Between the superpowers: Southeast Asia’s strategic supply chain dilemma

Key points

• Southeast Asia’s strategic supply chains — spanning renewable energy and emerging and critical technologies — have been exceptional growth drivers, now representing more than 20% of the region’s exports and half of its foreign investment.
• As a “connector” economy between the US- and China-led blocs, Southeast Asia’s strategic supply chains are increasingly exposed to geoeconomic tensions. With the two powers progressively decoupling, the region must learn to limit the worst spillovers, including when it becomes a direct target.
• Industrial policy could help offset escalating geopolitical constraints, but not all strategic supply chains are of equal importance. Critical minerals deliver limited value, and solar photovoltaic manufacturing faces stagnation. Governments should resist pressure to subsidise either, directing scarce fiscal and institutional resources instead to regional supply chains for semiconductors and electric vehicles and batteries.
• Regional coordination — on semiconductor investment, electric vehicle ecosystems, skills pipelines, and critical mineral governance — would help ASEAN governments align national policies and cultivate these industries for the long term. Collective, accelerated decarbonisation would add further demand-side benefits.

Executive summary

Southeast Asia’s strategic supply chains — those tied to renewable energy and advanced technologies — have been among the region’s most dynamic sectors. Southeast Asia’s role as a “connector” economy between the US and Chinese blocs has served the region’s trade- and investment-led growth model well. However, that same role is now a vulnerability. US–China competition is creating conditions far less favourable, or outright hostile, than only a few years ago, and the indirect linkages running through the region leave it exposed to decisions made in Beijing and Washington.

This paper assesses the four most consequential strategic supply chains for Southeast Asia — semiconductors, critical minerals, solar photovoltaic (PV) manufacturing, and electric vehicles (EVs) and lithium-ion batteries. As industrial policy regains appeal for sectors under rising geopolitical pressure, the paper argues that prioritisation and cooperation are required. Semiconductors should be the top priority, followed by EVs and batteries, given the economic returns both represent. Critical minerals and solar PV manufacturing offer more limited opportunities, so intervention in those sectors warrants caution. Because its connector role means the region cannot escape the geoeconomic pressures reshaping the global economy, targeted interventions may be justified.

Disciplined, coordinated industrial policy would maximise the region’s economic returns. These supply chains also offer a substantial pathway — open to few other economies — to benefit from global decarbonisation, and an ambitious net-zero push at the regional level would further secure a long-term competitive advantage across them.

Introduction

Southeast Asia’s future prosperity depends on responding to a more fragmented, uncertain global economy, defined by geopolitical competition and economic decoupling between the United States and China.^* Certain economic domains — renewable energy and critical and emerging technologies — are where this fragmentation is most intense. To date, these sectors have represented exceptional economic and growth opportunities for Southeast Asia (hereafter also referred to as ASEAN).^* They also embody the trade-offs between economic integration and security most sharply, leaving these sectors especially exposed to rising tensions.

A path forward for the region’s broader export-led economic model appears possible.^* President Donald Trump’s “reciprocal” tariffs accelerated decoupling with China and targeted other countries, including in Southeast Asia. Yet the region remains a major beneficiary of the global economy’s reconfiguration in response to US protectionism and global efforts to derisk from China. Southeast Asia’s position as a trade-intensive connector economy between US and Chinese blocs has proven an asset. Yet it simultaneously exposes the region to intensifying geopolitical and economic competition. More narrow, sector-specific risks will endure.

Nowhere is this more evident than across “strategic” supply chains — the emerging industries that will underpin economic and geopolitical power in the coming decades, are reliant on globalised and highly integrated manufacturing networks, and sit at the forefront of economic security concerns. These sectors span the energy transition, dual-use products, and emerging and critical technologies. They include semiconductors, vital to most modern industries, and advanced technologies such as uncrewed vehicles (drones) and industrial robotics, increasingly disruptive across defence and commercial applications. Solar PV technology, wind turbines, batteries, and EVs will drive renewable energy deployment essential to the energy transition and future energy security. Critical minerals are irreplaceable inputs for most of these technologies. In this paper, strategic supply chains refer to these sectors.

The spillover of geopolitical concerns into the economic arena — geoeconomics — is increasingly defining the outlook for strategic supply chains. For years, these sectors have been front lines in intensifying US–China rivalry. For the United States and its allies, dependence on China’s renewable energy and critical mineral industries is becoming untenable. For China, the same is true for semiconductors. As each side leverages their respective advantages, seeks to further control flows of technology and goods, and limits direct and indirect dependencies on the other, these sectors will be hit hardest. That has direct implications for Southeast Asia. Strategic supply chain sectors have become substantial drivers of exports and foreign investment. As tensions rise, Southeast Asia’s connector role increasingly exposes these industries to external pressure.

There is a need to prioritise growth opportunities and, despite rising geoeconomic tensions, there are several reasons why strategic supply chains offer strong growth pathways to the region. Emerging economies, including in Southeast Asia, are struggling to maintain growth convergence with richer economies.^* Compounding sluggish economic growth, the global economy is experiencing yet another exogenous shock, with the Iran war negatively affecting outlooks. Southeast Asia is particularly vulnerable to the energy shock and supply chain disruptions the conflict has created. Strategic supply chains have grown faster than other industries in Southeast Asia in recent years and now account for more than one-fifth of the region’s exports and half of new foreign investment projects. Asian miracle economies historically supported rapid growth and strong development outcomes by cultivating technologically sophisticated sectors that required integrating with global value chains.^* These same sectors remain economically important today. The wider benefits included demand for a highly skilled workforce and productive clusters of related industries that built human capital and economies of scale for countries now considered among the most successful modern economies. Strategic supply chains generally align with these characteristics, and global demand for the goods these industries produce is expected to rise. Cultivating strategic supply chains holds much promise.

