US-China Trade War: Implications for Southeast Asia

By Awantika Agrawal*
Posted on 11th July 2025

The Trump administration-imposed tariffs on multiple countries and renewed tensions in the global trade system. US-China competition remains the principal issue; however, the scope of trade war now covers globally from large countries including Canada to small states as Cambodia. This latest wave of tariffs, justified by Washington on the grounds of industrial overcapacity and national security concerns has pushed countries further to look for alternatives and explore other options. Southeast Asia has emerged as a critical node due to its manufacturing hub and supply chain diversification. It remains a vital link to both China and America. China is the neighbour and largest trading partner, while the US is the security partner and holds substantial investment across the region. The economic rivalry between the two powers is giving space to perceivable shifts in Southeast Asia. China is seeking geopolitical and economic cooperation in the wake of this created gap. Varying across countries, but Chinese engagement with its southern neighbours is crucial in reshaping regional power dynamics. Then how are the recent tariff measures reshaping Southeast Asia geopolitically. China is using the moment to expand its influence in the region and it is visibly impacting India's strategic calculus.

The Strategic Dilemma

Southeast Asia has become one of the largest markets for China because of its geographical strategic locations on trade routes and fast growing economies. As a result of tariffs, the Chinese companies are shifting their operations or investments to Southeast Asian countries, in order to bypass restrictions. This is creating a dilemma of choosing economic and geopolitical inclinations. The countries are trying to be cautious to remain away from the crossfire of US China tensions.

The Chinese firms are opting for diversification, especially in the manufacturing sectors of electric vehicles, minerals and computer chips. Chinese firms are rapidly investing in Vietnam, Thailand, and Indonesia. The move is part of a strategy often called "China plus one." Countries in Southeast Asia are benefiting from more foreign investment and better export sales. However, they are also in a difficult position due to the competition between major global powers. As trade and technology become more separate, these nations must carefully balance gaining economic benefits with keeping their independence.

China has responded quickly to these changes. It has increased its involvement with Southeast Asian countries. China presents itself as a reliable economic partner. It contrasts this with what it calls the unpredictable actions of Western nations. Through agreements like the Regional Comprehensive Economic Partnership (RCEP) and other deals, China has worked to become more involved in the region's supply chains. It continues to invest in infrastructure and digital projects through the Belt and Road Initiative. New projects in areas like e-commerce, financial technology, and green technology have also expanded China's influence in the region. China's message increasingly emphasizes working together as a region and not interfering in other countries' affairs. This aims to differ from Washington's focus on security.

However, Southeast Asian countries are reacting with practical caution. Many welcome Chinese investment and access to its markets. But they are also concerned about becoming too dependent, especially with rising tensions at sea and worries about debt from infrastructure projects. These countries are not fully siding with any single power. Instead, they are trying to have many options and remain flexible. For example, countries like Vietnam, the Philippines, and Malaysia are building economic ties with China. At the same time, they are strengthening defense relationships with the United States, Japan, and Australia. The Southeast Asian region is becoming more important in the developing structure of the Indo-Pacific, not just economically, but also as an area where influence is being challenged.

India in the Evolving Regional Dynamics

The region of Southeast Asia is undergoing geopolitical shifts. Southeast Asia has emerged as a key destination for redirected investments, as the world witnesses reorganised global supply chains. While this brings economic benefits, it also places greater pressure on the region to manage the increasing rivalry between major powers. China has responded swiftly by expanding its economic footprint and strategic engagement. It has made infrastructural investments and digital partnerships. Beijing is taking proactive steps to consolidate its influence across several Southeast Asian countries.

For India, this changing landscape presents both challenges and opportunities. Southeast Asia is very crucial for India’s Act East Policy and its broader Indo-Pacific vision. The region offers access to crucial maritime routes, dynamic markets, and multilateral platforms. India aspires to act as a stabilising power in Asia and integrate deeper with strategic calculus. Additionally, many Southeast Asian states seek to preserve their strategic autonomy and look forward to diversifying partnerships beyond the US-China binary. This environment allows India to enhance its presence through pragmatic, cooperative engagement.

Despite this potential, India’s involvement is lacking consistency and depth. Key connectivity initiatives such as the India–Myanmar–Thailand Trilateral Highway and the Kaladan Multi-Modal Transit Project have faced persistent delays, weakening India’s credibility as a regional partner. Economically, India's trade and investment ties with ASEAN remain limited compared to China’s coercive efforts. India continues to be seen in a favourable light due to its democratic character, non-coercive diplomacy, and civilizational linkages with Southeast Asia.

India must recognise the stakes and recalibrate strategies to manage external pressures and maintain regional stability. Its ability to build strategic trust, provide timely infrastructure support, and act as a dependable partner will define its role in the evolving regional order. The present moment is a diplomatic test and a broader assessment of India’s capacity to purposefully act in its national interest. It needs to deliver on commitments, and sustain long-term partnerships.  This approach would be based on openness, mutual respect, and long-term cooperation. However, India must act decisively to be seen as a reliable alternative. This situation will test India's foreign policy intentions, its ability to deliver on promises, and its consistent strategic actions. How India navigates this complex terrain will shape its future position in Southeast Asia and credibility as a significant power in the Indo-Pacific.

* Awantika Agrawal is pursuing M.A. International Relations from Manipal University, Jaipur and currently a research intern at the Kalinga Instuitute of Indo-Pacific Studies (KIIPS)

Disclaimer: The Views in the Article are of the Author