SEAI Exclusive: Navigating Geo-Economic Realignments in Southeast Asia Dilemmas and Emerging Opportunities
Publication date/year: 6 May 2026
Author: Vu-Thanh Tu-Anh is Professor at Fulbright University Vietnam and a former member of the Vietnamese Prime Minister’s Economic Advisory Group (2017-2021).
Today’s discussion of the global economy often focuses on the polycrisis, which encompasses challenges from geopolitical rivalry to technological disruption and climate change. In this environment, Southeast Asia is often characterised as being caught in the crossfire of great-power competition, particularly between China and the United States. While these challenges are real, this narrow focus on crises often overlooks opportunities arising from the current global and regional dynamics.
A central question for Association of Southeast Asian Nations (ASEAN) countries in this critical juncture is whether and how the region can turn short-term opportunities into long-term structural repositioning and upgrading. This article addresses that question by first outlining the key geo-economic dilemmas facing ASEAN. It then examines Vietnam as an illustration of how these dilemmas play out through trade, investment, and GVC restructuring and considers the opportunities created by US-China rivalry and multipolar fragmentation.
One way to understand ASEAN’s current position in the global economy is by examining the interrelated dilemmas or structural trade-offs that constrain policy choices and shape strategic behaviour of its member nations.
The first dilemma is the trade-off between the gains from US-China rivalry and the reliance on it. ASEAN economies have benefited from the intensification of US-China strategic competition. Trade diversion, China-plus-one strategies, and investment relocation have boosted exports and foreign direct investment (FDI) across the region. However, these gains are inherently fragile: a de-escalation of rivalry could slow down relocation, while further escalation would intensify pressure on ASEAN countries to align both politically and economically. Reliance on rivalry-driven opportunities thus creates a new and significant source of vulnerability.
Second, ASEAN faces the dilemma of efficiency versus resilience in its global value chain (GVC) strategy. Since the end of the cold war, ASEAN competed successfully as a low-cost production base within highly efficient, just-in-time supply chains. Today, multinational corporations (MNCs) increasingly prioritise resilience and risk management. Reliability, regulatory predictability, supply-chain security, and Environmental, Social, and Governance (ESG) compliance now matter as much as cost. Adjusting to this shift requires substantial investment, better capabilities, and stronger institutions.
A third dilemma concerns the choice between openness to all and pressure to choose sides. ASEAN’s traditional strength has been its ability to hedge by engaging economically with all major powers through overlapping free trade agreements. However, the emergence of bifurcated technology ecosystems in semiconductors, data governance, telecommunications, and cybersecurity makes neutrality increasingly difficult. Maintaining openness now depends on much stronger domestic regulatory and governance capability.
A fourth dilemma is commonly known as the “assembly trap,” or the policy choice between attracting foreign direct investment (FDI) and domestic upgrading. ASEAN continues to attract large volumes of manufacturing FDI, but high inflows do not automatically translate into improved domestic capacity and value capture. Without deeper local supplier networks, skills upgrading, and technological absorption, ASEAN countries risk remaining stuck in low-value segments of fragmented GVCs.
Fifth is the tension between industrial policy ambition and state capacity. Industrial policy, once taboo under the Washington Consensus, has returned globally – from the United States and the European Union to China and across ASEAN. Governments now target sectors such as semiconductors, electric vehicles, batteries, and green technologies. However, ambition often exceeds implementation capacity, leading to coordination failures, regulatory bottlenecks, and investor uncertainty.
A sixth dilemma concerns the trade-off between competing for capital and ASEAN cohesion. ASEAN countries increasingly compete with one another for FDI through fiscal incentives and concessions. While this may generate short-term gains, it also creates a race to the bottom that weakens ASEAN’s collective bargaining power and undermines regional supply-chain integration.
Finally, ASEAN faces the dilemma of green transition versus growth and social stability. The region’s export structure remains carbon-intensive, exposing it to climate-related trade measures such as carbon border adjustments. Yet rapid decarbonisation is costly and politically sensitive, especially for middle-income economies facing energy-security constraints.
The three-level game: Global, regional, and domestic dynamics
The geo-economic dilemmas facing ASEAN are best understood through the lens of a three-level game, which involves the complex interplay between global, regional, and domestic forces. This approach is similar to that proposed by Goh and Sahashi, in which the regional level is conceptualised as ‘image 2.5’ to bridge the gap between domestic and structural analysis. The ‘three-level game’ framework in this article explicitly treats the regional dimension as a distinct and primary layer of strategic interaction. By doing so, it captures how regional production networks and strategic adjustments do not just mediate between the global and domestic but actively drive their own unique set of dilemmas and opportunities.
At the global level, the international system is undergoing disruptive change.
Geopolitical rivalry, economic crises, technological disruption, pandemics such as
COVID-19, and climate change have collectively brought the era of relatively peaceful,
rule-based hyper-globalisation to an end. Regardless of leadership changes in major powers, the underlying conditions that sustained that era are unlikely to return in the same form in the foreseeable future.
At the regional and MNC level, capital flows and production networks are being politicised as investment decisions are increasingly shaped by national security concerns and friend-shoring strategies. The COVID-19 pandemic further exposed the fragility of supply chains optimised mainly for efficiency, accelerating a shift toward resilience. As a result, GVCs are becoming more fragmented, regionalised, and politicised.
At the domestic level, internal political-economy dynamics shape national responses.
Shifting comparative advantage, demographic change, and growth ambitions interact
with institutional constraints. These internal dynamics are often overlooked, yet they are critical for understanding policy choices and outcomes.