Southeast Asian governments are already actively supporting strategic supply chains through trade and industrial policies alongside human and physical capital expansions. A renewed interpretation of industrial policy as a potentially “useful instrument of development” reflects growing mainstream acceptance of active interventions within economies.^* Understandably, governments may feel empowered and justified pursuing industrial policy in this context. However, industrial policy must be conducted under the right conditions to be effective, accounting for trade-offs and appropriately designed to match a country’s market size, government capacity, and fiscal space. The evidence remains mixed on whether it sustains long-term economic gains. Government intervention can support economic development, as it did in East Asia. Equally, poorly designed policy can be costly, deliver little, and even be counterproductive. As geoeconomic tensions spill into the region, this will encourage policy interventions but obscure accurate assessments of their effectiveness. Calibration of Southeast Asia’s industrial policies is therefore essential to maximise benefits and ensure sustainable, positive outcomes.

This paper examines those opportunities and challenges. First, it explores the growing economic importance of strategic supply chains to Southeast Asia and the geoeconomic constraints the region faces. Second, it analyses the most consequential strategic supply chains. And finally, it makes recommendations on how best to calibrate Southeast Asian national and regional policy.

Building economic power and strategic relevance

Geoeconomic fragmentation has begun and strategic supply chains are experiencing this most acutely. Trade and investment flows between US- and China-aligned economic blocs are declining relative to within bloc flows.^* Despite this, trade and investment between these blocs and connector economies — those countries with no clear bloc alignment — has remained robust. As a result, supply chains have lengthened, with firms in connector economies inserting themselves into trade and production networks.^*

In concert with rising global demand for strategic goods, driven by the artificial intelligence (AI) boom, digitalisation, and the energy transition, strategic decoupling has accelerated. China’s share of US strategic technology product imports declined by more than double that of aggregate goods trade between 2017 and 2022.^* These types of shifts have elevated Southeast Asia’s geoeconomic relevance, with strategic supply chains relocating to and expanding in the region.

Strategic supply chains subsequently became significant economic sectors for Southeast Asia. Strategic exports have grown rapidly in the last decade and now account for more than 20% of Southeast Asia’s exports and 10% of the region’s economy (Figure 1).^* Historically, the semiconductor supply chain was the most important, responsible for three-quarters of total strategic exports in 2013. Singapore and Malaysia, the established semiconductor supply chain participants, accounted for 80% of strategic exports (Figure 2). However, a quadrupling of strategic exports across semiconductors, critical minerals, and clean energy technologies in the rest of the region closed this gap over the last decade. By 2023, critical minerals accounted for 16% of strategic exports, primarily driven by Indonesia, solar PV exports accounted for 6%, and lithium-ion battery (used in EVs and many other products) and final EV exports represented less than 2%. While semiconductors’ share of the region’s total strategic exports had fallen by 2023, they remained the largest single export category. Singapore and Malaysia’s share of strategic exports has correspondingly declined.

Southeast Asia’s strategic supply chains offer significant growth opportunities. Between 2013 and 2023, strategic exports increased at a compound annual growth rate of 7.7%, while non-strategic exports only increased by 2.7% (Figure 3). This holds across every major trading economy in the region. The fastest growing sectors were EVs and batteries (albeit from a low base), semiconductor manufacturing equipment, solar PV, critical minerals, and semiconductor chips. Over the same time period, exports of industrial robots and wind turbines were flat, while exports of drones were insignificant. These latter sectors hold limited relevance in Southeast Asia and are not evaluated in the following sections of this paper.

The biggest sources of global demand for strategic goods are in Asia. China and Southeast Asia, the top strategic export destinations, absorbed $90 billion and $80 billion in 2023, respectively (Figure 4). Advanced East Asia (Japan, South Korea, and Taiwan) absorbed $60 billion. Critical minerals, lithium-ion batteries, and semiconductors are vital inputs for many modern products — a characteristic central to their strategic nature. Direct strategic exports to the United States and the European Union (EU) may be smaller, but overall final demand in these economies is generating indirect demand for such inputs embedded within final goods exports from China and ASEAN. Therefore, these additional markets must not be discounted.

Strong growth has been enabled by a surge of foreign direct investment (FDI) into new projects (Figure 5).^* In 2019, strategic industries made up only 13% of foreign investment flows. Every year since 2021, strategic investments were more than half of total FDI flows. Indonesia’s industrial policies attracted substantial FDI into critical mineral, battery, and EV projects. Malaysia and Singapore’s ongoing centrality in regional semiconductor supply chains has proven a major advantage in attracting further semiconductor-related investments. Meanwhile, Vietnam has experienced a broad rise in FDI across most strategic sectors.

China has been vital for Southeast Asia’s strategic supply chains, but other partners also remain critical. China was the region’s single largest source of strategic foreign investment this decade, reflecting its leading global position in many of these industries. However, strategic FDI flows from the United States and its allies in Advanced East Asia and Western Europe have been larger than China’s every year except in 2020 during the pandemic (Figure 6). Furthermore, China dominates only the region’s solar PV industry. In critical minerals, EVs, and batteries, US allies in Advanced East Asia and Western Europe are secondary to China but still important partners. In semiconductor supply chains, the United States dominates — a lead cemented by a surge of investment into Singapore, Malaysia, and Vietnam in 2025. Meanwhile, China is largely inconsequential, only providing 1.8% of total foreign investment into new semiconductor-related projects since 2003.

