Conventional wisdom holds that protectionism and tariffs harm economic growth, especially for developing regions. The data says otherwise: the current wave of protectionist measures, particularly those targeting China, is accelerating industrialisation and economic development across South Asia and Southeast Asia (SASEA).
Protectionism as a Catalyst for Investment Diversion
The escalating trade tensions between major economies, particularly the United States and China, have triggered significant shifts in global investment patterns that are proving beneficial for SASEA economies.
From China to Southeast Asia: The Great Redirection. The investment data has now moved past anecdote into structure. On UNCTAD's like-for-like measure of gross inflows, South-East Asia drew $222 billion in 2024 and $244 billion in 2025, while China drew $116 billion and then $105 billion. That is a ratio of better than two to one, and China's inflows have now fallen for three consecutive years. The milestone is bigger than the ratio: in 2025 South-East Asia overtook East Asia to become the largest recipient subregion in developing Asia, a first, and it happened while global FDI rose 6% to $1.6 trillion. This redirection is directly linked to protectionist policies. The investment that previously would have flowed to China is now finding new homes across the region, with Vietnam and Indonesia the clearest beneficiaries, and India, on a separate South Asian track, posting a 44% rise in inflows in 2025.
One caution on the numbers, because it changes how they should be read. Comparisons of this kind are routinely built from two different measures, gross inflows on one side and a net balance-of-payments figure on the other, which can overstate the gap several times over. The figures above are gross inflows on both sides, from a single source, which is why the ratio here is narrower than the ones usually quoted. The narrower number is the real one, and it is still decisive.
"China+1" Strategy: Accelerating Industrial Diversification. Tariffs on Chinese exports are altering corporate strategy, with companies worldwide implementing what analysts call "China+1" or even "China+3" strategies. This approach involves maintaining some production in China while establishing additional manufacturing capacity in alternative locations, primarily SASEA countries. Bain & Company, DBS, and the Angsana Council name this shift directly as a structural driver of the region's outlook: their Navigating High Winds: Southeast Asia Outlook 2024-34 report projects SASEA's six largest economies to outpace China in both GDP and FDI growth over the coming decade, citing the China+1 realignment alongside domestic demand as the two forces behind it. This strategic diversification is driving substantial investment in manufacturing capabilities across SASEA.
The "Flying Geese" Effect: Tariffs as Pro-Globalisation
Perhaps the most counterintuitive aspect of current protectionist policies is how they are functioning as accelerants for a more distributed form of globalisation rather than impediments to global trade. For decades, China's vast internal market and government policies created powerful incentives to concentrate manufacturing within its borders. This concentration slowed the natural spread of industrialisation to neighbouring countries, a pattern economists call the "flying geese" model of development, where manufacturing naturally migrates to lower-cost locations as economies develop. Tariffs on Chinese goods are now effectively reversing this concentration, pushing manufacturing to spread across more countries. Without tariffs and de-risking policies creating pressure to diversify, SASEA countries may well have had to wait decades more before cost pressures would have finally forced Chinese firms to invest abroad.
Chinese Companies' Outward Investment. It is not just Western companies relocating production to SASEA. Chinese manufacturers themselves are establishing operations in SASEA countries to circumvent tariffs. Companies like BYD, Huawei, and Xiaomi have announced plans to invest in SASEA to avoid tariffs and find new growth opportunities as China's domestic economy slows. This pattern is particularly noticeable in Vietnam, but Malaysia and Thailand are also important destinations for Chinese FDI. China is now out-investing Western countries in Southeast Asian manufacturing in some sectors, with battery manufacturing emerging as a particularly significant area of investment.
Country-Specific Benefits of Protectionist Realignment: SASEA's Diverse Development Pathways
The redirection of investment flows due to protectionist policies is creating distinct development pathways for different SASEA countries, each using its distinct comparative advantages to attract investment that might otherwise have gone to China.
Vietnam: The Prime Beneficiary. Vietnam has emerged as the clearest winner from manufacturing relocation, with FDI rising by 5.4% year-on-year to $2.95 billion in February 2025. The country's strategic positioning allows it to attract investment from both the United States and China, as both economic powers view it as a crucial "swing state" in their regional competition. Vietnam's manufacturing sector has shown substantial growth, with its industrial production index for manufacturing reaching 183.4 in the third quarter of 2024, far exceeding both the baseline of 100 and other regional performers.
Indonesia: Using Resources for Industrial Development. Indonesia's abundant natural resources are attracting significant investment, particularly in processing industries. The country received approximately $33 billion in greenfield manufacturing FDI in 2023, much of which might previously have gone to China. Indonesia is successfully pressuring China to invest in its local battery supply chain, demonstrating how SASEA countries can use their market access to secure valuable technology transfers. This strategy is particularly effective in sectors like electric vehicle battery production, where Indonesia's nickel reserves (22% of global reserves) give it significant leverage.
