# Beyond Factories: The Next Chapter in ASEAN-China Economic Integration

- Link: https://www.thailand-business-news.com/asean/332773-beyond-factories-the-next-chapter-in-asean-china-economic-integration
- Published: 2026-10-21T03:17:00+07:00
- Author: News Desk

ASEAN-China integration is already deep. Whether it produces durable, broadly shared
gains will depend on the local linkages governments and firms build across ASEAN
economies.

Debate over China’s industrial rise is increasingly polarized. One side sees subsidized
overcapacity and the risk of a second China shock. The other sees innovation, scale
and affordable technologies that can support development and the green transition.
Neither captures the whole story. Both tend to separate China from the rest of the
world. That framing fits East Asia poorly, where production, investment and demand
are already deeply intertwined.

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ASEAN offers an important vantage point. China is simultaneously a major market,
a source of capital and technology, a supplier of competitively priced inputs and
an increasingly important competitor. These roles coexist.

Two-way goods trade exceeded USD 1 trillion in 2025. Most ASEAN economies run bilateral
deficits with China, and the aggregate gap has widened. But bilateral balances alone
are a poor measure of gains and losses, especially since most ASEAN economies remain
in current account surplus or close to balance. Weak Chinese domestic demand, partly
reflecting the property downturn, has weighed on its imports even as ASEAN has continued
to buy machinery and production inputs.

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The composition of trade is therefore important. Intermediate and capital goods 
make up close to 90 percent of two-way trade, with intermediate goods alone accounting
for roughly two-thirds. Much of the relationship consists of inputs moving through
a regional production system. This does not make every bilateral deficit benign 
but changes the policy question from how much ASEAN imports to what those imports
enable its economies to produce.

[AMRO’s value-added analysis](https://amro-asia.org/wp-content/uploads/2026/04/high-res-AMRO-AREO-2026-Updated-6Apr2.pdf)
reveals supply linkages hidden by gross trade. By 2022, Chinese value added accounted
for around one-fifth of the foreign value added embodied in ASEAN exports, while
ASEAN contributed more than one-eighth of the foreign value added embodied in China’s
exports. Both shares had risen substantially since 2000, from 4 percent and 8 percent,
respectively. Gross trade statistics record the full value of a product when it 
crosses the border, obscuring the income and production generated on both sides 
of the chain.

Demand is becoming more regional and reciprocal. China is now ASEAN’s largest foreign
source of final demand; the nominal value of ASEAN production absorbed there has
nearly quadrupled since 2000. ASEAN, in turn, is China’s second-largest foreign 
source of final demand after the United States, with its share roughly tripling 
to more than 9 percent by 2022. ASEAN is more than a production platform serving
distant consumers. China and ASEAN increasingly produce for one another.

Both sides have strong reasons to deepen these links. ASEAN gains access to China’s
market, industrial capabilities, capital and competitively priced technologies. 
China gains complementary production capabilities and proximity to a diverse market
of nearly 700 million people. ASEAN’s younger population and room for income and
consumption growth make it an important source of future demand as China ages and
its population decline. A more prosperous ASEAN would be a stronger production partner
and a larger market for Chinese firms.

The same shift is visible in investment. Annual Chinese foreign direct investment
into ASEAN rose from about USD 8 billion in 2012 to USD 26 billion in 2025, with
more than one-third going to manufacturing. China is now one of ASEAN’s leading 
sources of new investment, although its accumulated presence remains smaller and
its local institutional relationships less established than those of US, European
and Japanese investors. Yet investment volume is not the same as domestic capability.
A factory can raise output and employment while remaining weakly connected to the
host economy. A locally rooted ecosystem brings domestic suppliers into production
networks, develops skills, embeds engineering functions and eventually supports 
innovation.

Thailand, host of this year’s IMF and World Bank Annual Meetings, offers a useful
comparison. In the 1960s, its automotive industry mainly assembled imported kits
with few local supplier links. Domestic parts production emerged gradually under
localization policies in the 1970s and 1980s. A competitive export base came later.
The shift from shallow assembly to a substantial regional cluster took [several decades](https://amro-asia.org/wp-content/uploads/2025/12/Thailand-Annual-Consultation-Report-2025_for-publication.pdf).

Nor was the ecosystem built by Japanese firms alone. Successive Thai governments
provided infrastructure, investment incentives, supplier-development institutions
and evolving product strategies. Japanese assemblers and component makers created
sustained demand, introduced demanding production standards and invested repeatedly
in supplier training. [Japanese public support also mattered](https://link.springer.com/chapter/10.1007/978-981-16-9748-7_3):
official development assistance helped finance Eastern Seaboard infrastructure and
human-capital development, while Japanese technical cooperation supported Thai SMEs
and supplier development. The ecosystem was co-produced through decades of learning
and adjustment by governments and firms on both sides.

Chinese investment in Thailand’s electric-vehicle industry is much younger. Manufacturers
are establishing local production and bringing suppliers, while [Thai agencies seek to deepen domestic sourcing and upgrade local firms](https://documents1.worldbank.org/curated/en/099090126231031160/pdf/P509945-66f89b76-d5fe-4ab6-a7a9-2ce3f3bb74f5.pdf).
Still, these are early elements of ecosystem formation. Local content can come from
Chinese-owned suppliers without strengthening Thai-owned firms, and investment pledges
alone do not demonstrate sustained technology transfer.

Its shorter history matters, but Chinese firms are entering an economy with infrastructure,
skilled workers and supplier institutions inherited from earlier investment. That
foundation should allow localization and upgrading to proceed faster. Thailand is
also one of ASEAN’s more industrially capable economies; outcomes elsewhere will
depend even more on domestic capabilities and policy execution.

The next phase of ASEAN-China integration will also require action from China. Chinese
policymakers can support stronger domestic consumption and more predictable access
to China’s market for competitive ASEAN producers. Chinese public institutions can
complement outward direct investment with technical cooperation, skills development
and supplier-upgrading programmes designed with host governments. Chinese firms 
can deepen local procurement, train workers and place more engineering and research
functions in the region.

ASEAN governments, for their part, cannot assume that FDI spillovers will emerge
automatically. They need to define the capabilities they want investment to create,
invest in skills, standards and supplier capacity, and build institutions that connect
foreign investors with domestic firms. Incentives can be assessed against observable
outcomes such as local procurement, workforce development and engineering activity,
then adjusted as industries evolve. Deeper intra-ASEAN integration would give regional
suppliers the scale to participate, while targeted, rules-based remedies can address
demonstrable injury without retreating from integration.

ASEAN-China integration will endure, but its consequences are not predetermined.
Its next phase should be judged less by trade volumes and factory announcements 
than by the value and domestic capabilities it creates. Thailand’s experience offers
a clear lesson: ecosystems take time, but time alone does not build them. They emerge
through sustained investment, learning and adjustment by governments and firms on
both sides.

A version of this article was first published in [The Bangkok Post](https://www.bangkokpost.com/opinion/opinion/3330555/aseanchina-ties-deepen-further)
on October 3, 2026.

Source: [Building More Than Factories: The Next Phase of ASEAN-China Economic Integration – ASEAN+3 Macroeconomic Research Office ](https://www.amro-asia.org/building-more-than-factories-the-next-phase-of-asean-china-economic-integration)