Between superpowers in the age of geoeconomics

After a period of rapid expansion, external conditions are now constraining Southeast Asia’s strategic supply chains. Geoeconomic tensions between competing blocs have eroded the favourable environment that previously underpinned this growth.

The second Trump administration’s decoupling efforts are complicating Southeast Asia’s connector role. So-called “reciprocal” tariffs triggered a collapse of direct trade with China in 2025. US tariff adventurism also targeted Southeast Asia, in part due to perceptions these economies were acting as a “back door” for Chinese goods.^* Crucially, Southeast Asia absorbed the broader US tariff shock, further displacing China’s US import share.^* However, conditions remain fluid. The US Supreme Court’s decision in early 2026 to strike down “reciprocal” tariffs has only created more uncertainty. The Trump administration’s response has been to initiate Section 301 trade investigations into “unfair trade practices” of US trading partners, and further Section 232 national security trade investigations could be announced.^* National security tariffs are more legally durable than “reciprocal” tariffs in the United States and will disproportionately target strategic supply chain sectors. However, a positive sign is that previously threatened Section 232 tariffs on semiconductors and critical minerals have not materialised. Whether that continues remains unclear.

Geoeconomic pressure from the United States also takes other forms. Coercive measures in recent trade deals with Southeast Asian governments aim to impose extraterritoriality and alignment with US economic and national security policies, with significant uncertainty on how they will be enforced.^* Rules of origin under the Biden administration’s now defunct Inflation Reduction Act would have largely excluded the use of Southeast Asia’s critical minerals in US clean technology supply chains. US anti-dumping and countervailing duties against Southeast Asian solar PV exporters, implemented due to the region’s close ties to China’s solar industry, were increased in 2025. The United States blocked Chinese EV technologies on national security grounds, which means many manufacturing operations being established in Southeast Asia by Chinese firms will be excluded.

Other governments have also reacted to growing strategic supply chain exposure. Since 2022, the EU has introduced EV tariffs against Chinese firms, critical mineral and semiconductor industrial strategies, and is now considering measures to protect its wind turbine industry. This will lower demand for Southeast Asia’s exports over time. For China, the “small yard, high fence” semiconductor export control policy introduced under the Biden administration was a turning point.^* Beijing has since doubled down on developing a fully indigenised semiconductor industry in response. That has reduced semiconductor import demand in China, weighing on Southeast Asia’s exports.

As geoeconomic pressures intensify, the connector role that helped ASEAN build strategic supply chains is becoming a liability. The next sections examine the region’s four most important strategic supply chains: semiconductors, critical minerals, solar PV manufacturing, and EVs and batteries.

1. The semiconductor edge

Semiconductors have attracted the most foreign investment and export revenues of any strategic supply chain in Southeast Asia. Despite mixed geoeconomic conditions and continued US–China decoupling, the region is well positioned to deepen semiconductor supply chain participation.

Of the ten global economies with the highest revealed comparative advantage in semiconductor chip exports, Southeast Asia boasts five — Malaysia, the Philippines, Singapore, Thailand, and Vietnam.^* The region collectively exported $258 billion in chips in 2023 — 28% of global exports (Figure 7). Semiconductor-related exports account for roughly 16% of the region’s total exports.^* Semiconductor trade and production networks are acutely specialised, interdependent, and trade intensive. Semiconductor “chips” are also essential inputs for many technologies and goods such as vehicles and consumer electronics, key exports for the region. More recently, the boom in data centres has created further demand. These characteristics of scale and global integration are typical of sectors prioritised by successful East Asian industrial policies in the past. Semiconductors appear a promising candidate for Southeast Asia to prioritise.

To date, the region’s major role has been in assembly, testing, and packaging (ATP), though chip fabrication and semiconductor manufacturing equipment are becoming prominent. While lucrative, the ATP segment is potentially as low as 6% of the full value across the entire semiconductor supply chain.^* This could be a limiting factor.

However, Southeast Asia is demonstrating capacity to move up the value chain. Regional exports are expanding across most varieties of chips.^* Singapore produces 20% of global semiconductor manufacturing equipment and 9% of chips, while Malaysia holds 13% of global testing and packaging, second only to China.^* The region’s semiconductor manufacturing equipment exports reached more than $32 billion in 2024 after a fivefold increase in just over a decade.

China, like Malaysia and Singapore, cultivated a semiconductor sector early by prioritising low value activities. China is now the largest ATP producer, and is building an advanced domestic supply chain.^* ATP is the first step towards expanding into more valuable segments of the global semiconductor supply chain. This is a model that can, and should, be replicated throughout Southeast Asia. Furthermore, the most complex ATP operations for advanced semiconductors remain in Taiwan, South Korea, and China. That suggests substantial space remains for upgrading in ATP activities.

Foreign investment into Southeast Asia’s semiconductor supply chain has surged post-Covid (Figure 8). FDI remains concentrated in the more advanced economies — Singapore and Malaysia — while Thailand and the Philippines previously attracted smaller capital inflows. Vietnam has recently emerged as a leading destination for semiconductor investments, announcing the first chip fabrication facility in the country in 2026.^* More than 90% of regional FDI comes from the United States, Europe, and advanced East Asian economies. China’s investment footprint is insignificant.

As investment continues diverting into Southeast Asia, governments are proactively intervening to support semiconductor supply chains at the national level. Singapore, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam have all introduced industrial strategies to support the industry, including through substantial fiscal incentives. Human and physical capital investments are also central to these plans. Malaysia announced in 2024 that it would spend $5.3 billion and train 60,000 engineers over a decade.^* Vietnam plans to expand the skilled labour force from 7,000 to 50,000 by 2030.^*

However, one downside is that competing industrial strategies are creating a scramble to attract investment, dampening the region’s potential. The post-Covid semiconductor investment surge saw increased “incentive shopping” where multinational firms approached numerous governments to extract the maximum policy support available, raising the costs of industrial policy.^* National efforts to build education and skills pipelines will also create duplicative spending. Scarce fiscal resources need to be better spent.

