The numbers, at first glance, are intoxicating. Foreign direct investment into ASEAN climbed 8–10% to roughly $225–226 billion in 2024, even as global FDI contracted 11%. The region's share of global FDI has tripled — from 6% a decade ago to 17% today. US goods imports from ASEAN hit $352 billion in 2024 and then surged a further 29% to $454 billion in 2025 alone. The "China+1" thesis — that multinationals are diversifying away from the Middle Kingdom and planting new roots across Vietnam, Thailand, and Malaysia — appears confirmed by the data.

Dig deeper, however, and a more disquieting picture emerges.

ASEAN's economic momentum is substantially derivative rather than generative. The surge in FDI and export growth is disproportionately driven by geopolitical arbitrage — firms rerouting supply chains to sidestep US–China tariffs — rather than by organic industrial upgrading or deep regional integration. The region risks becoming a high-volume relay station for Chinese-made components rather than an innovation ecosystem of its own.

The Triangular Trade Trap

The chart above captures the core paradox. Between 2018 and 2024, US imports from ASEAN grew by $166 billion — an 89% rise. Over the same period, ASEAN's imports from China grew by $217 billion — a 78% increase. The ratio is damning: for every $1 increase in US imports from ASEAN, ASEAN's imports from China rose by approximately $1.30. These are not the numbers of supply-chain diversification. They are the numbers of supply-chain elongation.

The mechanism is not subtle. Vietnamese factories import semiconductors, display panels, and electronic sub-assemblies from Shenzhen; they affix "Made in Vietnam" labels and ship to US consumers. The tariff is avoided. The domestic value-added in Vietnam is minimal. OECD Trade in Value Added data shows Vietnam's foreign value-added content of gross exports at 48% — nearly double the OECD average of 26.7%. In electronics and ICT, Vietnam's flagship export category, the foreign value-added share exceeds 70%.

"ASEAN is not replacing China in global supply chains. It is extending China's reach while laundering the country of origin."

— ASEAN Intelligence Briefing, March 2026

Chinese outbound FDI into ASEAN manufacturing has nearly tripled since 2017, from $12.5 billion to $37.3 billion in 2023. In Vietnam, 30% of new investment projects registered in January 2025 were Chinese-owned. The China+1 strategy has, in large measure, been co-opted by Chinese firms themselves — who have simply relocated the final assembly step across a political border.

The Single Market That Never Was

The ASEAN Economic Community was launched in 2015 with the ambition of creating a borderless production base rivalling the EU's single market. A decade later, intra-ASEAN trade accounts for just 21.2% of total ASEAN trade — compared to roughly 60% for the EU — and the share has been falling, from 22.5% in 2022 to 21.2% in 2024. As tariffs within ASEAN fell to near zero under AFTA, non-tariff measures (NTMs) proliferated to fill the protectionist gap — licensing requirements, inspection procedures, and opaque technical standards that function as hidden tariffs. The distribution across the bloc is wildly uneven, as the charts below reveal.

Thailand stands out grotesquely. It applies NTMs to 37.8% of product lines — nearly three times Indonesia's share — adding an estimated 12% to intra-regional trade costs. Singapore, with NTMs on just 0.4% of lines, represents the other extreme. The total number of NTMs across ASEAN rose 15% in three years. In the rice sector alone, NTMs climbed from 94 in 2000 to 414 by 2018, raising trade-cost equivalents by approximately 18% — more than twice the effect of applied tariffs.

The underlying dynamic is a race to capture China+1 FDI individually rather than collectively. ASEAN nations are competing against each other for the same factory relocations, using NTMs as hidden subsidies for domestic industries. The result is a bloc integrated enough for Chinese exports to flow freely inward, but fragmented enough to prevent genuine intra-ASEAN industrial specialisation. The upgraded China–ASEAN FTA 3.0, signed in 2025, will deepen this asymmetric dependency further. One question deserves to be asked plainly: who benefits more from ASEAN remaining fragmented — Beijing or Bangkok?

The Productivity Time Bomb

The most structurally alarming dimension is labour productivity. Vietnam, the poster child of the China+1 boom, earns roughly $7.80 per hour in purchasing-power-parity terms — just 8% of the US level. FDI is flowing to Vietnam not because of productivity advantages, but because of cost arbitrage and tariff avoidance. The chart below maps the full spectrum: labour productivity on the vertical axis, FDI per capita on the horizontal, and bubble size representing the foreign value-added share of exports — the "upgrading illusion" made visible.

Vietnam sits bottom-left: modest FDI per capita and low productivity — but with a large red bubble revealing that nearly half its export value is foreign-sourced. Singapore alone occupies the top-right corner, small green bubble intact. The rest of ASEAN is clustered in the lower-left, absorbing capital without a corresponding leap in output per worker. Cambodia and Myanmar barely register on either axis. Indonesia, with 270 million people and vast resources, sits at just 10% of US productivity despite decades of FDI inflows.

AMRO's 2025 growth accounting deepens the alarm. Potential growth across ASEAN+3 has decelerated from 6.0% in 2001 to 4.0% in 2023, with over 90% of the decline attributable to weakening capital accumulation and falling total factor productivity. Thailand's potential growth could fall to 2.4% by 2050 — the region's canary, as the following table makes plain. The demographic dividend that powered ASEAN's 1990s miracle is now unwinding as populations age.

ASEAN's FDI bonanza is masking structural rot. The region is absorbing capital without meaningfully improving total factor productivity. It is building warehouses, not laboratories. When the tariff arbitrage window closes — whether through US policy recalibration, Chinese domestic restructuring, or reciprocal tariff normalisation — the exposed economies will be those that invested in assembly lines rather than innovation ecosystems. The challenge for ASEAN's policymakers is not to attract the next wave of displaced Chinese factories, but to build the capabilities that will one day make those factories redundant.