in Southeast Asia. The corridor is located in the Philippines, which is currently Washington’s closest ally in the region. Luzon was chosen for its abundant reserves of critical minerals, such as nickel, cobalt, copper, and bauxite, all of which are vital to the semiconductor and electric vehicle industries, including battery production.¹¹ The potential access to these raw materials alone acts as a strong incentive for foreign firms to invest in the corridor. Together, the Philippines and Indonesia account for around 45 per cent of global nickel production.¹²

In 2023, Japan signed the Japan-Vietnam Joint Initiative in order to benefit from Vietnam’s strong growth over the past decade, while in Cambodia, Japan created a Special Economic Zone in 2024 to attract Japanese investment. This latter move was partly informed by Japan’s observation of China’s heavy investment in Cambodia’s textile industry, which helped the underdeveloped country build a robust manufacturing base. Today, Chinese firms own around 90 per cent of Cambodia’s garment factories, and the sector accounts for roughly 40 per cent of the country’s GDP.¹³ By 2022, Cambodia had become the eighth-largest exporter of clothing and footwear in the world. Numerous Chinese firms are now integrated into local supply chains that produce goods for export to Japan, the US, and Europe.

Japan itself has learned from first-hand experience what it means to be overly dependent on China. In 2010, Beijing restricted its exports of rare earth elements to Japan: Along with other developments, this move prompted Tokyo to pursue the diversification of its supply chains, particularly in areas previously dominated by China. One central element of this strategy is the Economic Security Promotion Act (ESPA), which was introduced in 2022. The ESPA primarily aims to shield Japan’s supply chains from geopolitical disruptions by relocating production or by relying more on allied countries rather than on China. To that end, the law seeks to secure stable access to critical raw materials, to ensure the reliability and continuity of vital infrastructure, and to support the development of key technologies. In order to achieve these goals, the Japanese government introduced a range of subsidies aimed at boosting domestic production, funding R&D, and encouraging investment in global supply chains for strategic industries. Between 2020 and 2023, for example, Japan’s Overseas Supply Chain Diversification Project supported 124 initiatives in Southeast Asia.¹⁴ Japan is also increasingly using its development cooperation to support export-oriented companies, particularly through tied aid schemes. These schemes involve low-interest loans to partner countries on the condition that contracts be awarded to Japanese firms. If successful, this approach would not only help Japan reduce its reliance on China, but also significantly enhance the competitiveness of Japanese companies in Southeast Asia.

Europe needs an integrated foreign economic policy in Southeast Asia

While Japan has fundamentally shifted its strategy in order to push back against China’s growing economic dominance, Europe remains surprisingly hesitant to engage more decisively with Southeast Asia. Now that many European companies are looking for ways to reduce their dependence on China and to diversify into the region, they are finding it difficult to compete with rivals that have spent years entering regional markets and supply chains with the support of governments pursuing long-term strategies to expand their economic influence. Europe should learn from the success of these strategies and develop its own foreign economic approach to Southeast Asia – one that combines open trade policy with a pragmatic strategy for economic cooperation and proactive support for international business.

The EU should seize the momentum created by US tariff threats in order to swiftly close trade deals in Southeast Asia

To date, the EU has signed free trade agreements in Southeast Asia with only Singapore and – more recently – Vietnam in 2019. Negotiations with a number of other high-growth Southeast Asian countries have dragged on without resolution, in some cases for years. However, recent US tariff threats – particularly under the Trump administration – have sparked new urgency within the EU about securing successful trade deals. In recent months, the European Commission has adopted a more pragmatic trade stance towards Southeast Asia. The political agreement announced on 13 July 2025 by Commission President Ursula von der Leyen and Indonesian President Prabowo Subianto to conclude trade talks that had been running since 2014 would likely not have been possible, for example, without the pressure created by US tariff threats.

Launched in 2010 but suspended in 2012 due to major disagreements, the EU-Malaysia trade negotiations were likewise not revived until early 2025, again in response to shifts in US trade policy. Meanwhile, talks with Thailand and the fast-growing Philippines have been ongoing for years – with little progress to speak of.

One key obstacle in past negotiations has been the EU’s attempts to impose non-trade-related conditions on its partners, including far-reaching environmental and social standards. Indonesia and Malaysia in particular have strongly rejected these demands, accusing the EU of protectionism disguised as climate policy. Given the region’s growing global economic relevance, Europe’s own economic challenges, and stagnating trade with the EU, Southeast Asia’s rising economies now find themselves in a position to walk away from negotiations. Meanwhile, the proliferation of bilateral and regional trade agreements in Asia – such as ACFTA and RCEP – has only reinforced the leverage of these rising economies.

In this context, the EU should make the most of the momentum created by US tariff threats to bring all ongoing trade negotiations in Southeast Asia to a rapid and successful conclusion following the positive example set by the deal with Indonesia. This effort would help remove trade barriers and facilitate market access for European businesses in the region. The EU must avoid overloading these talks with non-trade demands and should continue its new, more pragmatic approach if it is to finally conclude trade agreements with all of the region’s dynamic economies after years of stalled negotiations.