Semiconductor supply chains represent an enormous opportunity for Southeast Asia. The global semiconductor market, currently worth roughly half a trillion dollars, could reach between $1–1.8 trillion by 2030.^* Estimates suggest one-quarter of Malaysia’s economy can be attributed to the industry, which employs more than 100,000 people.^* In Singapore, it represents 6% of GDP, substantial for an advanced economy.^*

Semiconductor competition in Southeast Asia

Economic security concerns regarding semiconductor supply chain integration affect both the United States and China, but weigh on Beijing more heavily. The resulting geoeconomic competition is dampening Chinese demand for foreign chips and driving an investment surge into non-China economies.

China imported $413 billion in semiconductor chips in 2024, making it the world’s largest gross and net importer. Since 2018, the United States has sought to restrict China’s access to leading-edge semiconductors, aiming to limit its military and AI advancement.^* Escalations in US export controls and attempts to force allies such as Japan and the Netherlands into alignment have, from Beijing’s perspective, made import dependency an intolerable national and economic security risk. A colossal semiconductor industrial strategy, aimed at semiconductor self-sufficiency, was scaled up to reduce import dependence; total government support now exceeds $150 billion.^*

By 2024, China’s imports of Southeast Asia’s chips had fallen by almost 22% since their 2021 peak. An economic downturn following the property market correction is partly responsible, but the decline has continued even through China’s recent export boom, with the country still presumably consuming chips embedded within exported products. This represents a major headwind and is likely the greatest long-term challenge to semiconductor supply chains in the region.

The United States and its allies responded to pandemic-related disruptions and deteriorating geopolitical relations with China by derisking, now a key strategy for multinational semiconductor firms.^* Given its comparative advantage, Southeast Asia is a natural location for ATP outside China. This, together with rising chip demand, drove the 2025 surge of foreign investment into the region’s semiconductor supply chains.

The Trump administration also balked at implementing tariffs on semiconductors in 2025. “Reciprocal” tariffs announced in April of that year exempted semiconductors and dulled the impact of tariffs on the US and Southeast Asian economies. The national security investigation into semiconductors also confirmed a limited protectionist stance. The recommendations included continued trade negotiations with countries able to “strengthen” the US semiconductor industry (read Southeast Asia), and the implementation of very narrow tariffs on the most advanced chips, with major carve-outs.^* A second phase proposing broad-based tariffs is unlikely to materialise given the potential costs to the US economy. That most globalised semiconductor supply chains are reliant on US firms in some way, not Chinese ones, reduces the incentive for sharper decoupling.

Nevertheless, there are few substitutes for China’s demand. In 2023, semiconductor chip exports to the United States were more than $19 billion, while those to China were $48 billion. The only comparable market is ASEAN itself, with intraregional trade of semiconductors reaching $64 billion in 2023. The next largest export market is Advanced East Asia, at about 80% the size of China’s, but export growth has been sluggish. Only exports to ASEAN economies increased as a share of the region’s global chip exports. Intraregional trade in chips is becoming more important. The primary threat to the region’s semiconductor ambitions is China’s attempts to reduce import dependence in response to Washington’s export restrictions. The United States, an irreplaceable partner in deepening regional participation in semiconductor supply chains, has also stunted demand growth in the region’s biggest external market.

There is also the possibility of other tensions arising. Criminal smuggling operations discovered in early 2025 across Singapore and Malaysia were circumventing US semiconductor export controls, bringing increased US scrutiny and prompting Malaysia to introduce its own export control measures.^* The Trump administration is considering restrictions in response.^* This example demonstrates how clauses in regional trade agreements signed with the United States on economic security and export control alignment could be potential flashpoints if not managed carefully.

Geoeconomic forces impacting Southeast Asia’s semiconductor ambitions are pulling in opposing directions. Southeast Asia should focus on maximising the benefits of semiconductor-related investments driven by derisking strategies, deepen intraregional trade, and ensure economic security and export control issues do not jeopardise its position.

2. Critical to everything, controlled by a few

Critical minerals are those essential to modern economies and technologies, and vulnerable to supply disruption.^* The critical minerals with the most potential in Southeast Asia are aluminium, nickel, copper, and rare earths (Table 1). Antimony, cobalt, graphite, and tin have latent potential, but exports are either stagnating or remain small, limiting any broader growth benefits.

Critical mineral supply chains in Southeast Asia are concentrated, and the economic benefits appear limited. Diverging from other strategic supply chains, geoeconomic competition is creating opportunities for critical mineral projects in Southeast Asia. With negative social and environmental externalities already undermining economic benefits, a focus on improving governance is needed.

Indonesia, the region’s largest producer of critical minerals, pursued a costly and decades-long industrial policy program to build refining capability across the country’s various critical minerals.^* An export ban on nickel in 2020, alongside substantial fiscal incentives, appears to have successfully transformed the country into the top global producer of refined nickel and second-largest producer of cobalt (a byproduct of nickel refining). Indonesia’s resource-based industrial policy also targeted aluminium, copper, and tin with less success. The country produced 4% of global mined copper in 2024 (Figure 9). Exports of copper ore and concentrates and refined copper reached $8 billion and $3.2 billion in 2024, respectively (Figure 11). Alumina and aluminium exports are also increasing (Figure 12).