Vietnam illustrates these three-level dynamics particularly clearly, as its ambitious high development goals must navigate the intersection of global geopolitical shifts, the restructuring of regional production networks, and domestic institutional capacities.
Vietnam as a window into ASEAN’s geo-economic realignment
Vietnam has been among the most dynamic economies in Southeast Asia over the past two decades. Sustained high growth – typically around 6-7 per cent, and close to 8 per cent in 2025 – has been driven largely by manufacturing exports and FDI. Current leaders have articulated ambitious double-digit growth targets for the next 20 years, so that by 2025 – when Vietnam celebrates the 100th anniversary of its independence – it will have become a high-income country.
From an economic perspective, such targets face structural constraints. Diminishing returns on investment will eventually set in, making it increasingly difficult to sustain growth through capital accumulation alone. Yet limitations in domestic financial markets and inefficiencies in public investment mean that Vietnam continues to rely heavily on foreign capital, with the downside that it has become increasingly dependent on foreign-invested enterprises. Three decades ago, FDI accounted for one-quarter of exports; today, it accounts for nearly three-quarters. The reversal of roles between the domestic and foreign sectors is stark and raises deep concerns about manufacturing resilience and domestic value capture.
This reliance on FDI has, however, helped modernise Vietnam’s industries and transformed its export basket. In 2005, crude oil, textiles, and footwear dominated exports. Two decades later, electronics, mobile phones, machinery, and equipment had taken their place. This shift reflects the profound impact of FDI-led industrialisation.
Vietnam’s export-led model also carries environmental costs. Export-related CO2
emissions are high relative to regional peers, making Vietnam an outlier in Asia. This
poses significant challenges in light of the government’s commitment to net-zero
emissions by 2050.
GVC restructuring further complicates Vietnam’s position. Nearly 30 per cent of
Vietnam’s exports go to the United States, while around 40 per cent of its imports come from China. This triangular trade structure has intensified scrutiny over transhipment
and rules of origin, particularly in US-Vietnam trade relations during the reciprocal tariff negotiations between the two countries.
FDI data reveal another layer of realignment. Since the first Trump administration, Chinese investment into Vietnam has increased markedly. Recent surges reflect not only mainland Chinese investment, but also capital routed through Hong Kong and Singapore. In recent years, a substantial share of Singapore-registered FDI projects in Vietnam has originated from Chinese firms.
These shifts also reshape Vietnam’s internal economic geography. Only a decade ago, FDI was still concentrated in the southern region around Ho Chi Minh City. Today, the Red River Delta in the north attracts over half of Vietnam’s FDI inflows due to its proximity to China. This reallocation changes domestic power balances and policy priorities, which in turn shape Vietnam’s strategic responses to global geo-economic shifts.
Vietnam’s experience is not unique but revealing. It highlights how ASEAN economies are embedded in and constrained by global and regional realignments.
Multipolar fragmentation and emerging opportunities
Global value chain restructuring is occurring within a more contested and stratified economic order. This transition is not necessarily a retreat from globalisation, but a pivot towards a more fragmented, regionalised, and politicised system of production and trade, in which economic flows are increasingly shaped by geopolitical considerations and strategic competition among major powers.
For ASEAN, this fragmentation brings both challenges and opportunities. As production networks diversify away from excessive concentration under the “China plus one” strategies, ASEAN are better positioned to capture a larger share of global manufacturing, investment, and trade. However, since these gains are partly a by-product of US-China rivalry, ASEAN countries are vulnerable to uncertain shifts in geopolitical and geo-economic tensions.
A central risk is that ASEAN remains locked into lower-value segments of restructured value chains. While fragmentation may generate additional assembly and processing activities, moving into higher-value functions – such as research and development, design, and core technologies – continues to be challenging. Without deliberate upgrading, ASEAN risks becoming a region of module assemblers rather than innovators.
At the regional level, fragmentation has intensified both cooperation and competition. While ASEAN members recognise the value of collective positioning, competition for mobile capital has increased, raising the risk of a race to the bottom in regulatory standards and fiscal incentives, potentially weakening ASEAN’s collective bargaining power and leverage.
At the same time, multipolar fragmentation creates multiple entry points for ASEAN. Investment sources have diversified, allowing a strategy of “many doors, many deals”, while overlapping trade agreements expand market access and strategic flexibility. Competition among major powers has increased ASEAN’s leverage but also raises the risk of asymmetric dependence.
Fragmented value chains also generate new sectoral openings. Electronics, semiconductors, electric vehicles, batteries, and green industries have become more accessible to ASEAN economies compared to just a few years ago. Vietnam and Malaysia’s growing participation in semiconductor-related activities and Thailand’s push into electric vehicles illustrate how fragmentation can open new opportunities.
Finally, fragmentation allows greater room for shaping rules and standards. Norms in areas such as digital trade, sustainability, and supply-chain governance remain unsettled. With stronger coordination, ASEAN has the potential to influence these frameworks rather than passively adopting standards set elsewhere.
Strategic adaptation, not binary alignment
ASEAN is navigating a more contested and stratified geo-economic environment. While GVC restructuring offers real opportunities, many of these gains depend on the US-China rivalry and are therefore uncertain. Taking sides is risky, but maintaining strategic autonomy is also increasingly difficult. The way forward for ASEAN is, therefore, not binary alignment, but strategic adaptation through stronger domestic institutions, upgraded skills and infrastructure, deeper regional coordination, and greater capacity to turn external shocks into internal upgrading. Whether ASEAN can do so will determine whether the current period of realignment becomes a trap or a turning point.
This article was developed based on the writer's presentation at the Southeast Asia Regional Geo-economic Update at The Australian National University on 2 Dec 2025.