India: Scale and Technology Transfer. India's large domestic market and relatively low wages are attracting companies seeking alternatives to China. Apple's expansion of iPhone manufacturing operations in India exemplifies this trend, with the company redirecting production that would likely have remained in China absent current trade tensions. India's electronics manufacturing has shown substantial growth, with mobile phone production increasing from $3 billion in 2014 to $38 billion in 2023, transforming the country from a net importer to an exporter of smartphones.
Thailand: Balancing Protection and Chinese Investment. Thailand presents a particularly interesting case of navigating the complex balance between protectionism and maintaining strong ties with China. The Thai government is currently considering imposing a seven percent value-added tax on Chinese goods priced less than 1,500 baht (US$40) that are routed through Thailand's free trade zones to protect local businesses. This measure aims to curb the influx of low-cost products that have reportedly caused local manufacturers to reduce production by approximately 50 percent. At the same time, Thailand has benefited significantly from Chinese investment and technology transfer, particularly in supporting the country's ambition to transform into a regional EV hub. Direct investment from Chinese firms in Thailand was valued at $4.6 billion in 2023.
Malaysia: Investment Guarantees Despite Political Challenges. Malaysia has created a strong framework for attracting and protecting foreign investment through Investment Guarantee Agreements (IGAs). These agreements protect against nationalisation and expropriation, ensure prompt compensation, provide free transfer of profits and capital, and guarantee settlement of investment disputes. This framework has helped Malaysia attract more than 8,000 international companies from over 40 countries. However, Malaysia's experience also highlights a significant challenge: political instability can partially offset the benefits of protectionist realignment. Research found that political instability has a significant negative effect on FDI, with a 0.27% decrease in FDI for each unit increase in political instability.
Bangladesh: Manufacturing Growth Through FDI. Bangladesh has emerged as another significant beneficiary of manufacturing diversification, attracting the second highest FDI in South Asia as of 2021. The country has strategically positioned its manufacturing sector as a priority since independence, and foreign investment has been crucial for enhancing production. Through trade openings, Bangladesh has promoted FDI, resulting in increased investment flows and greater diversification of FDI across manufacturing sectors. For Bangladesh, with its status as a developing nation and limited domestic capital, FDI functions as a vital tool for increasing material wealth, creating employment, boosting productive capacity, and enhancing local workers' skills through technology transfer.
Philippines: Liberalisation to Overcome Restrictive Barriers. The Philippines has historically maintained highly restrictive barriers to foreign direct investment, ranking as the third-most restrictive country out of 84 nations in the OECD's FDI regulatory restrictiveness index in 2020. However, recognising the potential benefits of greater foreign investment, the Philippines has been implementing significant reforms to liberalise its economy. These reforms include amendments to the 85-year-old Public Service Act, the 30-year-old Foreign Investments Act, and the 20-year-old Retail Trade Liberalization Act. Manufacturing has emerged as the biggest FDI destination in the Philippines.
Singapore: Strategic Infrastructure Investment. Singapore, as a highly developed economy within SASEA, faces unique challenges from rising protectionism. Unlike other SASEA countries that can compete on labour costs, Singapore must position itself as a high-value hub within reconfigured supply chains. In response to increasing competition from advanced economies rolling out large subsidies for domestic production in strategic industries, Singapore has focused on investing in connectivity infrastructure. The ongoing construction of Changi Airport Terminal 5 and Tuas Port aims to significantly enhance Singapore's capacity and reinforce its status as a business and logistics hub. These investments have already attracted more multinational corporations to anchor their regional and global supply chain operations in Singapore.
This diverse set of responses across SASEA countries demonstrates how protectionist policies directed at China are creating varied opportunities throughout the region, with each country using its specific advantages to attract investment and develop its manufacturing capabilities. The overall pattern suggests that rather than hampering globalisation, current protectionist measures are redistributing manufacturing capabilities more widely across Asia, potentially creating more resilient and diversified supply chains.
Conclusion: Redefining Globalisation Rather Than Ending It
The current wave of protectionist policies is not ending globalisation but rather reshaping it in ways that unexpectedly benefit SASEA economies. By forcing diversification of manufacturing away from its heavy concentration in China, tariffs and other protectionist measures are accelerating industrial development across SASEA that might otherwise have taken decades. This suggests a paradoxical truth: in today's complex global economy, certain forms of protectionism may actually spread economic development more widely rather than concentrating it. For SASEA countries, this presents a historic opportunity to build industrial capacity and integrate into global value chains, potentially setting the foundation for decades of future growth.
Rather than representing deglobalisation, the current trade environment might better be described as "reglobalisation," a reconfiguration of global production networks that distributes manufacturing more widely across Asia rather than concentrating it in a single country. For the 2.5 billion people of SASEA, this unexpected consequence of protectionism may provide a critical pathway to accelerated economic development.