The rest of Southeast Asia’s critical mineral production is spread across the region. Malaysia and the Philippines are the next largest producers, with exports concentrated in alumina and aluminium, copper, and nickel (Figures 10, 11, and 12). Thailand, Singapore, and Vietnam have smaller but notable exports across alumina, aluminium, and refined copper.

Southeast Asia is also emerging as a promising location for rare earth element (REE) mining and refining. Myanmar is the region’s largest exporter of mined REEs, while satellite data show Laos opening dozens of new mines since 2022.^* Thailand has also rapidly increased REE mine production.^* Vietnam maintains a small but crucial share of global rare earth magnet manufacturing, although a 2023 corruption scandal set the mining and refining supply chain segments back years and has limited the country’s relevance.^*

Malaysia is the regional success story, scaling both mining and refining. The country is notably responsible for 4% of global refined REEs, the largest non-China share, and is the only country outside China to produce heavy rare earths (an important subset of REEs).^* A recent discovery of significant reserves, together with the entry of rare earth magnet producers, suggests Malaysia will continue moving up the global value chain.^* The government, replicating Indonesia, banned rare earth ore exports in 2023 to stimulate downstream processing and refining.

These critical minerals are crucial inputs into clean energy and advanced technologies (and other manufactured products) and demand is therefore expected to grow. In value terms, exports of alumina and aluminium, copper, and nickel are already substantial. However, global aluminium and copper supply chains are diversified, constraining future growth opportunities.^* Global nickel markets are already dominated by Indonesia, with little room for further expansion. For REEs, regional reserves and mining, refining, and magnet manufacturing suggest a rare earth supply chain is developing. While valuable as a hedge against China’s near monopoly in rare earths, the small global market offers limited economic returns.

Critical mineral exports are economically significant only for Indonesia, where they account for 15% of total exports. For the other major ASEAN economies, they have driven less than 2% of exports for more than a decade. Critical minerals are also the slowest growing strategic export category after wind turbines and industrial robotics for economies outside of Indonesia. Foreign investment has played a central role in Indonesia’s success. Roughly $50 billion flowed into new critical mineral projects over a decade, concentrated in nickel refining and alumina and aluminium production. However, critical mineral FDI flows to the rest of the region were marginal — only $3 billion between 2019 and 2025, and spread across various minerals.

Indonesia’s critical mineral success has created limited meaningful economic spillovers.^* This is a warning to others. Costly subsidies and export bans were used to achieve a critical mineral boom, but lax environmental, social, and governance standards have resulted in serious harms to the agriculture sector, the environment, and local communities.^* Substantial capital flows into EV and battery supply chain projects have accompanied this boom, but these industries are facing their own difficulties, discussed later.

Pollution is also becoming a regional issue. Unregulated mining for copper, nickel, tin, and rare earths across Myanmar, Laos, and Cambodia is contaminating the Mekong River system that sustains millions of livelihoods.^* Growing domestic opposition in Thailand to critical mineral mining was triggered by rising pollution levels in river systems attributed to REE mining in Myanmar.^* These harms are widespread and substantial, and weak governance has allowed environmental and social damage to undercut whatever economic benefits the critical mineral industries have delivered.

Tensions rising, opportunities growing

Southeast Asia is benefiting from the geoeconomic competition over critical minerals. China’s prioritisation of critical mineral industries has generated demand for Southeast Asia’s resources, with Western attempts to diversify global supply chains providing further opportunities.

China’s large investment footprint in foreign mining projects, ongoing lead in refining, and manufacturing dominance across downstream products such as battery cathodes and rare earth permanent magnets have given it considerable influence.^* China is now the largest buyer of Southeast Asia’s critical minerals including copper, aluminium, and nickel. The exception is Malaysia, held up as a diversification success story, which supplies refined rare earths to other markets. Notably though, Malaysia has recently drawn closer to China on REEs.^*

China’s global critical mineral dominance gives the country significant geoeconomic leverage. Beijing has progressively introduced more export controls across various minerals in response to US economic security policies, mainly around semiconductors (Figure 13). These controls are both a symptom and a driver of intensifying geoeconomic tensions, and are accelerating more serious efforts to build non-China supply chains.

Southeast Asia is benefiting from these diversification efforts. Realising cooperation with others was necessary, the Trump administration finalised critical mineral agreements with Malaysia and Thailand (two emerging players in rare earths) and inserted relevant clauses and commitments into regional trade agreements.^* The US national security trade investigation into processed critical minerals and derivative products, concluded in October 2025, found the United States “too reliant on foreign sources”, especially for rare earth magnets.^* The primary recommendation was to pursue critical mineral agreements with other nations to better manage concentrated import dependence. As a result, US interest in Southeast Asia’s critical minerals will be ongoing.

Southeast Asia’s critical mineral ambitions are enjoying broadly favourable geoeconomic conditions. China’s efforts to maintain its lead across global critical mineral industries and attempts to build non-China supply chains in response are providing ample opportunities for critical mineral industries. Therefore, as these industries expand, an approach that prioritises governance, minimises negative externalities, and moves away from industrial subsidies and export bans is needed. 

3. The brightest spot now dimming

Southeast Asia’s solar PV supply chain has been a remarkable growth story. However, failure to diversify from US demand and Chinese investment and technology left the regional supply chain exposed to geoeconomic tensions. That has proven a major barrier to ongoing success.

