When his textile factory in Bandung, West Java, began laying off workers in January, Kurniadi Eka Mulyana became increasingly anxious.
The 26-year-old had started working at the factory two years earlier after losing his job at another textile maker.
Mulyana was dismissed in March. Managers at the plant told him that the company’s sales and revenue had been sliding since TikTok Shop launched in Indonesia in 2021, selling cheap goods sourced from China to viewers on its video platform.
Around 49,000 workers in the textile, garment and footwear sectors have been laid off this year as factories have closed in the Indonesian provinces of Banten, West Java and Central Java.
In response to pleas from textile producers, Indonesian trade minister Zulkifli Hasan said in June that the government would look at imposing duties of up to 200% on imported fabrics, potentially multiplying the current tariff rate. He indicated that new duties are also under consideration to deal with surging imports of ceramics, clothing, shoes, cosmetics and electronics.
Other Southeast Asian nations are also moving to raise barriers to cheap Chinese goods, especially those arriving via e-commerce platforms.
In January, Malaysia imposed a 10% sales tax on imported goods bought online for under MYR 500 (USD 108); such goods were previously exempt from the sales tax and import and excise duties that apply to more expensive products. Thailand followed suit this month by extending its 7% value-added tax (VAT) to incoming purchases valued at less than THB 1,500 (USD 42).
“More than 15% of Thai GDP depends on Chinese involvement,” said Aat Pisanwanich, an international trade scholar previously with the University of the Thai Chamber of Commerce. “We need Chinese tourism, we depend on the Chinese market to export our products and we need their foreign direct investment.”
For Southeast Asian governments, the flood of discounted Chinese products poses dilemmas. While domestic retailers and manufacturers are seeking relief from what they see as unfair competition, government officials are courting Chinese companies to invest in local production, especially in high-tech sectors.
Balancing these priorities has become more difficult as economic malaise spreads within China, dampening demand for Southeast Asia’s exports and leaving Chinese companies with surplus inventory to clear away at rock-bottom prices. This is widening Southeast Asia’s trade imbalance with China, fueling further calls for government action on imports.
Last year, Southeast Asia and other emerging Asian markets took in around one-third of China’s exports even though they represented just a 10th of global gross domestic product, according to calculations by Goldman Sachs economists.
China is Thailand’s second largest export destination after the US and its leading source of imports, accounting for nearly a quarter of all incoming goods by value. Thailand’s trade deficit with China has been steadily expanding, climbing to USD 36.6 billion in 2023 from USD 20 billion in 2020. Malaysia’s trade deficit with China grew even more dramatically over the period, going to USD 14.2 billion from USD 3.1 billion.
Indonesia has fared better thanks to rising metals exports to China. Jakarta even managed to post a USD 2 billion bilateral trade surplus last year. But over the first half of 2024, Indonesia racked up a USD 5 billion deficit in non-oil and gas trade with China.
To some extent, the widening trade imbalance is a function of moves by Chinese companies and their foreign counterparts to shift some production and assembly operations from China to Southeast Asia due to trade tensions with the West and other factors.
“China sees investment in other countries as a hedging strategy,” said Charles Austin Jordan, a senior research analyst with US policy research company Rhodium Group.
This supply chain movement has tempered demand from China for raw materials and intermediate goods from Southeast Asia while increasing the flow of such products the other way. In many cases, the final products are sent on to Western markets. Indeed, Southeast Asian exports to the US exceeded those to China in the January-March quarter by more than USD 10 billion, breaking China’s streak as the region’s top market.
For Vietnam in particular and ASEAN in general, this rejigging has been quite beneficial on balance, in the view of HSBC economists.
“With the help of trade with China, ASEAN’s influence in global trade is also deepening,” they wrote in a research note on Tuesday while acknowledging that “from roughly USD 80 billion during the pandemic, ASEAN’s trade deficit with mainland China has ballooned to almost USD 115 billion today.”
The change is also generating new trade complications. Last month, the US reimposed tariffs ranging as high as 250% on imports of solar panels produced by Chinese companies in Cambodia, Malaysia, Thailand, and Vietnam.
In 2022, four Chinese solar companies were found to have evaded tariffs on direct exports to the US by channeling their output through Southeast Asia, but penalty tariffs were temporarily suspended to make solar more attractive to American consumers.
Southeast Asia’s solar sector, as with other green industries, is dominated to a large extent by Chinese companies that are often seeking ways around Western tariffs.
“The risk for emerging economies is that Western governments will be scrutinizing supply chains in a deeper way,” Jordan said.
