Shock resistance

China and ASEAN can further their cooperation to build a more integrated, digitally enabled regional trade system

China’s record-breaking $1 trillion trade surplus in 2025 is the product of two closely intertwined forces: China’s strategic reorientation of trade under renewed tariff pressure from the United States and a rapid deepening of regional integration through diversification and digitization. Together, these dynamics have reshaped Asia-Pacific supply chains and reinforced the Association of Southeast Asian Nations’ role in China’s evolving external economic strategy.

The reinstated and expanded tariff regime under the Donald Trump administration has acted as a catalytic shock, accelerating trends that were already underway. Elevated US tariffs have constrained direct trans-Pacific exports and reinforced China’s dual-circulation paradigm, forcing external trade flows to pivot decisively toward intra-Asian markets. ASEAN has consequently consolidated its position as China’s largest trading partner for the fifth consecutive year. This shift is not merely a redirection of goods but a qualitative deepening of production and supply chain integration across the region.

Malaysia illustrates this transformation clearly. China’s exports to Malaysia have increasingly consisted of capital goods, industrial machinery, semiconductors and photovoltaic components — inputs that feed directly into Malaysia’s electronics and renewable energy manufacturing ecosystems. At the same time, tariff pressure has encouraged Chinese companies to offshore final assembly and lower-margin manufacturing to Southeast Asia to diversify value chains against the backdrop of the US trade barriers. Vietnam, Thailand and Malaysia have emerged as key beneficiaries of this “China+1” strategy, attracting investment in electronics assembly, textiles and machinery production.

Overlaying this physical reconfiguration of supply chains is a second, equally important force: the digitization of regional trade. The full operationalization of the ASEAN-China digital economy partnership has transformed cross-border commerce. Digital platforms now enable near-frictionless transactions, with customs pre-clearance, integrated logistics and real-time payments compressing delivery times and costs. Malaysian small and medium-sized enterprises can source precision machinery parts directly from Shenzhen in South China’s Guangdong province, while agricultural producers, such as durian farmers in Pahang, Malaysia, can reach Chinese consumers through livestreaming e-commerce. This digital leap has made regional trade more agile and inclusive, particularly for SMEs.

Importantly, US tariffs have not diminished China’s role in regional trade; instead, they have reconfigured it. The Regional Comprehensive Economic Partnership has become a critical institutional backbone, with rules of origin allowing firms to combine Chinese intermediate inputs, Southeast Asian labor and assembly, and preferential market access to multiple destinations. ASEAN has thus evolved into an integration platform rather than a peripheral production base, anchoring a more complex and regionally embedded trade architecture.

Nevertheless, the record-breaking surplus masks underlying structural imbalances. China’s surplus has been amplified by relatively weak import growth, suggesting that domestic demand remains softer than anticipated. Moreover, while ASEAN exports to China continue to expand, they remain disproportionately concentrated in commodities and intermediate goods, whereas China’s exports are dominated by high-value-added manufactured and green technology products. This asymmetry underscores the persistent challenge for parts of ASEAN — including Malaysia — to move up the value chain and achieve more balanced, value-added trade relationships.

Looking to 2026, the volatile US trade policy will continue to shape the Asia-Pacific, but the task is no longer to resist disruption — rather, it is to absorb shocks through a more integrated, digitally enabled regional system, and to recalibrate strategies accordingly.

For China, the 2025 trade surplus was partly the result of tariff-induced export diversion and relatively subdued import growth — an imbalance that risks inducing further complex responses from the US.

A more stable trajectory lies in a strategic rebalancing consistent with the logic of dual circulation: expanding imports of higher-quality consumer goods and services from ASEAN to support domestic consumption, while continuing to move up the export value chain toward high-tech, green-energy and industrial solutions that are difficult to substitute. Such a shift would also help address the asymmetries in China-ASEAN trade identified in 2025, where value-added manufacturing remains heavily concentrated on the Chinese side.

For Malaysia and ASEAN, the challenge in 2026 is to move beyond reactive adaptation to US tariffs and toward proactive regional design. While the trade diversion in 2025 and “China+1” investments highlighted ASEAN’s importance, they also exposed the limits of tariff avoidance-led industrialization, underscoring the need for coordinated action across four dimensions.

First, deepening ASEAN Economic Community integration to accelerate the removal of internal non-tariff barriers is critical. A more unified ASEAN market will give the bloc greater collective bargaining power, attract higher-quality investment and prevent member states from being played against each other in a “race to the bottom” for tariff-avoidance factories.

Second, pursuing strategic value-chain positioning. Malaysia, with its established strengths in semiconductor packaging, electrical goods and medical devices, should focus on capturing higher-value segments of the regional supply chain. This means investing in skilled workforce development, digital infrastructure and regulatory clarity to attract R&D centers and advanced manufacturing, not just final assembly lines.

Third, institutionalizing digital and green partnerships. ASEAN should push to formalize and expand the digital trade arrangements with China, establishing common standards for data security, digital payments and consumer protection. Simultaneously, a China-ASEAN green transition partnership could be championed, focusing on joint investment in renewable energy infrastructure, sustainable agriculture and circular economy projects, turning a global imperative into a regional growth engine.

Fourth, diversifying strategic partnerships. While deepening ties with China, ASEAN must also energetically pursue engagement with multilateral platforms such as BRICS and initiatives such as the inaugural trilateral summit between ASEAN, the Gulf Cooperation Council and China. This network of partnerships provides vital strategic autonomy and mitigates over-dependence on any single economy.

To conclude, China’s record $1 trillion trade surplus in 2025 marks a pivotal moment for the global economy as the world looks beyond 2026. For Malaysia and ASEAN, it presents a critical opportunity to move beyond the role of supply-chain intermediaries and become regional architects — shifting the focus away from bilateral surpluses toward building an integrated, innovative and resilient Asia-Pacific economy capable of generating sustainable, value-added growth.

The author is a research associate at the Malaysia-China Friendship Association and the former deputy director of the Institute of China Studies at the University of Malaya. 

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.