Over the past decade, Southeast Asia — led by Vietnam, Malaysia, Thailand, and Cambodia — has emerged as the only competitive alternative to China in solar PV exports. US tariffs on China pushed Chinese solar firms to relocate production to the region. Solar cell and panel exports grew rapidly, reaching almost $20 billion in 2023 with more than three-quarters destined for the US market (Figure 14). Chinese investment into new PV-related manufacturing projects in Southeast Asia drove this expansion, reaching a cumulative $16.8 billion since 2016 — more than from any other source (Figure 15).

Global integration and the region’s connector role, not industrial policies, were the primary drivers of Southeast Asia’s solar PV manufacturing success. In Vietnam, projects appear to have benefited from high-technology manufacturing tax incentives; in Indonesia, the overly restrictive local content requirements that hindered the industry have now been relaxed.^* It was openness to foreign investment, technology, and inputs as well as access to US demand that were the most influential factors.

Failure to diversify partners reduced the economic significance of the solar PV sector for Southeast Asia and left the regional supply chain exposed (discussed in the next section). Solar cells and panels reached just 1.2% of total exports in 2023, and although they accounted for over 13% of strategic supply chain FDI, that was only 4% of all manufacturing and extraction FDI since 2016. Cambodia is an exception. At its peak, solar PV exports made up 85% of the country’s strategic exports and 10% of its total exports. Solar panels became the largest non-textile export for the country.^*

Suffering from success

The progressive imposition of US import duties on Southeast Asia’s solar PV exports starting in June 2024 marked a turning point from which the region may never recover.

Those duties are now so high as to be effectively exclusionary for most producers in the region.^* US solar panel and cell imports from Cambodia, Malaysia, Thailand, and Vietnam collapsed by 85% by the end of 2025 (Figure 16). US import duties have been imposed on Southeast Asia’s solar PV manufacturers in essence because of strong supply chain linkages to China.

More recently, Indonesia, Laos, and India have emerged as significant import sources (Figure 16). Export volumes from all three surged eight-fold in the two years to 2024, with Laos having exported nothing in 2022.^* That tariff workaround will likely also close as US anti-dumping and countervailing investigations against all three were announced in August 2025. The Trump administration has also initiated a Section 232 investigation into polysilicon and derivative products, examining whether these imports threaten US national security.^* Tariffs on these upstream segments would be a final blow. While Malaysia and Vietnam have developed polysilicon and silicon wafer production for solar cell manufacturing, tariffs would close off this last avenue for US exports. A regional solar PV value chain capable of producing across every supply chain segment had been emerging, albeit dependent on China’s investments, technology, and inputs. Washington still decided to cut it off given the presence of China in the supply chain. Cambodia’s refusal to cooperate with US trade investigations implies a heavy reliance on China and limited domestic value-add in the more extreme cases. Nevertheless, it is not clear this was transhipment in Cambodia.^*

Southeast Asia’s inability to capture demand elsewhere reflects intense competition from Chinese producers. Massive overcapacity in China collapsed solar panel prices over 2023 and 2024, leaving Chinese firms dominant in global markets — the European Union sourced 96% of solar PV imports from China in 2024. That leaves Southeast Asia few opportunities to redirect its exports.

Southeast Asian countries have capitalised on solar PV supply chain reconfigurations but never diversified away from US demand or Chinese investments. The International Energy Agency (IEA) now expects the region’s share of global solar PV manufacturing capacity to decline by 2030.^* Southeast Asia’s connector role has turned opportunity into vulnerability for the solar PV supply chain.

4. Driving a clean energy future, slowly

An electrified automotive future is arriving much faster than expected. The region’s EV and lithium-ion battery supply chains remain underdeveloped and fragmented while foreign production services much of this new demand. Geoeconomic realities are further weighing on regional supply chain expansion. However, a window of opportunity to expand EV and lithium-ion battery production is opening.

Global EV sales are surging and legacy combustion engine vehicles are losing market share at a ferocious speed, with Southeast Asia emerging as a leading EV adopter.^* Vietnam and Thailand are the fastest adopters in the region, with 50% of prospective car buyers in these markets intending to purchase EVs.^* Government support has been essential to this rapid adoption through sustained investment in charging infrastructure and incentives for buyers. Thailand is meeting much of this demand through imports, while in Vietnam domestic production services demand — the difference has been final vehicle import tariffs. Notably, Vietnam is the only Southeast Asian economy with a domestic EV firm, VinFast. Despite rapid EV adoption and being the frontrunner for EV- and battery-related investment, Indonesia’s local production only provided about 9% of domestic sales in 2024.^*

While adoption is a success story, exports have underperformed despite the huge influx of foreign investment. The top exporter in Southeast Asia, Thailand, only shipped $377 million in finished EVs over 2024. This represents a fraction of total exports. Current data for Vietnam’s EV exports is lacking, but in 2023 they were higher than Thailand’s, at $192 million. Indonesia’s EV exports have been even lower. Small exports do not align with the scale of foreign investment the region has attracted. While some manufacturing projects are still to come online, this initial weakness is concerning. FDI across new projects since 2016 has totalled $44 billion, roughly one-quarter of strategic FDI flows; Indonesia, Thailand, Vietnam, and Malaysia have been the major recipients. Indonesia has attracted $29 billion of this (Figure 17), concentrated in the battery and battery input sectors. Indonesia has also received roughly $6 billion in foreign investment into final EV automotive manufacturing projects, more than double anywhere else in the region — yet its EV exports are inconsequential. Major projects for both EV battery and car manufacturing have been announced in Malaysia, Thailand, and Vietnam, although at a smaller scale.