In many cases, Southeast Asian officials are courting these investments in the production of green goods.
For example, to entice Chinese electric vehicle producers like BYD and Great Wall Motor to invest in local factories, Thailand has allowed them to import vehicles duty-free while their new plants get up and running. It has also included these imported EVs in its subsidy program to support consumers buying electrics and offered the manufacturers special income and excise tax breaks.
The financial incentives have been a blessing for Chinese EV makers, but the resulting import boom has been costly for Honda Motor and other companies already producing vehicles and auto parts in Thailand.
“Parts orders have dropped by 40% so far this year,” said Sompol Tanadumrongsak, president of the Thai Auto Parts Manufacturers Association. “Most local parts makers cut their operations to only three days a week as demand fell.”
Narit Therdsteerasukdi, secretary-general of the Thailand Board of Investment, hinted at Bangkok’s dilemma at the opening ceremony this month for a Chinese EV plant.
“We are glad there are more Chinese EV makers invested here in Thailand as it reflects that they are confident about our policy to support EVs,” he said. “However, it would be great if they could lend support to our parts producers by using some auto parts produced by Thai companies.”
Thai officials also worry that exports besides solar panels could get caught in the trade crossfire between the West and China.
“We have a list of 58 products that are at high risk for anti-circumvention measures. That includes steel, honey, furniture, solar panels and other green tech products,” said Chanintorn Rimcharone, Thailand’s director of trade interests and remedies.
“Thai exporters have to use a lot of local content and import fewer intermediate goods,” she said. “We are educating investors so that they understand the regulations.”
Adding to official pressure to shift toward more local production inputs, the Thai Department of Foreign Trade has proposed a 30.9% tariff on imports from China of hot-rolled steel, which is used in the making of vehicles, machinery and bridges. Four Thai producers have claimed injury from products made by 17 Chinese steelmakers found to have evaded earlier anti-dumping duties by making slight modifications to their products.
Thai steel importers have expressed opposition to new tariffs, arguing that they would raise costs and make their own products less competitive. They argued at a public hearing that local steelmakers simply made bad investment choices.
The rebalancing of China’s trade flows with Southeast Asia also reflects “a conscious trade strategy by Beijing to redirect exports” due to tensions and trade barriers rising in the West, argues Sonal Varma, Nomura’s chief economist for Asia excluding Japan.
Suppliers of materials and products used in construction, including steel, machinery and chemicals, have been particularly hard hit by the collapse of China’s property development sector.
“A lot of China’s employment is tied up in these industries,” said Rhodium’s Jordan. If these manufacturers are unable to export their surplus output, he added, “It’s going to lead to losses for companies that are already unprofitable, and that’s going to lead to joblessness.”
To keep this from happening and affecting their own positions, local authorities in China are going to great lengths to support exporters and sustain local economic growth. But Southeast Asian companies feel like they are bearing the cost of keeping Chinese factories open.
Last year, more than 1,300 factories closed in Thailand, 60% more than the previous year. Between January and May, another 500 plants shut down, resulting in 15,342 lost jobs, according to the Thai Department of Industrial Works.
Steel has been Thailand’s most impacted industry. Under the onslaught of discounted Chinese output, domestic production in Thailand fell 497,000 tons, or 7%, last year.
Hot-rolled steel producer GJ Steel, a unit of Nippon Steel, saw its first-quarter loss widen 62.5% from a year before to THB 52 million (USD 1.4 million). Red ink at G Steel, another Nippon Steel subsidiary in Thailand, more than tripled to THB 204 million (USD 5.7 million) from THB 64 million (USD 1.8 million).
According to calculations by Siam Commercial Bank’s Economic Intelligence Center (EIC), every 100,000 tons of lost Thai steel production reduces the country’s GDP by 0.2%. Wirote Rotewatanachai, president of the Iron and Steel Institute of Thailand, said the collapse of local steel production would pose a national security risk at a time of geopolitical conflict.
China’s redirection of excess production is not just dampening domestic revenues for Southeast Asian companies. Nomura’s Varma points out that cheaper Chinese exports can also cost Southeast Asian exporters sales in other foreign markets.
Yet wary of retaliation by Beijing, Southeast Asian officials have been quick to insist their scrutiny of imports is not specific to Chinese goods.
Asked in parliament last week what the Malaysian government was doing for small and medium enterprises hit by Chinese imports, deputy trade minister Liew Chin Tong took pains to say an ongoing review of the adequacy of the country’s anti-dumping laws is not about China per se.
