The Trump administration’s tariff policy is casting a long shadow over the export engines of Asia, which have served these economies well for so long. However, with the US absorbing around 13% of the world’s imports, Asian exporting nations can still serve as production hubs to service the remaining 87% as long as they remain competitive and maintain their good fundamentals. The latest data on foreign direct investment (FDI) provides some encouragement that this is indeed the case.
Data from Unctad, the UN’s trade and development body, reveals that global FDI in 2024 totalled US$1.5 trillion, the second highest level ever. Between 2021 and 2024, overall FDI flows to South-East Asia increased by 10%, even as global FDI flows fell 11%. Meanwhile India’s share of global flows of FDI in greenfield projects rose sharply in 2024.
The world’s businesses are gravitating to ASEAN to avoid US tariffs
Flow factors
Several factors support the growth of FDI flows to South-East Asia and India:
- Supply chain diversification. As businesses across the world seek to reduce their reliance on supply chains that are most at risk from US trade policy, they are deploying more capital in South-East Asia and India. Chinese companies are expanding overseas to avoid trade restrictions imposed by the US and are gravitating towards South-East Asia.
- Manufacturing ecosystem. Businesses are drawn to regions with a strong manufacturing ecosystem. South-East Asia hosts affiliates of more than 80% of Fortune 500 companies, along with more than 5,000 regional headquarters for multinational corporations. This concentration has seeded the emergence of local suppliers and contract manufacturers with a high level of production capacity. This trend is most evident in the semiconductor sector, where the regional operational presence of the world’s top semiconductor companies has contributed to an interconnected ecosystem.
- Consumer pull. ASEAN and India are also seen as offering large and growing consumer markets. In South-East Asia, the share of the population classified as middle class is projected to more than double, from 24% today to 51% by 2030, commanding an estimated US$300bn in disposable income.
Profit margins from ASEAN ops are often better than from China
Ultimately, competitiveness in attracting FDI in export-oriented projects is a function of the capacity to deliver superior returns on FDI. This is often related to the quality of the ecosystem that supports manufacturing activity in a country. Other factors such as a large domestic market and attractive investment incentives can also help a country gain a higher share of global FDI flows.
Better returns
Analysing the International Monetary Fund’s data on income earned by global corporations, it appears that profits from the Indian and South-East Asian operations of global businesses have grown sharply since 2014. Some countries now offer better returns on capital than mainland China where rising wages have eroded the cost advantages that made it the world’s manufacturing hub.
However, the returns advantage varies significantly across countries. Those with younger populations, simpler regulations and more developed industrial clusters are seeing their investment attractiveness grow faster than others, creating a clear hierarchy within the region that goes well beyond what traditional competitiveness rankings capture. Singapore, Malaysia and Thailand whose investment promotion agencies have an excellent track record are also likely to do well.
Trade protectionism is likely to hurt growth prospects for most of the world’s economies in the coming years. But how bad that impact will be will vary from country to country. Countries that face a lower rate of tariffs will tend to do better than others that bear the brunt of the trade wars. The indications are that India and South-East Asia are likely to end up facing average US tariff levels of 20%–25% at most. Together with the improved fundamentals described here, these regions should be able as a result to maintain a decent rate of export-led growth.