Despite substantial capital inflows and rapid adoption, Southeast Asia is fast becoming a net importer of EVs. Indonesia is the leading destination for investment in battery supply chain projects. Imports of battery materials reached $900 million in 2024, which, in combination with a huge expansion in battery-related mineral refining, drove exports of batteries and battery components to $600 million in 2024 (Figure 18).^* When considered alongside minimal final EV exports and limited domestic absorption of local EV production relative to total EV consumption, the scale of investments has not yet brought commensurate returns. This holds across much of the region. Apart from Vietnam, domestic consumption throughout Southeast Asia is dominated by imports, which have surged (Figure 19). Exports remain a fraction of total imports. Billions in foreign investments appear to be underutilised, and a regional EV and battery supply chain looks to be stalling.

However, building EV and battery production capacity in Southeast Asia could still be attractive. The import taxes and tariff concessions given to Chinese firms, which positioned these economies as top destinations for China’s EV export surge, were temporary. Some have already expired, while others are winding down or ending in 2026.^* Demand for locally produced EVs should rise soon as a result. This will provide important initial demand, especially with such strong EV uptake by consumers. Additionally, China announced export and technology restrictions across the lithium-ion battery supply chain in 2025.^* These are paused for now, alongside rare earth export controls, but if China follows through, Southeast Asia could become one of the few competitive locations outside China capable of producing Chinese EV battery designs. Conversely, if China withholds inputs and technology from Southeast Asia, it could risk the region’s production capability. Beijing is unlikely to antagonise close economic partners in the region or domestic firms’ major investments in foreign markets, however.

Exports must be the long-term goal. The risk that these markets remain overly protected after temporary tariff concessions expire could lead to less competitive manufacturing, and EV exports may stagnate as a result. That would lock in low rates of return for EV and battery foreign investments and limit broader economic spillovers. Southeast Asia’s EVs are more expensive than China’s because the region’s battery production costs remain above the levels that China’s heavily subsidised industries are able to achieve.^* To expand EV manufacturing sufficiently to drive economies of scale, the region needs to export and build a more competitive battery industry. Protectionist barriers alone cannot achieve this.

Outcomes in the region suggest a nuanced approach is needed. VinFast’s sales in Southeast Asia have increased rapidly, surpassing even China’s hyper-competitive BYD, although this has occurred mostly in Vietnam.^* While final vehicle import tariffs are high in Vietnam, battery component imports from China are substantial.^* Here, global value chain integration raised cost-competitiveness for EV battery production while the final consumer good was restricted, representing a mixed global integration and import substitution industrial policy design. Indonesia offers an alternative example, remaining committed to building a self-sufficient domestic battery supply chain leaning more heavily on import substitution-style policies.^* So far, this has not delivered. It is not enough to force domestic production through import barriers. Accessing and leveraging global integration where possible is necessary.

The question then becomes, should Southeast Asia devote resources and capacity to building an EV and battery ecosystem?

Legacy automotive supply chains are already significant sectors in the region (Figure 20).^* Many supplier networks are readily transferable — windows, tyres, car doors, seats, and electronics are all crucial components of EVs. Without opportunities for firms, employees, and capital to be redirected, the coming electrification of transport will be highly disruptive. For Thailand, EV manufacturing and domestic EV adoption are already putting pressure on the traditional automotive industry. An EV industrial policy program that expanded in 2022, together with rising competition from Chinese EVs, has seen overall vehicle production decline, creating a painful transition, albeit an unavoidable one.^* Similar conditions are being felt to varying degrees in other economies throughout Southeast Asia.

As Southeast Asia’s pivot to an electrified automotive future gains speed, adapting existing regional automotive supply chains to an electric future would be prudent. There is clearly significant regional demand for EVs that could be leveraged towards this end. However, protected domestic markets and production cannot be the end-goal. Exports must be the focus to drive productivity and competitiveness.

Building up, crowding out

External geoeconomic dynamics are complicating Southeast Asia’s EV ambitions. China has been instrumental in establishing manufacturing projects for EVs and batteries. Simultaneously, China’s global EV export surge is exacerbating economic security tensions and subsequently constraining Southeast Asia’s production capacity.

China is arguably the global technological leader for EVs and batteries. That has meant foreign investment from Chinese firms has enabled Southeast Asia to build an EV and battery ecosystem. While Indonesia has enjoyed a diversified range of partners from North Asia across EV and battery projects, China has been the most successful. China has also been essential for the rest of the region, responsible for 60–90% of EV foreign investment (Figure 17). However, reliance on China has come at a cost.

Southeast Asia has been at the forefront of China’s EV export surge. Since 2018, exports to ASEAN have grown at a compound annual rate of 82%, outpacing China’s already rapid global EV exports. The United States, Canada, Mexico, and the European Union introduced various import restrictions to manage this surge and related economic security concerns. These measures would have encouraged trade diversion to non-OECD countries. ASEAN and others such as Brazil and the Middle East have been key markets. Import exemptions for Chinese EV firms establishing local operations and supportive industrial policies, together with rising protectionist barriers elsewhere, have driven a surge of exports into the region (Figure 21). Thailand, the region’s largest and most competitive automotive producer, exported just 19% of what it imported in 2024.

China now accounts for most EV imports across the region. While imports of renewable energy technologies like EVs are not inherently negative, the speed and scale of their arrival are highly disruptive. The result has been depressed domestic consumption of locally produced vehicles, hampering the important initial stages of scaling manufacturing operations. Southeast Asia’s efforts to build an EV industry are therefore undermined by fierce import competition from the very partner enabling that industry to develop.

With domestic demand constrained, external demand will be equally hard to find. The export surge is also reaching other major car markets, excluding the United States. As Europe, Advanced East Asia, and Brazil attempt to build competing EV industries, foreign demand will be further constrained. Additionally, Biden-era technology restrictions that excluded Chinese EV models in the US market will apply to Chinese EVs made in Southeast Asia.