Global Gateway has the potential to align EU development and economic interests

In 2021, the EU launched its Global Gateway initiative – partly in response to China’s BRI – with the goal of promoting “smart, clean and secure connectivity in digital, energy and transport, and strengthening health, education and research systems around the world”.¹⁵ The EU plans to invest 300 billion euros in developing countries by 2027 through Global Gateway, but only 10 billion euros¹⁶ of this money is earmarked for Southeast Asia – an inexplicably small amount given the region’s enormous geopolitical and economic importance. For comparison, China’s BRI-backed Rempang Eco-City industrial park project in Indonesia alone has a budget of nearly 10 billion euros.¹⁷

In Southeast Asia, the Global Gateway initiative supports the construction of grids and roads in Cambodia in line with the EU’s green agenda and its vision for “sustainable connectivity”. The initiative also aims to improve the electricity supply in order to boost energy efficiency, including the development of a hydropower plant in Vietnam. In Laos, the initiative includes the construction of urban transport systems, irrigation infrastructure, and roads to enhance connectivity, while in the Philippines, it supports the installation of solar power plants and home solar systems in order to provide electricity to remote areas. Although these projects primarily reflect the EU’s green agenda, they also have the potential to create economic opportunities for European companies, to secure control over key infrastructure, and to gain access to critical resources that – for now – are still acquired through Chinese supply chains in the region. In practice, however, Global Gateway in Southeast Asia still largely follows the logic of traditional development cooperation, in which creating economic openings for European businesses is treated as a secondary consideration.

Furthermore, the Global Gateway concept suggests that it is a coherent investment strategy coordinated and managed by the EU Commission. However, in Southeast Asia, the concept remains a loose collection of uncoordinated projects, many of which are funded and managed by national development banks and agencies in EU member states and some of which had already been in planning long before the European initiative was launched. Given the limited scale of most projects, the relatively modest total funding mobilized for the region, and the lack of a genuinely strategic approach to implementation, it is questionable whether Global Gateway can be seen as a credible answer to China’s BRI or to Japan’s economic corridors.

For this reason, the Global Gateway initiative should be restructured as a strategically coordinated European investment programme. The budget earmarked for Southeast Asia urgently needs to be revised in order to reflect the region’s central role in Europe’s diversification efforts. In addition, Global Gateway projects should focus on areas in which European companies hold a competitive edge to create entry points and business opportunities for these firms in the region.

European businesses need a strategic external economic policy

To date, the EU still lacks a comprehensive strategy to support European companies in building a stronger presence in Southeast Asia. A structured and perhaps even institutionalized dialogue between the European Commission and the business community – aimed at jointly addressing the challenges faced by European firms abroad – exists only in rudimentary form. In the most recent EU-ASEAN Business Sentiment Survey, 59 per cent of European companies reported that the EU does not sufficiently support their interests in Southeast Asia – the highest level of dissatisfaction since the survey began in 2015.¹⁸ The EU should take closer note of the cooperation models between governments and businesses that have been established by countries such as China, Japan, and South Korea in order to boost its relevance in the region’s economies. While Europe lacks China’s state-owned enterprises and Japan’s historically close political-economic integration, it does have a vast internal market, globally respected industrial companies, and – crucially – a high level of trust that it still enjoys in the region. Indeed, the EU continues to be viewed by regional elites as a preferred partner for navigating the uncertainties of the US-China rivalry.¹⁹

Europe clearly has the potential to become one of the region’s leading economic powers and to expand its presence in strategic sectors across Southeast Asia. However, for that to happen, the EU must change course by stepping up exchanges between the Commission, national governments, and the business sector to better understand the specific challenges that European companies face in the region and to implement the policy measures that are necessary to boost the competitiveness of these companies. This effort also requires member states to further develop their national approaches to external economic promotion and – where appropriate – to coordinate more effectively at the European level. Such measures must be focused first and foremost on economic goals rather than being weighed down by non-economic requirements that make it more difficult for European companies to compete on equal footing with Chinese or Japanese firms in Southeast Asia.

Dr Denis Suarsana is Head of the Konrad-Adenauer-Stiftung’s office for Indonesia and Timor-Leste.

1. The China+1 strategy refers to a production, sales, and supply chain approach in which companies select at least one additional country alongside China as a manufacturing base. The aim is to reduce dependency through diversification in order to minimize risks such as the loss of market share, supply chain disruptions, rising costs, and political tensions. ↩︎
2. The present article draws on the study Der wirtschaftliche Wettlauf in Südostasien – und warum Europa zurückfällt, which was co-authored by the author and Prof. Edmund Terence Gomez in October 2024, Konrad-Adenauer-Stiftung Website, published 28 October 2024, https://ogy.de/2roa, accessed 29 June 2025. ↩︎
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