“This trade remedy action is aimed at overseas manufacturers or exporters that result in harm to local industries including SMEs in Malaysia,” he said.
Similarly, speaking after his colleague announced Indonesia’s new tariff plans, coordinating minister for maritime affairs and investment Luhut Pandjaitan said: “We’re not targeting a particular country, let alone China. We’ve agreed to prioritize our national interest, but we will not abandon our partnership with a country that is our good friend.”
Added Franciska Simanjuntak, head of the Indonesian Safeguards Committee: “Countries targeted in the probe aren’t just China. Other than China, there is South Korea, Japan, the US, and others.”
Yet the rise of e-commerce platforms like Singapore’s Shopee, Alibaba-owned Lazada, and ByteDance’s TikTok Shop have clearly given Chinese exporters a new bridge to reach Southeast Asian customers looking for the best bargains.
Overall, the region’s e-commerce platforms handled the sale of USD 114.6 billion worth of gross merchandise value last year, 15% more than a year before, according to Singapore consultancy Momentum Works.
“The biggest distribution channel for Chinese businesses is Lazada or Shopee. With those two distribution channels, they don’t even need to register a company in Thailand,” said Chaovalit Pakpianthakolphol, chair of the Federation of Thai Industries’ SME export promotion board.
Ristadi, president of Indonesia’s National Labor Union Confederation, said, “Chinese goods keep piling up both in our conventional and online marketplaces.”
At the same time, William Ng, chairman of the Small and Medium Enterprises Association of Malaysia, said the 10% tax his country imposed in January has not had much impact on the influx of cheap Chinese imports. Online vendors marketing to Malaysians are now supposed to register with the customs department if they sell more than MYR 500,000 (USD 108,000) a year in low-priced goods, though.
Significantly, Thailand’s new 7% VAT on incoming small purchases covers goods routed through the country’s free trade zones. Since 2010, goods brought in through these zones have been protected from tax by the China-ASEAN Free Trade Agreement.
The pact was supposed to benefit Southeast Asian companies making goods using Chinese intermediate products. While many expected that ASEAN SMEs might be negatively affected by eased restrictions on Chinese imports in the short term, the agreement was expected to boost northbound shipments of agricultural products and industrial inputs from Southeast Asia.
In 2022, the Regional Comprehensive Economic Partnership, signed by the 10 members of ASEAN as well as China, Japan, South Korea, Australia, and New Zealand, further brought down barriers to Chinese imports into Southeast Asia. The pact set rules for e-commerce and IP protection but contained no provisions to curb government subsidies for exporting industries.
“The problems for SMEs started with the China-ASEAN FTA, and then RCEP,” Aat said. “We have to review what were the positive benefits and negative impacts on SMEs and agricultural products in Thailand.”
A silicone smartphone case can now be bought on Lazada for as little as THB 35 (USD 1). Compared to the cheapest offerings in a Thai department store, usually priced at THB 400 (USD 11.2), a 7% tax is marginal for consumers prioritizing savings.
Other Asian nations outside of ASEAN are wrestling with similar issues. South Korea, Asia’s fourth largest economy, recorded its first trade deficit with China in 31 years in 2023.
While South Korean companies still lead their Chinese counterparts in high-tech items like semiconductors, there are growing signs that the country’s consumers are seeking cheaper alternatives for basics like houseware, clothing, and accessories. Companies are also sourcing more high-tech products from China, including smartphones and batteries.
Analysts have linked the growing influx of Chinese goods into South Korea with a spike in corporate bankruptcies. Nearly 1,000 South Korean companies filed for bankruptcy in the first half of the year, up from 724 in the same period last year.
Yet rather than clamp down on Chinese imports, the South Korean government in May agreed to accelerate an expansion of the country’s existing free trade agreement with China as well as step up talks for a three-way pact including Japan.
South Korea, though, has found a partial solution to its worsening trade balance with China by focusing more closely on the US, which has recently become Seoul’s top export market, as well as on Europe. This shift has helped enable South Korea to record year-on-year total export growth for the past nine months.
Australia has similarly pushed to diversify its export markets following years of informal Chinese trade blocks on shipments of wine, beef, timber, coal and other goods that were put in place amid political tensions. Most of the trade barriers have been lifted over the past year as the government of Prime Minister Anthony Albanese has worked to rebuild warmer ties.
Other niche products that have faced blocks from Beijing in recent years include wool from New Zealand, liquor from France, and bananas from the Philippines. Durian farmers in Thailand may need to take care should things get heated between Bangkok and Beijing.