Geoeconomic tensions are driving heightened import competition and shrinking potential export markets. Ongoing policy intervention to support the industry may be justified under these circumstances. As import and tax exemptions for Chinese EVs end, Southeast Asia has a window to turn things around by leaving import tariffs in place temporarily to give local manufacturing space to scale as the region rapidly electrifies its transport industry.

Supportive policy done right

Southeast Asia’s strategic supply chains are subject to intensifying geoeconomic competition that has spilled into the region in myriad ways. Interventions are potentially justified under such circumstances. However, economic returns and prospects vary considerably. Policies and interventions that support strategic supply chains must reflect this, and steps towards concrete regional coordination must be made.

Industrial policy should focus on resource allocation and constraints. Interventions that are too broad risk being ineffective, straining government budgets, and tying up institutional capacity. Prioritisation is essential.

Semiconductors are by far the region’s most valuable strategic supply chain and its most promising for future growth. Governments are rightly directing substantial fiscal and industrial policy resources to support it, and should continue to do so. EV and battery industries should be the other priority. As import concessions end, the region’s rapid EV adoption offers a chance to scale local production after a mediocre start. Continued consumer subsidies and other EV purchase concessions can be paired with import tariffs on finished vehicles. This is justifiable, at least temporarily, given the scale of China’s export surge and the agreements made with Chinese EV firms already.

Governments should avoid subsidising other strategic supply chains. Future critical mineral demand and diversification efforts will sufficiently expand regional critical mineral supply chains. Indonesia’s overly generous subsidies and distortive export bans encouraged environmental exploitation and industrial overcapacity with little economic return. This should not be replicated. Solar PV supply chains face an existential loss of US demand with few alternatives. Governments have largely avoided supporting solar PV manufacturing, and should maintain this stance.

Physical and human capital accumulation is also essential. Charging infrastructure for EVs, solar panel deployment for renewable electricity supply, specialised but common-use infrastructure for semiconductor firms, and traditional road and port infrastructure all require greater investment by governments. These technology-intensive industries also depend on a deeper pool of skilled workers. The role of government in providing these public goods should not be forgotten as other interventions are pursued.

Regional coordination mechanisms need to be implemented. The recent ASEAN Geoeconomics Report 2025 reinforced the need to “strengthen internal market integration and unlock regional demand” across Southeast Asia and to develop intra-ASEAN industrial policy cooperation.^* Semiconductors, critical minerals, and EVs are identified as priority sectors, underscoring the importance of strategic supply chains in the new geoeconomic order.

ASEAN already has the institutional infrastructure to achieve this, through mechanisms such as the ASEAN Industrial Projects Based Initiative, but could scale further.^* Focusing on an ASEAN regional semiconductor transparency framework and investment coordination body would increase Southeast Asia’s bargaining power and reduce incentive shopping when negotiating with semiconductor multinationals. Similarly, a coordinated ASEAN semiconductor training pipeline with regional university and tertiary skills development programs would complement national human capital development initiatives. The ASEAN Framework for an Integrated Semiconductor Supply Chain has similar proposals but under “non-binding principles”, which will curtail its impact.^* Governments should be bolder and expedite a regional approach now.

In principle, ASEAN has committed to building a regional EV ecosystem.^* Yet industrial policy based on national production incentives, rules of origin, and local content requirements promotes a fragmented regional supply chain. Instead, import tariffs, production incentives, and content requirements should have regional rather than national criteria. This would promote openness and competition, yet still provide protection to an underdeveloped industry facing excessive external competition.

By 2040, the combined market value of critical mineral mining and refining in Southeast Asia is estimated to reach $180 billion.^* The environmental and social impacts of these industries will only increase. Ongoing ASEAN mineral cooperation initiatives have so far failed to drive substantive improvements in the sustainability of critical mineral industries. Regional minimum standards are needed for mining waste storage and disposal, and for pollution monitoring and reporting on critical mineral projects. The long-term goal should be to align with global standards. However, income disparities between economies will be a limiting factor.

More broadly, accelerated decarbonisation — recognising this comes with its own complexities — would generate long-run demand for strategic supply chains. Critical minerals, EVs and batteries, and solar PV would all clearly benefit. Further, electrification of energy grids and transport will drive semiconductor demand.^* Strategic supply chains give Southeast Asia a pathway that aligns strong economic outcomes with faster decarbonisation that few other regions can match.

Conclusion

Strategic supply chains have been important sources of export growth and foreign investment. Their significance to Southeast Asian economies has expanded rapidly and is set to continue. The region’s connector role, once an advantage, has exposed these supply chains to geoeconomic tensions that now threaten ongoing success.

The benefits of supporting some strategic supply chains, such as semiconductors, are outsized, though national approaches will ultimately prove more costly. Critical minerals, while politically favoured, deliver little net economic value without adequate governance and regulation. Solar PV, once a bright spot, faces stagnation after failing to diversify. EV and battery production remain underdeveloped, needing a suite of supportive policies to build what could be a rapidly scaled regional supply chain.

Industrial policy support can take many forms; this paper offers several recommendations for designing policy interventions and cultivating strategic supply chains. Fiscal sustainability and space must be prioritised, which requires selective subsidies. Greater investment in human and physical capital is also needed. Regional coordination and governance mechanisms would serve the region well. Decarbonisation, though difficult, could be a powerful tool for creating demand.

Geoeconomics is reshaping global integration and trade. Southeast Asia’s strategic supply chains, having already delivered significant economic dividends, are increasingly exposed to these shifts. Future success will depend on how the region responds.

Note: All currency is in US dollars unless otherwise stated.