The Paradoxical Benefit: How Protectionist Policies Are Accelerating SASEA's Economic Development
In the ongoing debate about global trade policies, conventional wisdom suggests that protectionism and tariffs generally harm economic growth, especially for developing regions. However, a compelling counternarrative is emerging: the current wave of protectionist measures, particularly those targeting China, may actually be accelerating industrialization and economic development across South Asia and Southeast Asia (SASEA).
Source: Peter Nguyen; Nguyen Hue Boulevard, Ho Chi Minh City
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 surprisingly beneficial for SASEA economies.
From China to SASEA: The Great Redirection
Recent data reveals a remarkable transition in investment flows. Between 2018 and 2022, the six largest Southeast Asian economies grew their foreign direct investment (FDI) by an impressive 37%, while China saw only a modest 10% growth in the same period. Even more striking, in 2023, these six SASEA economies collectively attracted $206 billion in foreign direct investment compared to China's $43 billion, marking the first time in a decade that SASEA surpassed China as an investment destination.
This redirection is directly linked to protectionist policies. Research indicates that protectionist measures contributed to an estimated 18.3% overall decline in FDI to China from 2018 to 2022. The investment that previously would have flowed to China is now finding new homes across SASEA countries, with Vietnam, Indonesia, and India emerging as primary beneficiaries.
Source: Bain & Co/DBS/Angsana Counsil Southeast Asia Outlook 2023/24
"China+1" Strategy: Accelerating Industrial Diversification
Tariffs on Chinese exports are fundamentally 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.
As Dr. Anitha Sharma of the Singapore Economic Research Institute observes in the broader discourse, "Companies now speak of 'China+1' or even 'China+3' strategies. The days of putting all manufacturing eggs in one basket are over." This strategic diversification is driving unprecedented investment in manufacturing capabilities across SASEA.
The "Flying Geese" Effect: Tariffs as Pro-Globalization
Perhaps the most counterintuitive aspect of current protectionist policies is how they're actually functioning as accelerants for a more distributed form of globalization 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 industrialization to neighboring 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 very well have had to wait for decades more before cost pressures would have finally forced Chinese firms to invest abroad.
Chinese Companies' Outward Investment
Interestingly, it's 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 leveraging its unique 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 remarkable 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: Leveraging 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 massive 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 dramatic 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. This dual approach of selective protectionism while maintaining strong investment ties with China illustrates how SASEA countries can craft nuanced policies that protect domestic industries while still benefiting from Chinese capital and expertise.
Malaysia: Investment Guarantees Despite Political Challenges
Malaysia has created a robust framework for attracting and protecting foreign investment through Investment Guarantee Agreements (IGAs). These agreements protect against nationalization and expropriation, ensure prompt compensation if such events occur, 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. Recent 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. This suggests that SASEA countries need political stability alongside favorable investment policies to fully capitalize on the opportunities created by global protectionist trends.
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 opportunities, boosting productive capacity, and enhancing local workers' skills through technology transfer. The time series analysis has shown that there is a statistically significant relationship between FDI and manufacturing sector growth in Bangladesh, reinforcing the importance of foreign investment for the country's industrial development.
Philippines: Liberalization 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, recognizing the potential benefits of greater foreign investment, the Philippines has been implementing significant reforms to liberalize 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, with significant growth also occurring in public utilities, infrastructure, and industrial services in recent years. The country's ongoing liberalization efforts, combined with the broader protectionist realignment, position the Philippines to potentially capture significant manufacturing investment that might previously have been directed to China.
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 labor costs, Singapore must position itself as a high-value hub within reconfigured supply chains. In response to increasing competition from advanced economies rolling out "massive 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 strategy demonstrates how even high-cost economies within SASEA can benefit from protectionist realignment by positioning themselves as critical nodes in diversified supply chains.
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 leveraging its specific advantages to attract investment and develop its manufacturing capabilities. The overall pattern suggests that rather than hampering globalization, current protectionist measures are redistributing manufacturing capabilities more widely across Asia, potentially creating more resilient and diversified supply chains.
Conclusion: Redefining Globalization Rather Than Ending It
The current wave of protectionist policies is not ending globalization 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 deglobalization, the current trade environment might better be described as "reglobalization"—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.
Sources:
https://dredfern.substack.com/p/south-and-southeast-asia-sasea
https://lkyspp.nus.edu.sg/docs/default-source/aci/acirp202414.pdf
https://fulcrum.sg/trumps-reciprocal-tariff-policy-implications-for-southeast-asia/
Bain & Co. / DBS / Angsana Council Southeast Asia Outlook 2023-2024 Report
